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APEC Oil and Gas
Security Newsletter
April 2016 Issue No. 9
CRUDE OIL SPOT PRICE
In this issue
Declining CAPEX Raises Concerns Over Oil Supply Security ......................................... 1
Ambitious Attempt of European Commis-sion for Gas Supply Security ..................... 2
Middle East Update .................................. 3
Declining amounts for LNG imports in 2015 ......................................................... 3
Interview with Dr. Ross Lambie ................ 4
Petroleum Product Trading and Security .. 6
2nd Oil and Gas Security Forum ............... 6
Highlights
Upcoming Event · IEEJ 50th/APERC 20th Anniversary Joint Symposium 2016
Upcoming Event · LNG Producer-Consumer Conference 2016
Crude Oil Spot Price (WTI and Brent)
Natural Gas Spot Price (Henry Hub)
Photo Story
Declining CAPEX Raises Concerns Over Oil Supply Secu-
rity
The tumultuous environment in the energy industry has resulted in
dramatic cuts to capital spending across many oil and gas companies
worldwide. Spending for 2015 was significantly below 2014 and this
trend will continue throughout 2016, marking the first time capital
spending has dropped for two consecutive years since 1980. Reductions
on capital spending, rig counts and headcounts allow companies to
shield dividend commitments and ease investor concerns. Total US
spending in 2016 is expected to fall 25.4% in response to huge losses
posted last year with cuts directed primarily at drilling exploration and
production. ExxonMobil and Chevron announced capital expenditure
cuts of approximately 25% this year.
Despite these moves, global crude supplies continue to outweigh
demand. OPEC estimates that the global oversupply for 2015 was 2.02
million b/d, up 1.0 million b/d from 2014. Inventories will remain high
through 2016 in light of Iran’s return to the market and China’s slowing
economy.
It has become increasingly difficult to issue new equity to fund pro-
jects, especially as refinancing old debt may come at a higher cost with
greater restrictions due to declining credit ratings. The top 60 US inde-
pendent oil and gas companies currently have a combined net debt of
$206 billion. Up to half of these companies are at risk of bankruptcy due
to an inability to sell assets and acquire merger or acquisition opportuni-
ties. Last year, 40 US oil and gas companies filed for bankruptcy, holding
a combined debt of $16 billion. This difficult environment has spurred an
increased emphasis on exploring new forms of capital sourcing and de-
ployment while improving efficiencies. Diversified energy portfolios and
trade relations are required to stabilize energy security.
Numerous projects have been cancelled or postponed to reduce
costs, pushing supply to a future when oil prices have (next page)
WTI—USD 41.67 (Apr. 25) Source : US Energy Information Administration
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Brent 2.3%
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Declining CAPEX ...
recovered. This raises the question of when and if these future cash-
generating projects will be brought back online. Wood Mackenzie re-
ported in January 2016 that 68 major projects have been cancelled
since 2014, corresponding to 2.9 million b/d deferred production. The
US oil rig count has also fallen to 351 units as of April 15, 2016 from its
peak levels of 1,609 in October 2014. Because projects are very slow
and difficult to resume, supply may not be able to catch up if demand
increases too quickly.
NATURAL GAS SPOT PRICE
“...supply may not be
able to catch up if de-
mand increases too
quickly.“
Ambitious Attempt of European Commission for Gas
Supply Security
A new proposal from the European Commission (EC) may initiate
interesting discussions among energy stakeholders.
On February 2016, EC unveiled a draft of energy security policy
package so called ‘Toward Energy Union’. It consists of four policies
namely 1) Security of Gas Supply, 2) Intergovernmental Agreement, 3)
LNG and Gas Storage, and 4) Heating and Cooling.
The policy package is an implementing rule of the prior strategic
decision called ‘Energy Union’. The aim of the policy package is to ad-
dress the necessity to prepare for possible energy supply interruption,
particularly natural gas supply interruption. The policy covers broad
range of issues to enhance supply security such as curbing energy de-
mand, increasing indigenous production, diversifying energy use and
import partner/route, and further integration of internal energy mar-
ket.
Amongst the most interesting part for the author is the proposal
for increasing EC’s ability to engage in a new gas import contract. Un-
der the proposed new rule, gas importing company is requested to
submit their contractual information with non-EU countries where
they made an agreement. EC will make an ex-ante check for the con-
tract term whether it comply with EU competition law.
Currently, except for a case that importer is a national company,
sales and purchase contract is purely a private business matter thus, it
does not disclose any specifications to third party including concerned
government. In this view point, the new rule is ambitious and chal-
lenging as it seems to be trying to change current common business
practice and relationship between private and public.
“to address the necessity
to prepare for possible
energy supply interruption,
particularly natural gas
supply interruption.”
Henry Hub—USD 1.97 (Apr.25) Source : US Energy Information Administration
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Do
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Btu
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3
Middle East Update
Sanctions Against Iran, Lifted
The sanctions against Iran are now lifted and the Iranian gov-
ernment, with a strong popular support, is determined to revive its
economy with the help of both enhanced oil revenues and foreign
direct investment. The export of Iranian crude to the European
market has resumed since February this year, which perhaps has
contributed in keeping the international oil prices low, while the
government is still trying to finalize its new oil contract formula
(IPC) to attract international oil companies (IOCs)’ attention. It
needs to be closely watched whether the new 10th parliament that
will convene at the end of May will approve IPC, which is expected
to contribute to a swift expansion of oil and gas productions in Iran.
Iran aims to produce 5.7 million barrels per day of oil by 2020.
Declining amounts for LNG imports in 2015
2015. Volumes imported by new importers, notably
Egypt, Pakistan, and Jordan, and some recoveries of Euro-
pean imports cancelled out declines in imports into North-
east Asia.
While Northeast Asia maintains (and in the future is
expected to maintain) its prominent share of 60% in the
global LNG market, declines of not only imported volumes
but also paid amounts for LNG imports were notable.
Japanese LNG imports decreased in 2015 for the first
time since the great earthquake and ensuing nuclear crisis
in 2011, to 85 million tonnes. Korean LNG imports de-
creased again in 2015 after peaking at 40 million tonnes in
2013, down to 33 million tonnes. Measures to maintain bal-
ances between energy sources and to reduce energy con-
sumption - and costs - may be contributing to moderating
excessive use of LNG in those countries.
China did not grow LNG imports much in 2015 for the
first time since it started LNG imports in 2006 at around 20
million tonnes. Only Chinese Taipei modestly increased LNG
imports by 1 million tonnes in 2015 among the four import-
ers in the region to 14.5 million tonnes. More remarkable is
reduction in payments for those LNG imports.
Japan's payment was 30% (in JPY) and 39% (in USD)
smaller year-on-year for 4% smaller imports of LNG at
JPY 5.5 trillion and USD 46 billion;
Korea's payment (in USD) was 40% smaller year-on-
year for 10% smaller imports of LNG at USD 19 billion;
China's payment (in USD) was 27% smaller year-on-year
for around the same volumes of imports of LNG at USD
9 billion;
Chinese Taipei's payment (in USD) was 36% smaller
year-on-year for 8% larger imports of LNG at USD 6 bil-
lion.
In all, Northeast Asia paid USD 80 billion for 153 mil-
lion tonnes of LNG (4% smaller volumes compared to 159
million tonnes in 2014), which was 38% smaller than USD
128 billion in 2014.
The region was paying less than USD 8 per million Btu
on a weighted average basis in January 2016, compared to
around USD 14 one year earlier.
Although excessively low prices, as well as their volatil-
ity and unpredictability, delay and hinder investment in
LNG projects, affordable prices and costs of LNG are critical
elements of security of supply.
The affordability of LNG also helps promote the
cleaner fuel in different countries, as evidenced by mush-
rooming new LNG importers in recent years (especially in
2015), enabling LNG to play more important roles in the
future.
“…..has resumed since
February this year,
which perhaps has con-
tributed in keeping the
international oil prices
low….”
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4
Interview with Dr. Ross Lambie
Dr. Ross Lambie serves as the General Manager of Resources and En-
ergy Economics Branch Department of Industry, Innovation and Science. He
is also one of APERC’s Advisory Board members.
APERC—Please explain briefly the function of Resources and Energy Eco-
nomics Branch of Department of Industry, Innovation and Science, or the
role of your office in addressing oil and gas supply security issues.
Dr. Lambie—The Department of Industry, Innovation and Science (the De-
partment) is the lead government agency in identifying, assessing and de-
termining the state of security in regards to our energy markets. However,
we do not do this is isolation, the department is informed by a range of Aus-
tralian government agencies, both economic and security related.
The Resources and Energy Economic Branch (REEB) within the Depart-
ment’s Office of the Chief Economist (OCE) role is twofold. Firstly the REEB
collects, collates and analyses energy data in general and specifically oil and
gas data. Secondly, REEB plays a role in undertaking periodic economic
analysis of the energy sector to inform government and the community.
APERC—As a policy maker¸ have you been sought advice or implement pol-
icy addressing oil or gas supply security issues/threats in Australia? If yes,
do you mind mentioning in what particular issue/threat or what were the
cause?
Dr. Lambie—Strictly the OCE is not a policy area, though we work very
closely with these areas. The way Australia addresses oil or gas security is-
sues is by undertaking regular assessments of Australia’s energy security,
primarily through the National Energy Security Assessment (NESA). The
NESA is a forward-looking, whole-of-government energy security assess-
ment of Australia’s liquid fuels, gas and electricity sectors. NESAs were con-
ducted in 2009 and 2011 and a third NESA is currently in preparation.
Previous NESAs have focussed on the market fundamentals of supply,
delivery and price competitiveness for the liquid fuel, gas and electricity
sectors. We look at the whole energy system. Much of the data underpin-
ning these assessments is derived from work that REEB performs. For the
third NESA, the scope of the assessment will be expanded to look at system
resilience issues related to infrastructure and supply across the entire chain
(domestic and international) as well as the wider security environment.
The Australian Government also conducts on-going monitoring and
assessment of Australia’s energy security situation by commissioning exter-
nal studies on specific issues, and internal analysis across government agen-
cies. My Department has commissioned several studies in recent years to
examine the potential risks to liquid fuel supply, the implications of Austra-
Dr. Ross Lambie
General Manager Resources and Energy Eco-
nomics Branch
Prior to joining the Department of Industry,
Innovation and Science, Dr. Lambie was Man-
ager of the Economics Team for the ACT Inde-
pendent Competition and Regulatory Commis-
sion. Ross has extensive experience trading
fixed interest securities and derivatives in the
New Zealand Financial Market including posi-
tions as manager of money market and bond
trading desks for Westpac New Zealand. Ross
holds degrees in Accounting, Resource Studies
and Economics (Hons) and a Master’s degree in
Commerce and Management. He has recently
been awarded a PhD in Public Policy from the
Australian National University.
“…..how these new
approaches to risk
could be applied to
energy security..”
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5
lia’s declining refining capacity and the resilience of our
maritime supply chains. This on-going analysis ensures
that we have an up-to-date awareness of changes in
global and domestic energy markets.
We also regularly run disruption scenarios to test re-
silience of liquid fuel supplies. Recent interruptions in Aus-
tralia have been at the distribution rather than the supply
level, and have been resolved by the domestic market un-
der close monitoring by the government.
APERC—As energy exporter, how do you think Australia’s
role in oil and gas security is evolving within APEC as a
whole?
Dr. Lambie—Australia has a unique position of being a
large energy exporter but also, like many APEC member
economies, an energy importer for liquid fuels. We have a
diverse range of high quality energy resources, including
the world’s largest uranium reserves, the fourth largest
coal reserves and the eleventh largest gas reserves. How-
ever, Australia’s resources of crude oil, condensate and
liquefied petroleum gas are not as abundant as other re-
sources, and as a result we are increasingly reliant on im-
ports of liquid fuels.
Like many other economies we are reliant on well
performing energy markets for the provision of liquid fu-
els. Accordingly, our approach to energy security consid-
ers the large role of markets in maintaining supply and
managing supply disruptions.
As an exporter, we see our role in APEC as a reliable
supplier and partner in contributing to global, and in par-
ticular Asia-Pacific, energy security, with the added advan-
tage of having a very clear understanding of the needs and
concerns of energy importers. We have long established
trade and bilateral relationships, and an understanding of
the region that we can bring to the table in international
fora on all energy issues including oil and gas security.
APERC—At the Oil and Gas Security Network Forum last
month in Kagoshima, Japan, the Australian Government
hosted a workshop on Risk Management Approached to
Energy Security. Could you please explain this approach,
and Australia’s vision for it within the APEC region?
Dr. Lambie—Australia is interested in looking at how
modern risk approaches can apply in the area of energy
security.
The workshop arose from thinking about how ap-
proaches to managing risk have changed in recent years,
particularly following the Global Financial Crisis (GFC). The
GFC was pivotal in changing how policy makers and regu-
lators think about risk, because it was clear that tradi-
tional approaches no longer worked in a large complex
and highly interconnected system such as global financial
markets. As a result, approaches to risk management have
shifted more towards looking at the whole system and
how its different components interact. This means that
the risk profile of the system can look very different to the
profile of only one part of the system, such as an individ-
ual firm.
Like financial markets, global and regional energy
markets and systems are highly complex and integrated.
As analysts and policy advisers, we see value in investigat-
ing how these new approaches to risk could be applied to
energy security to enhance our ability to assess, under-
stand and mitigate energy security risks at the broader
regional level. We think that this way of thinking about
risk offers many benefits for policy makers, particularly in
terms of providing greater insight into the costs and bene-
fits associated with different risks as mitigation options.
This was the basis for the workshop in Kogashima at
the Oil and Gas Security Network (OGSN) Forum. The Fo-
rum supported Australia in pursing the work, and subse-
quently we have developed an APEC project proposal for
EWG consideration in early May. The proposal is to de-
velop some shared risk principles and a conceptual frame-
work for risk management approaches to energy security
in the APEC region. The framework would be theoretical,
to help guide policy makers thinking, but which we envis-
age could developed and implemented as a model or spe-
cific methodology at a later stage if this was something
that APEC wanted to pursue.
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6
Petroleum Product Trading and Security
The supply-demand balance of the member states in
the ASEAN region, and its neighbouring economies were
examined and analysed in this study.
Diesel fuel consumption, increased alongside eco-
nomic growth and is used for various purposes, such as
road transport, railroads, power generation (including pri-
vate power generation), and industrial fuel. Along with re-
cent progress in fuel substitution and energy saving, re-
forms toward the reduction or discontinuation of subsidies
in diesel fuels are making headway. Gasoline consumption,
on the other hand, is driven by improvement in standard of
living, that is, even people in the middle-income group
tends to own private cars. As is the case of diesel fuel, the
retail prices of gasoline are sometimes controlled in some
countries to remain below the international market
through providing subsidies. Although, increase in gasoline
prices will have little impact on gasoline demand even
when subsidies are discontinued as people's motive to buy
private car continues to be strong. On the other hand, die-
sel fuel demand is expected to decline as price elasticity of
diesel fuel demand is relatively significant. Consequently,
the present demand structure of petroleum products,
which is extremely skewed towards diesel fuel, will gradu-
ally change to a more balanced one as the ratio of gasoline
consumption increases and that of diesel fuel consumption
decreases. In light of this, closer attention should be given
whether the subsidy reforms in Indonesia – which has the
largest petroleum demand in Southeast Asia region – a
success or failure.
Environmental issues and fuel quality improvement
have become matters requiring urgent attention. While
efforts toward the quality improvement (standards) of
gasoline and diesel fuel varies from country to country,
most countries aim to shift from standards equivalent to
EURO III to EURO IV standards in the 2010s (some coun-
tries are aiming to shift to EURO V standards equivalent).
To address the current supply-demand gaps, it would
be effective to create a framework that achieves stable
exports for a long period of time – of about 10 years, and
not on a per need basis, through cooperation with Japan,
Korea, and Chinese Taipei. The establishment of a stable
supply system will enable the ASEAN member countries in
solving domestic supply problems. The establishment of
win-win relationships between the ASEAN region and Ja-
pan, Korea, and Chinese Taipei would serve as one of vari-
ous useful approaches toward a good supply-demand bal-
ance, including efforts to reduce facilities so that supply
commensurate domestic demand.
Excerpt from OGSS Series
2nd Oil and Gas Security Forum
The Asia Pacific Energy Research Centre (APERC)
hosted The 2nd Oil and Gas Security Forum on 10-11 March
2016 in Kagoshima City, Japan. Economy delegates from 19
APEC member economies participated in the Forum. The
Forum also gathered experts from the International Energy
Agency (IEA), ASEAN Centre for Energy (ACE), ASEAN Coun-
cil on Petroleum (ASCOPE), Heads of ASEAN Power Utili-
ties/Authorities (HAPUA), and Economic Research Institute
for ASEAN and East Asia (ERIA).
The President of APERC stressed in his opening state-
ment that the Forum, which is being held annually, aims to
establish an operational network as a platform to have a
substantive, effective and useful information exchange
scheme relating to addressing emergency supply situations.
Meanwhile, the official from the Ministry of Economy,
Trade and Industry (METI) of Japan presented the measures
undertaken during the Great East Japan Earthquake to deal
with oil supply disruptions. The oil companies were obliged
to set Joint-Operation Plan for oil supply in disaster
stricken areas. The Oil Stockpiling Law of (next page)
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7
2nd Oil and Gas….
Japan was also revised to make it more responsive to do-
mestic disasters.
Result of the Oil and Gas Security Exercise (OGSE) held
in the Philippines last December 2015 was presented cover-
ing three stages of emergency scenario. From the exercise,
the Philippine government sees the need to update its oil
contingency plan formulated in 2002, and to draft a national
gas contingency plan to address gas supply disruption. One
of the experts’ recommendations is for the Philippines to
consider establishing an emergency supply sharing agree-
ment, other than ASEAN Petroleum Supply Agreement
(APSA), with other APEC member economies either on bilat-
eral or multilateral basis.
Each of the APEC economies delivered a presentation
on its oil and gas supply and demand situation, policies on
oil and gas supply security, and on the policy reforms that
need to be considered both at domestic and regional levels
to further strengthen emergency preparedness and re-
sponses. Among the policy reforms identified include: crea-
tion of new market mechanism to promote investment in oil
and gas infrastructure; setting up of strategic oil stockpiling
and gas reserves; development of regional oil storage and
trading hubs; and, establishing regional supply sharing
scheme as a form of emergency response. On the other
hand, the experts underscored that it is the right time for
APEC economies to build stocks to prepare for future tight
market, and study the practical aspect of having an oil
stockpiling roadmap.
Mr. Koichiro Tanaka, President of JIME Center, a Mid-
dle East research division of the Institute of Energy Econom-
ics, Japan (IEEJ), briefed the participants on the develop-
ments in the Middle East, particularly on the ISIS issue and
the feud between Saudi Arabia and Iran. He mentioned that
one of the repercussions of such feud could be the intensifi-
cation of discord within OPEC, and thus continuance of ex-
cess supply of oil.
The Australian delegates facilitated a special workshop
session on risk management approaches to energy security.
The workshop was aimed at examining the value of modern
risk approaches to energy security. During the workshop,
three emergency situation case studies were presented for
discussions: Japan’s fuel mix resilience after the 2011 Great
East Japan Earthquake – the value of capacity; European gas
crises – applications to Asia-Pacific supply security; and fi-
nancial crises – managing risk in complex global system.
The workshop will likewise aid Australia in developing a pro-
ject proposal on this area for APEC funding and Energy
Working Group (EWG) endorsement by end 2016.
Upon the invitation from Russian delegate, the next
Forum is tentatively scheduled to be held in Irkutsk, Russia
in 2017.
Experts and Participants in the 2nd APEC OGSN Forum held in Kagoshima City , 10-11 March 2016
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8
Upcoming Event •
IEEJ 50th/APERC 20th Anniversary Joint Sym-
posium 2016
In 2016 IEEJ and APERC celebrate their 50th and 20th
foundation anniversaries, respectively. To commemorate
this important milestone, IEEJ and APERC are hosting an
Anniversary International Joint Symposium.
The Symposium also serves as a venue to discuss near
-term energy issues in the Asia-Pacific region and in the
world as well as long-term energy mix and energy issues
with widely recognized energy experts.
This will be held on 26-27 May 2016 in Tokyo. For
more information please visit its website http://
e n e k e n . i e e j . o r . j p /
seminar/1605_ieej50_aperc20_form.html.
Contributors for this Edition
Ms. Michelle Luk
Mr. Ichiro Kutani
Ms. Sachi Sakanashi
Mr. Hiroshi Hashimoto
Mr. Harumi Hirai
Mr. Michael Sinocruz
Ms. Elvira Torres Gelindon
Editor-in-Chief
Asia Pacific Energy Research Centre
The Asia Pacific Energy Research Centre (APERC) was established in July
1996 in Tokyo following the directive of APEC Economic Leaders in the
Osaka Action Agenda. The primary objective of APERC is to conduct
researches to foster understanding among APEC members of regional
energy outlook, market developments and policy.
Fax (+81) 3-5144-8555
Tel (+81) 3-5144-8551
E-mail [email protected]
Special Notice
As part of the celebration of its twentieth anniversary
of foundation, APERC adopted in 2016 a new logo. Made
of stylized characters of ‘A’ and ‘P’, its symbol mark repre-
sents APERC’s mission and will of contributing to the de-
velopment of the Asia-Pacific region through its research
and dissemination activities aimed at supporting the APEC
member economies in establishing efficient energy poli-
cies.
Upcoming Event •
LNG Producer-Consumer Conference
2016
On November 30, 2016, the LNG Producer-
Consumer Conference 2016 will be held in Tokyo,
hosted by the Ministry of Economy, Trade and Indus-
try (METI) and the Asia Pacific Energy Research Cen-
tre (APERC).
Conference participants will share the latest
trends in the global liquefied natural gas (LNG) mar-
ket and discuss various issues and challenges with a
view to ensure a stable, competitive and flexible
global LNG market.
Participation will be from high-level representa-
tives including Ministers, business leaders and ex-
perts from LNG producer and consumer countries. As
in the previous, the forum will serve as a venue to
form a network of working level officials in the APEC
economies and experts from international/regional
organizations.
More information will be announced in the
forthcoming issues of APEC OGS Newsletter.