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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25-Feb 26-Mar 25-Apr

US

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WTI-Cushing, OK Brent -Europe

Change fromprevious day

Brent 2.3%

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2

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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1.5

2

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25-Feb 26-Mar 25-Apr

Change fromprevious day

2.6%

Do

llars

pe

r Mill

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Btu

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….”

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..”

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.

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)

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

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 master@aperc.ieej.or.jp

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.