APEC Oil and Gas

Security Newsletter

Your Organization August 2015 Issue No. 5

CRUDE OIL SPOT PRICE

WTI—USD 42.62 (Aug. 21) Source : US Energy Information Administration

In this issue

Dilemma in Japan’s New Energy Policy ....... 1

Melting of the Arctic Sea Ice: Significance for the APEC Economies’ Energy Security ........ 2

Middle East Update .................................... 3

Interview with Ir. Dr. Sanjayan Velauthan .. 4

Challenges of Biofuel Use in Southeast Asia .................................................................... 5

APEC Regional LNG Trade Facilitation ......... 7

Highlights

50th IEEJ/20th APERC Anniversary Special Pre-Symposium

Upcoming Event : LNG Producer-Consumer Conference 2015

Crude Oil Spot Price (WTI and Brent)

Natural Gas Spot Price (Henry Hub)

Photo Story

Dilemma in Japan’s New Energy Policy

In July 2015, Japan’s government has decided to set a 2030 target of

energy mix. Electricity mix was the focus of the target and described as 22-

24% of Renewable Energy (RE), 20-22% of nuclear, 27% of natural gas, 26%

of coal, and 3% of oil. Compared with electricity mix in 2014, the share of

natural gas and coal will be reduced by 13 percent point and 7 percent

point, respectively. The government moves toward curbing the construc-

tion of gas-fired and coal-fired power plants because it will prejudice GHG

emission target.

The energy mix target is expected to be achieved by three major means

namely, 1) reduce the consumption of final energy by 13% from business-

as-usual (BAU) levels by rigorously improving energy efficiency, 2) increase

self-sufficiency to 24%* with the help of nuclear energy (10% to 11%*) and

RE (13% to 14%*) out of the remaining energy sources after the improve-

ment of efficiency and 3) reduce electricity costs once nuclear power

plants resume operations and efficiency is improved for thermal power

generation. The goal to reduce GHG emissions has been set at 26% in com-

parison with the 2013 levels in consideration of several factors including

the energy mix. (* Total Primary Energy Supply base)

On the other hand, looking into the current market situations, there is a

notable initiative to construct new coal-fired power plants. As the liberali-

zation of Japan’s retail electricity market is a “done deal,” many new busi-

nesses showed intention to enter the market in the pursuit of business op-

portunities, particularly within the jurisdiction of Tokyo Electric Power

Company, Inc. Most of these newcomers are betting on coal-fired power

generation. It comes as no surprise that they will try to use low-cost, coal-

fired power generation to win the competitive battle with an incumbent

power utility that owns many highly-efficient, but still expensive gas-fired

power generating facilities. This entire movement is a natural response to

the government’s competition policy, wherein a succession of entries by

companies with low-cost power plants into the electricity (next page)

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Dilemma in Japan’s….

market results in intensive competition and lower electricity tariffs.

The problem here is the contradiction with the energy mix target

shown earlier. This situation has created a serious dilemma for the Japa-

nese government in terms of energy mix targets and competition policy.

In other words, how Japan realizes its energy mix targets in a liberalized

market is a big challenge, where energy supply companies are encour-

aged to act freely based on their business decisions. This is also the case

with ensuring the security of natural gas and oil. This major contradic-

tion has already surfaced in the European market, driving different

forms of trial and error. Going forward, the policy direction of the Japa-

nese government needs to be closely watched.

NATURAL GAS SPOT PRICE

“...if it continues, will

have a wide range of

devastating environ-

mental impacts on the

entire planet…”

Henry Hub—USD 2.70 (Aug. 21) Source : US Energy Information Administration

Melting of the Arctic Sea Ice:

Significance for the APEC Economies’ Energy Security

The Arctic sea ice has been melting because of global warming caused

by greenhouse gases, particularly CO2, whose main source of emission

has been heavy consumption of fossil energy for over two centuries. This

phenomenon, if it continues, will have a wide range of devastating envi-

ronmental impacts on the entire planet, including rising sea-levels to

affect all the countries sharing a coastline with open seas, including all

the APEC economies, and worsening global warming. However, it may

make possible the extensive exploration of the Arctic region’s undiscov-

ered oil and gas resources previously inaccessible estimated at 413 billion

barrels of oil equivalent. They account for 13% of the world's undiscov-

ered conventional oil resources and 30% of its undiscovered conventional

natural gas resources. Sharing borders with the Arctic region, three APEC

economies, namely, Canada, Russia and the USA, have a varying share of

these resources of which 84% are offshore, but, their combined resources

account for their bulk (oil: 78%; gas:88%) leaving the rest for Norway and

Greenland.

While extensive oil/gas exploration will likely worsen the Arctic’s frag-

ile environment, it could turn the Arctic region into a major oil/gas suppli-

er, provided the feasibility of its sustainable large-scale oil/gas production

and export at competitive prices. Such operation involves certain oppor-

tunities, including increasing the global supply of these fuels and, thus,

their availability to the APEC economies depending on oil and gas (LNG)

imports. Yet, this prospect could face certain challenges to prevent a rap-

id development of the regional oil/gas resources, including the technical,

economic, financial and political ones. “Arctic paradox” reflects the envi-

ronmental challenges as extensive oil/gas operation in the Arctic region

whose environment is fragile would speed up its melting with (next page)

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The Arctic Region Source: Map supplied courtesy of: [The Perry-Castañeda Library Map Collection and National Snow

and Ice Data Center (2015), “What is the Arctic”, All About Arctic Climatology and Meteorology, Boul-

der, Colorado, USA. https://nsidc.org/cryosphere/arctic-meteorology/arctic.html]

Photo and Photo Story

What is the Arctic?

The region surrounding the North Pole consists of a large

ocean surrounded by land. This ocean, called the Arctic

Ocean, is like no other ocean on Earth; and because of its

special location and climate, the lands that surround it are

unique.

“...due to the country’s

unrestrained fuel

consumption, Saudi Arabia

may be vulnerable to

economic and social crises. “

Middle East Update—Subsidy Policy in Saudi Arabia

Energy subsidies represent most of implicit subsidies, which have

caused inefficient energy use and thus inflated the energy demand

in Kingdom of Saudi Arabia (KSA). A report by Chatham House

warned that Saudi Arabia will become a net oil importer in 2038

based on a business as usual trajectory. Saudi Arabia’s current ca-

pacity is 12.34 mbd which is enough to supply the country’s demand

until 2037. The report also indicated that due to the country’s unre-

strained fuel consumption, Saudi Arabia may be vulnerable to eco-

nomic and social crises.

With the drop of crude oil prices since 2014, KSA is now facing a

budget deficit. The International Monetary Fund (IMF) repeatedly

pointed out that subsidy cut is the key to easing the burden, but

Saudi Arabia has yet to announce any effort in this line. Instead of

reducing subsidies, KSA has opted for energy efficiency measures by

introducing fuel economy standards for imported cars. With the

widening budget deficit and expanding energy demand, Saudi Ara-

bia needs to further review their energy policy.

For more information on the study of the oil situation in the KSA

you may view the report on the following:

http://www.chathamhouse.org/sites/files/chathamhouse/

public/Research/Energy,%20Environment%20and%

20Development/1211pr_lahn_stevens.pdf

Melting ….

the mentioned global impacts. Despite

the interest of the listed APEC econo-

mies, Greenland and Norway in devel-

oping their Arctic resources, their re-

spective operations’ extent and timing

are unpredictable due to the specified

challenges. The conceivable scenarios

for such operations include the de-

layed development scenario, which is

probable in this decade, the limited

development scenario, and a possible

scenario in the foreseeable future,

and the extensive development sce-

nario, an unlikely scenario in the fore-

seeable future.

4

Interview with Ir. Dr. Sanjayan Velautham

Ir. Dr. Sanjayan Velautham is a member of APERC Board of Advisors.

Following was APERC’s Interview with Dr. Sanjayan Velautham:

APERC—As the current ACE Executive Director, what task do you find challeng-

ing? Does ACE have a role in addressing oil and gas supply security issues in the

ASEAN?

Dr. Velautham—The mandate to take on this job was to enhance the capacity of

ACE and move it towards a higher performing institution as a regional centre of

excellence that serve to assist AMS by identifying and surfacing innovative solu-

tions for ASEAN’s energy challenges on policies, strategies and to become a

knowledge depository for AMS on Energy matters.

One of the specialized bodies structured within the ASEAN Governing Council for

Energy is ASOPCE which comprises of the respective national oil companies in

the ASEAN region. ASOPCE specializes to address the common challenges in all

aspects and phases of the petroleum industry for the AMS. ACE in this respect

facilitates and coordinates depending on the requirements of certain activities.

APERC—Now that APSA is being implemented, what is ACE role in its implemen-

tation? How can ACE help for its success?

Dr. Velautham—The ASEAN Petroleum Security Agreement (APSA) was signed

in Manila, Philippines, in 1986 by the AMS to establish the ASEAN Emergency

Petroleum Sharing Scheme for crude oil and/or petroleum products in times or

circumstances of both shortages and oversupply. This was updated in 2009 and

formed part of the agreement the annex “Mechanism for the operationalization

of the Coordinated Emergency Response Measures” or “CERM”, which details a

framework for regional consultation and coordination.

ASCOPE is the designated ASEAN energy body as the APSA Secretariat. The APSA

officially entered into force in early 2013, following final ratification by all 10

ASEAN Member States. However the APSA has yet to be made operational.

The 30th ASEAN Ministers of Energy Meeting in September 2012 endorsed the

establishment of the Task Force on APSA/CERM Operationalisation to propose

the necessary procedures, guidelines and plan of action, and required infrastruc-

ture for the operationalisation of the Coordinated Emergency Response

Measures (CERM) Mechanism under the APSA.

The ASEAN Centre for Energy (ACE) role in this was to serve as the Secretariat of

the APSA-CERM Task Force. The Task Force is currently in progress in the finali-

zation of the Review of the APSA document and Manual for the Operationaliza-

tion of APSA. The Manual is planned for adoption in the 33rd ASEAN Ministers of

Energy Meeting in October 2015 in Kuala Lumpur, Malaysia.

If all goes well, ACE is in a position to contribute, along with other secretariat

and technical functions that would be required to operationalize the APSA-

Ir. Dr. Sanjayan Velautham Dr. Velautham was appointed as the Executive

Director of the ASEAN Centre for Energy (ACE) in

January 2015 reporting directly to the Governing

Council consisting of Leaders of the Senior Offices on

Energy from the ASEAN member states.

His background is Engineering and before taking

the assignment as Executive Director, he had worked

in Singapore initially with Agency of Science, Tech-

nology and Research (A*STAR) as a Deputy Director

and then with General Electric as Country Manager

for the Power Generation Services business. He had

started his career with Tenaga Nasional Bhd. in Ma-

laysia within the Power Generations Division. He had

also served as the National Project Manager for the

BioGen Project for United Nation Development

Prgramme (UNDP – Malaysia).

“... is a significant

regional effort towards

ensuring energy security

but may require detailed

analysis for realization. ”

5

CERM.

APERC—Do you think an APSA-type arrangement can be appli-

cable to APEC region as a whole?

Dr. Velautham—Definitely, an APSA-type arrangement could be

applicable and beneficial to the APEC Member Economies. The

scope and arrangements may be different but with formalized

arrangement--energy security is enhanced, energy cooperation

strengthened and most importantly, exposure to an emergency

situation minimized through the implementation of short and

medium to long-term measures.

Under APSA, “voluntary and commercial oil stockpiling” is one

of the medium-to long-term measures. The inclusion of oil

stockpiling, ACE believes, is a significant regional effort towards

ensuring energy security but may require detailed analysis for

realization. Oil stockpiling in the ASEAN Member States range

from 15 to 90 days. The ASEAN countries are learning from the

IEA on the best practices to establish effective coordination

mechanism on the utilization of national oil stockpiles. ACE is

currently shepherding the development of the “ASEAN Oil

stockpiling Roadmap” under the framework of the ASEAN+3

energy cooperation; and is a good start towards raising aware-

ness and enthusiasm in developing oil stockpiling policies and

strategies in the ASEAN region. In the context of APEC, perhaps

a mandatory oil stockpiling would be more appropriate.

By putting in place an APSA-CERM like mechanism, the APEC as

a whole would have the opportunity to encourage and assist

Member Economies to have emergency mechanisms and con-

tingency plans in place to provide the capacity to respond to

energy emergencies, which may include encouraging the adop-

tion of best practice principles for the establishment and man-

agement of strategic oil stocks in interested Member Economies

which will include collection and reports on monthly oil data in

order to improve accuracy, coverage and timeliness of data and

transparency in the global oil market. Another aspect is to es-

tablish “Real-time Emergency Information Sharing System and

development of an operational manual to assist Member Econ-

omies use the System. And, the APEC whole would have coordi-

nated and unified strategy to monitor and strengthen sea-lane

security / strategic choke points within the APEC region and

thereby the region is better prepared to respond and communi-

cate with relevant bodies as appropriate in times of emergency.

APERC—APERC is currently implementing the APEC Oil and Gas

Security Initiative (OGSI) and one of the activities is the oil and

gas emergency exercise, do you think this is important and use-

ful especially for the Southeast Asian members in dealing with

emergency situation on oil and gas?

Dr. Velautham—Oil and gas emergency response exercise is

very important, especially to the ASEAN Member States, to en-

sure that the impact of any supply disruption is minimized. The

ASEAN Member States, including ACE and ASCOPE, have been

participating in the IEA’s oil and gas emergency response capac-

ity building cooperation which enhances awareness raising and

knowledge transfer on oil and gas security policies and practic-

es; national emergency preparedness policy, legislation, and

response structures; national emergency planning and prepara-

tion; data gathering for oil and gas markets in normal times and

during emergencies and data analysis in order to assess the im-

pact of supply disruptions.

IEA, ASCOPE, and ACE are currently organizing a mini simulation

exercise on emergency response under the framework of oper-

ationalizing and localizing the implementation of APSA. The ex-

ercise will involve all the ASEAN Member States and to be held

in September this year in Jakarta. The exercise is expected to

develop emergency response models that will make the ASEAN

Member States better prepared for any eventualities of supply

disruptions and emergency oil and gas situation.

APERC—Any final words?

Dr. Velautham—In today’s world as we progress along the way

we meet with organisations heading in the same direction and

sometimes on parallel paths. As such we find that our purposes

and principles are supportive and that we can go forward to-

gether, supporting and inspiring each other. I sure believe

APERC and ACE are such organisations.

This is further emphasized as ACE is progressing to enhance its

activities and scope to serve as a high-performing institution, a

regional centre of excellence that builds a coherent, coordinat-

ed, focused and robust energy policy agenda and strategy for

ASEAN. We most welcome organisations like APERC - to learn

from and to work closely in a collaborative and cooperative re-

lationship.

6

50th IEEJ/20th APERC Anniversary Special Pre-

Symposium

The 50th IEEJ/20th APERC Anniversary Special Pre-

Symposium was held on 11 June 2015 in Tokyo, co-hosted

by the Institute of Energy Economics, Japan (IEEJ) and

Asia Pacific Energy Research Centre (APERC). There were

eight presenters from international government agencies,

university, research institutions and IEEJ. About 120 audi-

ences from both local and international Japanese energy

companies including I staff and members of IEEJ and

APERC attended

The Pre-Symposium had two Sessions, Session I: Ener-

gy Mix of Major Countries based on the “3Es” Perspective

and Session II: The Outlook for Oil Prices and Economic

Impacts for Oil Producing and Consuming Countries.

The first session talked about the “3Es (Energy Securi-

ty, Economic Growth and Environmental Conservation)”

which are essentially linked to each other. Guest panel-

lists in this session include Prof. Li Zhi Dong from China,

Dr. Twarath Sutabutr of Thailand and Ms. Yukari Yama-

shita of Japan. They presented their respective countries’

plans and policies involving the “3Es”.

In Session 2, Prof. Paul Stevens, an independent con-

sultant from Chatham House, UK presented facts on oil

price drops. He presented that it is important to under-

stand whether the oil price declines is caused by factors

on the supply side or the demand side, since different

measures needs to be undertaken to cope with according

to the factors.

In this session, Ms. Loreta Ayson of the Philippines, Dr.

Tatiana Mitrova of Russia and Dr Marwan Hussein Masri

of Canada, shared the benefits and adverse impacts of

the low oil prices in their respective countries.

The minutes and presentation materials of the sympo-

sium will be uploaded at the APERC website (http://

aperc.ieej.or.jp/) soon..

Challenges of Biofuel Use in Southeast Asia

Biofuel use is expected to be one of prospective means to

curb consumption of petroleum products. While some econo-

mies in Southeast Asia have made substantial progress in man-

dating a certain level of biofuel blending, the following indicate

that stumbling blocks still remain even after the biofuel use is

required.

First, inadequate supply of feedstock slowed down biofuel

mandatory use in Indonesia and the Philippines. For example,

Indonesia postponed raising a mandatory blending level of bio-

diesel from 10% (B10) to 15% (B15) from April to August, 2015

since oil price drop has made gasoil cheaper than crude palm

oil, a feedstock in biodiesel production. Consequently, this de-

lay derailed the economy’s plan to reduce gasoil imports as

well. In case of the Philippines, the government has relaxed the

requirement for 10% ethanol blending (E10) in premium 97 oc-

tane gasoline resulting from low domestic ethanol production.

A circular dated 9 June 2015 specifies that this waiver is tempo-

rary until the local supply condition is improved. However, com-

pliance with the use of E10 seems to be continuously challeng-

ing for the Philippines because sugarcane, a feedstock in etha-

nol production, is not competitive enough due to low productiv-

ity and high production costs, thereby making it unattractive for

farmers.

Second, Malaysia’s announcement to roll out the 10% bio-

diesel blend (B10) revealed uncertainty related to technology

using biofuel. Although Malaysia will implement the B10 pro-

gram nationwide starting from this October, this move has

caused divided technical assessment among automakers. One

automaker stated that their diesel-powered vehicles would be

compatible with the new mandatory level whereas others

claimed that the B10 may cause damage to the car engines.

Such inconsistent evaluations would make the public puzzled

and hesitant to use biofuel.

Although gearing up for biofuel use may not go smoothly as

planned, biofuels certainly have potential to reduce dependen-

cy on petroleum products. Therefore, further administrative

strategy and support, and technology advancement are antici-

pated for biofuels to be facilitated.

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 master@aperc.ieej.or.jp

Contributors for this Edition

Mr. Ichiro Kutani

Dr. Hooman Peimani

Mr. Yasuhiko Nagata

Ms. Tomoko Matsumoto

Dr. Tetsuo Morikawa

Mr. Goichi Komori

Ms. Elvira Torres Gelindon

Editor-in-Chief

APEC Regional LNG Trade Facilitation

The Conference on APEC Regional LNG Trade Facilitation

hosted by the Ministry of Economic Affairs of Chinese Taipei and

organized by Taiwan Institute of Economic Research, was held

on 15-16 July in Taipei. The Conference was participated in by 17

experts from industry, government agencies, ASCOPE, and

APERC who presented about their views on LNG market in APEC

region, and attracted about 150 audiences.

While the presentations were very informative in under-

standing the current status of LNG market and projects as well

as market outlooks there was a glimpse of conceptual differ-

ences felt among the conference participants, as is often the

case with any other LNG-related conferences.

Firstly, there was apparently discrepancy between market

players and others over the concept of “LNG market” itself.

While some government agencies seemed convinced that gov-

ernments can create and develop “APEC LNG Market”, LNG

sellers/buyers did not seem so: presumably market players think

a market is something that emerges by itself in certain condi-

tions.

Secondly, similar difference was observed between market

players and futures exchanges in terms of the role of futures

market. Although futures exchanges argued that LNG futures

contracts will enhance market transparency and price discovery,

market players are not seemingly ready yet although they did

not explicitly express that.

On both instances, LNG sellers/buyers seem to have a point.

National government has a power over its own gas market

through regulation, but only indirectly through companies over

international LNG trade. Futures contract is a derivative which is

derived from physical trade. Therefore, at least theoretically,

futures trade cannot grow to a significant extent without liquid

physical trade.

Upcoming Event : LNG Producer-Consumer Con-

ference 2015

The LNG Producer-Consumer Conference 2015

hosted by the Ministry of Economy, Trade and Indus-

try (METI) and the Asia Pacific Energy Research Centre

(APERC) will be held in Tokyo on September 16, 2015.

It will build on last year’s successful Conference,

which had over 1,000 participants from 50 countries

and economies.

Participants in the conference is expected to come

from high-level representatives including Ministers,

business leaders and experts from producer and con-

sumer countries of LNG.

The LNG Producer-Consumer Conference has been

held every year since 2012. The Conference aims to

promote active discussions on securing a stable, com-

petitive and flexible global LNG market. This year’s

conference will address the latest developments and

challenges in the LNG market including: LNG supply

and demand balance, investment for future projects

and unconventional gas production in United States.

For inquiries :

Secretariat of LNG Producer-Consumer

Conference 2015 Phone：+81/3-3508-1277

Fax：+81/3-3508-1696

E-mail： lngreg "at" convention.co.jp

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