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Gas Matters, May 2013
Gas Matters was first published in May 1988 and provides an unrivalled overview for the world-wide natural gas and LNG industry.
Gas Matters concentrates on mid-stream industry developments, with each issue containing four or five analysis articles, around twenty-five shorter articles arising predominantly from recent news, and a features section including summaries of major gas industry statistics.
All subscribers also receive access to on-line search facilities and a library of back issues.
Samples (July 2008):
Japan’s energy policy: Committed to Kyoto and to mitigating climate change
After many years as the world’s leading LNG importer, Japan may now be facing a future in which both energy use and LNG imports will decline. But Japan’s leading role in world energy markets may just be changing, not declining, as it takes a leading role in the provision of alternative energy. In its latest review of Japan’s energy policy* the IEA notes that Japan is showing a real commitment, not unsurprisingly, to the aims of the Kyoto treaty. This commitment is reflected widely in its energy policy and nowhere more so than in its leadership of the G8. Japan currently has the presidency of the G8 and is using its position to promote energy efficiency and measures to mitigate climate change. This commitment has a significant impact on internal energy policy, and hence demand, but will also have an impact on energy consumers worldwide, as efficiency developments in electronics, motor vehicles and alternative energy sources move from development to implementation.
Energy demand scenarios The IEA last looked at Japan’s energy policy in 2003, when it forecast in the base case that total primary energy supply (TPES) in 2010 would be about 531 million tonnes of crude oil equivalent (mtoe)). If additional measures were introduced to tackle CO2 emissions it was seen that the total could fall to about 513 mtoe (the IEA quoted these data in million kilolitres of crude oil equivalent. We have assumed that 1 toe equals 1.172 kl). The IEA still forecasts 2010 TPES at 536 mtoe but quotes a Japanese government scenario for 2010 which looks at the effect of both existing and additional countermeasures to improve efficiency and reduce CO2 emissions. The low effect scenario shows TPES at 485 Mtoe whilst the high effect shows a reduction to 483 Mtoe; not a large difference but with only two years to go, significant perhaps.
In the longer term, to 2030, development of Japanese TPES is open to a significant range of uncertainty. The government has developed scenarios using three sets of assumptions relating to the use of technology for emissions mitigation and energy efficiency. The first is a conservative assumption that only technology available in 2005 is used - technology frozen case. Here the TPES is forecast to grow from 501 Mtoe in 2005 to 585 Mtoe, an average growth rate of only 0.6%/year. The central case assumes continuous effort along the current development trajectory; in this case TPES grows only slightly to 513 Mtoe by 2030. In the third scenario, the maximum introduction case, it is assumed that leading-edge technology to improve energy efficiency will be employed at the commercial level, but without legal compulsion to use equipment with such technology. Here TPES is forecast to fall to 449 Mtoe, an average reduction in TPES of around 0.5%/year.
Inevitably these data lead to two questions; are the data credible and what does it mean for natural gas? With regard to credibility there are a number of underlying assumptions, which could affect the outcome. Perhaps the most significant question is how committed is Japan to energy efficiency and emission reduction, because the success or otherwise of emissions reduction and energy conservation programmes will crucially affect the forecast TPES.
Energy efficiency targets In fact, as part of the plan to deliver on its Kyoto obligations, Japan has introduced a ‘Top Runner’ programme which has set ambitious targets for energy efficiency across a wide range of products including motor vehicles, electrical and electronic goods. Reported results show that the targets have been consistently met or exceeded. The impact of the programme will, of course, reach well beyond Japan to countries buying Japanese-made or designed motor vehicles or goods. Despite the success of the Top Runner programme, Japan is not yet on track to meet its Kyoto CO2 emission target, a 6% reduction on 1990 levels, and is currently running at 8% above 1990 levels. To counter this it is proposing to use, principally, a forest sink to manage emissions to 2012. Beyond 2012 more positive action will be needed, and perhaps this is where the government’s research programme will come into its own in providing the new technology required to achieve the TPES levels in the central and maximum introduction case quoted above.
Consumption of natural gas in Japan is dominated by the electricity sector which uses 60% of the supply. Whilst the proportion of total gas demand has fallen since a high around 1980, demand is still growing in this sector. Growth remains strong in the commercial and public services sector but residential use has been on a plateau since 2000 (see table on page 5). Japan’s usage pattern means that gas demand will be particularly sensitive to changes in the primary fuel balance in electricity generation.
As we have already mentioned, the government has made promotion of emissions reduction and energy conservation a key element of its presidency of the G8. It has gone well beyond simple exhortation in its domestic policy where, rather than rely on industrial development alone, it has maintained a very well-funded, government-sponsored research programme with a budget of $3.6 billion in 2006. The lion’s share of this, $2.26 billion, is focussed on nuclear energy with $450 million spent on conservation and efficiency, $239 million on renewables and the balance on fossil fuels developments.
Nuclear energy is a particular target. The plan is to at least maintain its share of power generation at the current 30% and possibly increase this to 40% by 2030. This is an ambitious target because a number of incidents affecting both nuclear plant and fuel processing since the 1990’s have eroded public confidence in the nuclear industry. These included sodium-coolant leakage at the Monju fast breeder reactor in 1995; the death of two workers and exposure of other workers and nearby residents to radiation from a leak at the Tokai Mura fuel facility in 1999: falsification of records relating to plutonium/Uranium mixed oxide fuel by the UK’s BNFL in 1999; and further falsification of TEPCO’s nuclear-plant-testing records in 2002. These culminated in the shutdown of Tokyo Electric’s Kashiwazaki-Kariwa 8.2GW nuclear complex, following an earthquake on July 18 2007 (see LNG in 2007 - Strong growth but continuing uncertainty over supply, LNG Focus, February-March 2008).
Despite this Japan has increased the number of active commercial nuclear reactors from 52 in 2003 to 55 today with a further two under construction and 11 in the planning stage. Nuclear energy could take a larger share of power generation, without new construction, if plant utilisation were to be increased from present levels of around 70-75% to the 90-95% achieved in the US, Finland and Korea. The reactors generally offer good performance with the frequency of automatic shut-downs running at about a sixth of the rate seen in the US. 87% of the downtime is related to periodical inspections, where Japan has a very conservative, time-based, rather than condition- or reliability-based, inspection programme. It is noticeable, however, that there was a significant jump in inspection-related downtime following the TEPCO record falsification incident. Prior to this, inspection-related downtime had been running at around 17% to 18% of maximum capacity. It increased to 21% in 2002 and hit 39% in 2003, but decreased to 25% by 2005. So a change in inspection regime to one similar to that in other countries would offer a very simple route to increase nuclear generation capacity and displace some fossil fuels. This could have significant impact on gas usage, given that 60% of LNG is imported for electricity generation. However given the low level of public confidence in nuclear generation, it seems likely to us that the conservative approach to inspection will remain in force for some time to come. A further factor influencing inspection is likely to be the age of many reactors. Already 12 units have undergone ageing assessment and a further 20 will reach 30-years service life in the next decade
One of the research targets, sponsored in the government’s programme, is aimed at carbon capture and storage (CCS), particularly with reference to coal combustion. This will be of interest to a broad audience, notably China where we commented (Gas Matters, April 2008) that CCS development could allow China to increase coal burning and avoid imports of LNG while still reducing its emissions. In the Japanese context, coal currently forms 21% of TPES, so CCS would have a significant impact on CO2 emissions.
Within the government’s scenarios for 2030 the range of outcomes for natural gas use varies widely. In the technology frozen case the share of TPES supplied by natural gas is forecast to increase from 15% in 2005 to 19% in 2030, that is from around 75 Mtoe to around 110 Mtoe (122 Bcm). More significantly, in the Continuous Effort case, the share of TPES increases by only 1% to 80 Mtoe (89 Bcm), whilst in the Maximum Introduction case the share of TPES drops to 14%, reflecting a drop in absolute levels of consumption to only 62 Mtoe (69 Bcm).
Of the three cases, the significant growth seen in the Technology frozen case seems least likely given Japan’s focus on new technology and energy efficiency, so LNG suppliers can expect little growth in Japanese demand, with most attention being placed on replacing contracted volumes as they expire. Unless, of course, the Maximum Introduction case is achieved, in which case contract expiry will be welcomed by the Japanese utilities, with, perhaps, only small, short-term contracts being agreed to manage the decline in demand. Despite the potential decline in LNG imports, Japanese companies are still expanding their import capacity with plans for new or expanded capacity in excess of 3 Bcm/year by 2012 along with a further 860,000 m3 of storage. It will be interesting to see how much of this planned increase is actually implemented.
Natural gas Another major component of the government’s energy policy centres on supply security. Japanese companies have developed their LNG contracts with a view to securing both reliable supplies and a range of suppliers. Thus in 2006 it took supplies from eight different countries under long-term supply agreements and from a further four under short-term arrangements. Further long-term supplies from a ninth country, Russia, will start in 2009 when Sakhalin II comes on-stream.
Storing gas in Japan is difficult and expensive; geography and geology get in the way of providing underground storage and holding stocks of LNG is expensive, both from the cost of building tanks and from the management of boil-off gas. Nevertheless the importing utilities hold stocks of 20-30 days supply in the receiving terminals which can be used to bridge any supply upsets. This storage is supported by agreements between the importers to swap cargoes and, where they use the same importing terminal, to exchange volumes in storage. Beyond the intercompany arrangements the government is also attempting to diversify supply sources through high-level diplomacy with producing countries; and as part of the ever-present research effort, and despite the geology, the government is looking at strategic storage of gas including underground storage.
Liberalisation Liberalisation is moving forward in Japan at a measured pace, having started in 1996. Following a further step in the process in 2007 consumers representing around 60% of demand, those with contracted annual demand in excess of 100,00m3 or greater, are now free to choose their suppliers. But here the Japanese system requires that a review will be undertaken to evaluate and verify the process before any further liberalisation is called for, so smaller users will have to wait for the results before they know whether they will be allowed a choice of supplier.
The other limit on liberalisation is access to the pipeline networks and here the situation is mixed. Legislation introduced in 2003 required all gas utilities to allow third-party access (TPA) to their pipelines from 2004 with guidelines to ensure neutrality and transparency. However the effects will inevitably be limited because the major pipeline systems have limited interconnections (see map on page 7). The lack of interconnections results from the development pattern, whereby the pipeline grids were built to take gas from coastal LNG terminals to customers in the terminal’s supply area. The LNG terminals were built close to major demand centres, which minimised both the need and incentive to build long-distance networks. Geography and land rights issues made it easier to build a new import terminal rather than extend the pipeline network.
Whilst new pipelines are under construction, these are extensions of existing networks rather than interconnections; the current projects are listed in the table on page 5. It is clear that pipeline construction is not easy in Japan. Construction times of five to six years for pipelines with lengths between 18 and 100 km reflect both the difficult terrain and the legal problems associated with wayleave acquisition. We should not expect rapid moves to interconnect the systems, given the apparent construction problems and, if the government’s view of TPES development is correct, a flat or declining market for gas. Even so the IEA recommends that the government should seek to provide the right incentives through both the market and regulatory framework to promote integration as an element of improving supply security.
LNG terminal access is a key element of liberalisation. Here the rules are set by guidelines which require terminal operators to create manuals for negotiations over the use of the terminals, coupled with disclosure of information necessary to estimate spare capacity now and in the future. This sounds very loose by, say, European or US standards and may be part of the driver behind the IEA suggestion that the legislation and rules surrounding liberalisation be reviewed to promote competition and provide transparency.
Renewables So the gas market may not grow, and could shrink, as Japan seeks to meet its Kyoto obligations. With nuclear expected to increase its share of TPES and efficiency improvements expected to reduce overall energy demand, what else might impinge on the demand for gas? Here the focus is on renewables and biofuels. The government has a target to increase the contribution to TPES from renewables (wind, solar, biomass, biofuels) from the current level of 1.3% to around 4.2% by 2030, not a very challenging target given that in mid June it was reported on one day that 40% of Denmark’s electricity was generated by wind farms. Given that both Japan and Denmark have extensive coastlines relative to the land area, this suggests that Japan could make a very significant reduction in fossil fuel demand by using more wind power. A caveat should, however, be born in mind; Denmark is embedded in a regional power grid and has significant standby support from generators in other countries. The need for standby capacity could be a restriction on Japan’s ability to use wind power. However Japan has a leading role as an innovator in photovoltaic (PV) cell development and is the second largest market for these cells (after Germany). The government has set targets for PV generation, which do not include power generated by households, which is not sold to the power companies. So perhaps we should look forward to efficient, cost-effective PV units sourced from Japanese companies.
For the environmental observers, there is a small cloud on the horizon; the government has plans for biofuels, with maximum ethanol contents of 3% and 5% in gasoline and diesel respectively. Recent reports of comments from UN agencies and others suggest that, at the margin, use of agricultural land to develop biofuels is pushing up food prices and could lead to further attacks on the rain forest. Your view of this will, of course, be entirely dependent upon the shade of green you use to view the world.
So Japan is setting the pace once again, from being the largest market for LNG it is planning a move to a shrinking fossil fuel future with LNG demand possibly declining over the next 25 years. Some of the old certainties, where Japan underwrote major projects in Asia Pacific, may change, the focus may shift to maintaining relationships with old friends in the LNG business. Australia should continue to do well in Japan’s planned future.
From Russia, but with how much love?
Who would be TNK-BP president Robert Dudley right now? Over the last few weeks the long running feud between the Anglo and Russian elements of the company has descended into all-out war, leading to Dudley being questioned by the authorities, fined and the Labour Inspectorate threatening to oust him from the job.
Whether the current commotion is a contrived build up to the ultimate ousting of the Russian party from the venture or simply a side show is the subject of great debate. “I wish I knew”, was the succinct response of an industry expert when asked what is really going on.
The most recent facts in the saga are thus: the TNK-BP office receives an unplanned inspection (or raid depending on how you look at it) on June 11, during which the authorities identify several employment violations. The company is fined 40,000 roubles ($1,696) and Dudley himself a paltry 3,000 roubles.
“If the company sorts out its issues by early July, there will be no more questions,” Mikhail Malyuga, deputy of inspections at the federal labour inspectorate was quoted saying. For its part, a TNK-BP spokesman has promised to fulfil “all that is required of the inspectors and eliminate any violations”.
But that’s unlikely to be the end of the matter. The Russian Alfa-Access-Renova (AAR) consortium, which owns 50% of the company, is threatening to sue BP at the International Arbitration Court in Stockholm and through a separate suit in Moscow because BP has rejected its demands for more executive control.
AAR has been calling for Dudley’s resignation, accusing him of acting only in the interests of BP. BP has refused and in return AAR won’t sign off on TNK-BP’s accounts.
The stand-off threatens to paralyse the company’s operations and as one source told Gas Matters “it needs and I believe will come to a head soon”. Enter Gazprom. It’s the most likely buyer of the Russian stake in TNK-BP, or even, possibly, a majority stake in the company in line with new legislation limiting foreign ownership of strategic sectors.
Whether it will pay up to $60 billion (the figure quoted by AAR) is another matter. Many believe AAR’s legal threats are designed to strengthen their bargaining position with potential buyers. One industry observer told Gas Matters: “I think the TNK guys know they will lose the stake to Gazprom, so they are blowing a lot of smoke. It’s my interpretation that AAR - who are after all, a bunch of 1990s oligarchs - have been told to sell their stake by the Russian government. They aren’t happy so they are trying to raise the price or keep their holding by accusing BP.
“This will be one of the first big tests for the new Russian president, Dimitry Medvedev. Is he going to let the 1990s oligarchs prevail? It’s also a fundamental question of who you want in control of one of your largest energy companies. Since Khodorkovsky, the government hasn’t had to press the oligarchs too hard to get what it wanted, for instnace Abramovitch’s sale of Sibneft to Gazprom. If AAR does eventually sell its TNK-BP stake, it will make a huge profit, but not as huge as it aspires to.”
Despite the complexities, Russia is still the destination of choice for many in the energy industry. “Moscow is in the driving seat - western energy firms need it more than it needs them,” says our source. “And don’t forget, in commercial terms the TNK deal has been wonderful for BP. In my opinion it would never willingly walk away. There are plenty of companies waiting for the chance to do business in Russia.”
One foreign company already active in the country is Shell. Just weeks ago, it agreed to establish a working group on participation in Gazprom’s proposed Tambey LNG plant on the Yamal Peninsula in north west Siberia. Gazprom told us there is “no concrete commitment as yet, as to the timeframe or the plant’s capacity” but Gazprom’s Yamal reserves exceed 10 Tcm.
The most recent development is a report in the Russian press that Gazprom has strengthened its hold on gas reserves in the area by buying the 1.2 Tcm South Tambey gas field from Tambeyneftegaz. (The government awarded it equity in the field without a tender). But that still leaves unresolved the question of who - from Shell, Repsol YPF, Anadarko Petroleum and Gazprom - may be involved in a Yamal LNG development.
Just a week after the Shell deal was inked, Gazprom dropped plans (on the other side of the peninsula) for Kharasevey LNG, citing too challenging geological and weather conditions. But this may not affect Tambey, where conditions are different. Ultimately Gazprom has a legal monopoly on gas exports and may not be in a hurry to develop this projecr, given its Sakhalin 2 and Shtokman priorities.
A Shell spokeswoman told Gas Matters that it had also discussed the progress of Sakhalin 2 with Gazprom. With $5.3 billion investment secured from Japanese and international banks to fund the final stages of construction, deliveries expected to begin in early 2009 and more than 90% of the 9.6 mtpa already linked to long term contracts, that must have been an altogether happier conversation.
Shell might still be smarting from the circumstances under which Gazprom obtained a majority stake in Sakhalin 2 last year, but the UK firm still holds a 27.5% share in the project - a pretty large slice of a very big pie. And that’s the appeal of Russia.
Deja vu - The Varanus Island incident brings back memories of Longford
E.ON Ruhrgas accepts competition in Germany
German gas market to shift from hourly to daily balancing in October 2008
EU gas package goes to MEPS with compromise over unbundling likely
Is there a Central European solution to ownership unbundling?
Gazprom concentrates on internal eastern developments
JBIC provides $3 billion finance for LNG projects aimed at Japan
HEART OF THE MATTER
EUROPEAN CARBON MARKET
TRADED MARKETS – NORTH-WEST EUROPE
GB MARKET TRENDS
EUROPEAN BORDER PRICES
JAPANESE AND KOREAN LNG PRICES
-Gaz de France’s
-China National Petroleum
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