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Energy Security and Challenges for Japan

14 February, 2012Masakazu Toyoda

IEEJ: April 2013 All Right Reserved

Contents(1) Japan’s Energy Security Is Fragile(2) Risks to Energy Security Are Increasing:

1) Contingent Risks2) Structural Risks

(3) If Energy Security Is Not Ensured…..(4) Actions for Energy Security and Status of Nuclear Power Generation

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■ Energy security means:"to secure adequate energy at reasonable prices necessary for the

people’s lives, and economic and industrial activities of the country."■ However, Japan is one of the weakest nations in terms of energy security:

The lowest energy self-sufficiency rate (4%) among G8 members No northeast Asian network (power grid and pipeline) like that in the EU

Energy self-sufficiency rate of major countries (2010)

Source: International Energy Agency

Grid interconnections in Europe

Non-nuclear 4%

(1) Japan’s Energy Security Is Fragile

Nuclear

Non-nuclear

Italy Japan Germany France UK US Canada Russia

Nordic

United Kingdom

North Africa

Synchronous Continental

EuropeTurkey

Baltic


4

19%

4%

Source: EDMC Handbook of Energy & Economic Statistics in Japan, the Institute of Energy Economics, Japan, IEA, etc.

Reference 1: Insufficient Development of Energy Security

75%

17%

65%

94%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009

First oil crisis

Second oil crisis

Dependency on fossil fuel

Dependency on oil

79%

10%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009

Including nuclear power

Excluding nuclear power

Energy self-sufficiency rate

First oil crisis

88%

71%

78%

68%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1965 1970 1975 1980 1985 1990 1995 2000 2005 201060%

65%

70%

75%

80%

85%

90%

95%

Volume of crude oil import

10,000kLDependency on

Middle East 87%First oil crisis

Second oil crisis

83%

43%

4.2%

4.8%

2.4%

0%

1%

2%

3%

4%

5%

6%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2011

Nominal GDP ratio of crude oil import

4-6月

2.4%

First oil crisis

Second oil crisis


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(2) Risks to Energy Security Are Increasing The various risks that could trigger a crisis can be

classified into two types: Contingent Risks Structural Risks

◎ Since the Oil Crisis in 1973, there have been many supply disruptions and energy crises.Risk factors are increasing in scale and complexity.


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1) Contingent Risks

Political events in main supplier countries including wars, revolutions, riots and terrorism■ The 4th Yom Kippur war: led to the 1st oil crisis (1973)■ Iran-Iraq war: led to the 2nd oil crisis (1979)

Political actions by consumer nations■ Sanctions against Iran

■ Accidents in energy supply chains Accidents at facilities that produce, import, ship and transport oil

and gas Accidents at transport bottlenecks (Strait of Malacca, Strait of

Hormuz, etc.) Accidents and troubles at power plants (nuclear power plants, etc.)


77

Reference 2: Sanctions on Iran: Scenarios and Influences

1. Policies of US and Future Scenarios1) The US decided to impose sanctions on Iran including crude oil

export to hinder its nuclear program.Europe supported the decision, which influenced other

countries including Japan and South Korea.2) Possible Scenarios

a. Iran decides to compromise and abandons its nuclear program (uranium enrichment).

b. Iran blockades the Strait of Hormuz and enters military conflict with the US and others.

c. Uranium enrichment by Iran is accepted, but limited to peaceful use.

d. Regardless of moves by the US and Iran, what will Israel do?

2. Influences on Oil, LNG and LPG TradesIf Iran stops producing, oil prices will soar and cause an energy

crisis.(Note) Approx. 80%, 25% and 85% of oil, LNG and LPG of Japanese imports pass through the

Strait of Hormuz. There are no LNG stockpiles or international interchange schemes. The inventory is equivalent to approx. 20 days. Since the nuclear power plant accident, it accounts for 40% of power generation.


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Reference 3: Sanctions on Iran:Schematic View of Strait of Hormuz

・ 2-mile wide passages each to the Persian Gulf and to the Indian Ocean

・ 2-mile wide interference zone between the passages

・Amount of oil traffic: more than 17 million B/D

(Approx. 20% of world oil production)

(85% of oil imports of Japan)

・ Amount of LNG traffic: more than 82.6 million tons

(Approx. 30% of world LNG production)

(18% of LNG imports of Japan)* Figures for Japan are derived from trade statistics in 2010, assuming that imports from Iran, Iraq, Bahrain, Saudi Arabia, Kuwait, Qatar, and UAE passed through the Strait of Hormuz.


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Reference 4: Influences on Crude Oil Prices in 2012

The two most important factors influencing the international oil market in 2012 are the situation of the world economy and international finance, and geopolitical risks.

In the reference case with no major turbulence, supply and demand will remain almost in equilibrium. The actions of OPEC are the focus of attention in terms of supply and demand adjustments.

Depending on how uncertainties in the world economy and oil supply/demand develop, crude oil prices (WTI) could vary dramatically from the second half of 2012.

Reference Case: around $100 $10 (annual average, same applies hereafter)(Note) Saudi Arabia’s Minister of Oil said in January that an oil price of $100 was ideal. Conventional

prices are $60-80. High Price Case: around $120 $10 assuming tensions with Iran Low Price Case: around $70 $10 assuming worsening of the European economic crisis Probability: around 60% for Reference Case; High Price and Low Price Cases are on an

equivalent level. With an emergency in Iran, prices could soar above the High Price Case (beyond the

previous maximum of $147?)(Note) Brent price is about $10 higher than WTI price. The CIF of Japan’s crude oil is also

about $10 higher.

Large fluctuations in prices cannot be avoided this year.(Note) Average crude oil price (WTI) was $100 in 2008, $62 in 2009, $80 in 2010, and $95 in 2011. What will it be in 2012?


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2) Structural RisksDemand side Rapid increase in demand mainly in Asia Competition for resources Energy options for measures to address global warming; shift from coal and oil to

LNG

Supply side Embargo imposed by supplier with political tension (resource nationalism, etc.) Use of market power by supplier (state-owned companies and oligopolistic

system) Depletion of resources and chronic lack of energy (shale gas and environment?) Lack of investment in supply due to environmental controls, deregulation of

market, etc.

Political issues Uncertainty caused by the Arab Spring Regional instability resulting from declining influence of US hegemony


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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,00019

71

1980

1990

2000

2009

2020

2030

2035

石油換算百万トン

Asia

North AmericaEuropean OECD Members

European non-OECD MembersCentral and South AmericaMiddle EastAfrica

Oceania

Annual Average Growth Rate

’80-’09 ’09-’35World 1.8% 1.7%Asia 4.6% 2.6%North

America 0.7% 0.4%

Under steady economic growth, energy consumption in Asia in 2035 will be nearly double the current volume (3.9 GT in 2009 → 7.6 GT in 2035). Non-OECD countries account for approx. 90% of the increase in world energy consumption from 2009 to 2035.

In 200911.2 GT

↓In 203517.3 GT

(1.5 times)

World

AsiaIn 20093.9 GT

↓In 20357.6 GT

(1.9 times)

3.9 GT

7.6 GT

Reference Case

Source: Asia/World Energy Outlook 2011, the Institute of Energy Economics, Japan

Reference 5: Outlook for World Energy Demand (by Region)

Oil equivalent MT


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Reference 6: Intensified Competition for Energy Resources

Increase in dependency on energy imports means greater fragility (especially in China).

To address this, strategies including development of domestically produced energy, diversification of supply sources, independent development overseas, and strengthening of companies as players will be fully implemented.

If such actions become excessively exclusive, protection of or competition for resources may intensify, leading to instability in the international market.

Source: Asia/World Energy Outlook 2011, the Institute of Energy Economics, Japan

Oil

Natural Gas

89 110

382

647

769

108 138194 209 204

-19 -28

187

438

564

-100

100

300

500

700

900

1980 1990 2009 2020 2030

Consumption Production Net Import

Oil equivalent of 1 MT

-21%

-25%

49%

68%73%

Outlook for Supply and Demand of Oil and Natural Gas in China

13 14

83

278

504

13 14

79

150

285

0 0 4

128

219

0

100

200

300

400

500

600

1980 1990 2009 2020 2030

bcm

0%0%

5%

46%

43%

Import Dependency

Consumption Production Net Import


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Reference 7: Shift of Surplus Production Capacity of OPEC

Causes of lowered surplus production capacity include decreased production in Libya. The level as of January 2012 was 3.67 million B/D.

367

58

799

0

100

200

300

400

500

600

700

800

900

2001年

03月

2001年

09月

2002年

03月

2002年

09月

2003年

03月

2003年

09月

2004年

03月

2004年

09月

2005年

03月

2005年

09月

2006年

03月

2006年

09月

2007年

03月

2007年

09月

2008年

03月

2008年

09月

2009年

03月

2009年

09月

2010年

03月

2010年

09月

2011年

03月

2011年

09月

2012年

03月

（万B/D）(ten thousand B/D)M

ar. 2

001

Sep

. 200

1

Mar

. 200

2

Sep.

200

2

Mar

. 200

3

Sep

. 200

3

Mar

. 200

4

Sep

. 200

4

Mar

. 200

5

Sep

. 200

5

Mar

. 200

6

Sep

. 200

6

Mar

. 200

7

Sep

. 200

7

Mar

. 200

8

Sep

. 200

8

Mar

. 200

9

Sep

. 200

9

Mar

. 201

0

Sep

. 201

0

Mar

. 201

1

Sep

. 201

1

Mar

. 201

2


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Reference 8: Expected Trend of Long-term Oil Prices

Sources: Annual editions of the International Energy Outlook, Energy Information Administration (EIA)

Due to the recent soaring crude oil price, the price outlook has been revised upward in the past 5 years.

（ドル/バレル）

2005予測

2006予測

2007予測

2008予測

2009予測

0

20

40

60

80

100

120

140

1601979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2 010予測

2011予測

(dollars/barrel)

Forecast for 2009

Forecast for 2010

Forecast for 2011

Forecast for 2008

Forecast for 2007

Forecast for 2006

Forecast for 2005


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Reference 9: Emerging Concerns over Limited Energy Supplies+ Arab Spring + Lower Influence of US

Unstable factors and issues in Middle East

Situations in and outside of Iraq after the Iraq War

Risk of terrorism targeting oil facilities

Uncertainty over future of peace situation in Middle East

Discontent with and objections to the US prevailing in Arab and Islamic societies

Tensions in international relationscaused by Iran’s nuclear program

Unstable factors accompanied by current administrations and systems in Middle East

Source: Developed by the Institute of Energy Economics, Japan based on various documents and materials

Actions to deal with increasing domestic energy demand


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Reference 10: Uncertainty over Supply of Natural Gas

While worldwide demand for natural gas is expected to increase, supplies of unconventional natural gas are likely to increase. Will the benefit to Japan be limited? Where will the effect of the US "shale gas revolution" extend in the world including Asia? The pipeline market is different from the LNG market. After the surge in gas demand in Asia following the Great East Japan Earthquake and the nuclear

accident, the Asia premium was raised.(US: $2-3/MMbtu, spot LNG price for Asia: $14-15/MMbtu)

Major Exporters of LNG: Qatar and UAE would be significantly affected by closure of the Strait of Hormuz.

Different from oil, LNG is vulnerable to a crisis. No international cooperation mechanism (unlike IEA for oil) during an emergency No surplus production capacity (surplus production capacity of OPEC for oil) in the international

market Limited inventory (equivalent to approx. 20 days for Japan) in consuming countries

Disruption of supply leads to skyrocketing price as well as physical problems. The price of LNG in Japan is linked with the crude oil price. Therefore, if the crude oil

price rises, so will the LNG price. The spot LNG price has significantly increased due to tight supply and demand, rising

by 6-70% in the past 10 months.

LNG Production Capacity(World trade volume: 221 MT in 2010)

LNG Import by Japan(7.17 MT in total in Dec. 2011)

Qatar 77 MT (25.7%) 19.4%

UAE 5.6 MT (2.8%) 5.9%


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Source: Monthly Report of Mineral Resources and Petroleum Products Statistics, etc.

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08No

v-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09No

v-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10No

v-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep-

11

マレーシアブルネイインドネシア

カタールオマーンアラブ首長国連邦

オーストラリアその他ロシア

(1000トン）

Qatar(Compared with 2010:+106.6%)

UAE(Compared with 2010:+18.2%)

In 2011, imports from Qatar doubled.

Reference 11: LNG Imports from the Middle East

Note: The recent LNG ratio accounts for 40% of power and is heavily reliant on Qatar.

(1000 ton)

Malaysia

Qatar

Australia

Brunei

Oman

Others

Indonesia

UAE

Russia


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(3) If Energy Security Is Not Ensured

What happens if energy security is threatened? Disruption of energy supply Soaring energy prices and volatility Competition for energy resources, resulting in useless disputes Resource nationalism, market power issues brought by oligopoly

Compulsory acquisition and imposed higher prices Global warming issues inhibit sustainable development

Climate changes and abnormal weather attracting attention worldwide

Impacts of the Great East Japan Earthquake and Nuclear Power Plant Accident

If nuclear power plants fail to be restarted in FY 2012: ■ Switching to LNG/oil - imports will exceed 3 trillion yen■ Shortage of electricity supply - there will be almost a 12% shortage in Japan this

summer■ Increase in global warming gases - 14% increase compared with 1990

■ Adverse effect on macro economy (GDP, employment, etc.)


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(4) Actions for Energy Security and Status of Nuclear Power Generation

Demand side: Control of demand (R&D/subsidies for introduction) - Energy conservationSupply side: Improvement in energy self sufficiency - renewable energy + nuclear power Inexpensive energy - nuclear power/coal and LNG Securing of a large volume of high density energy efficiently (support for introduction and

compensation) - nuclear power Secured power stability of renewable energy - linked with coal and LNG + batteries Diversification of energy sources (R&D/subsidies for introduction) - renewable energy + nuclear

power Measures for distribution and diversification of import sources (resource diplomacy) - LNG +

nuclear power Measures to strengthen relations with major suppliers + enhance negotiating capability (resource

diplomacy) - oil, coal, LNG, and nuclear power Actions to prevent global warming (R&D/subsidies for introduction) - renewable energy + nuclear

power Measures to strengthen emergency response (reserve effect) (national reserves/support for

introduction) - oil (200 days) and nuclear power (5 years) Export of infrastructure, assurance of safety and cooperation to cope with global warming

(resource diplomacy) - coal fired, renewable energy, nuclear power, etc.Safety aspect:■ Secured nuclear safety: stricter regulations, independent regulatory organizations, international

cooperation through IAEA, etc.

⇒ Market mechanism alone is insufficient (R&D, subsidies for introduction, resource diplomacy, safety regulations, etc.)

What is the contribution of nuclear power?


Contact: [email protected]

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