1 JAPAN-2014/01/14 THE BROOKINGS INSTITUTION THE U.S. UNCONVENTIONAL HYDROCARBON RENAISSANCE AND IMPACT ON JAPAN Washington, D.C. Tuesday, January 14, 2014 PARTICIPANTS: Introduction and Moderator: CHARLES EBINGER Senior Fellow and Director, Energy Security Initiative The Brookings Institution Panelists: MIKKAI HERBERG Research Director, Energy Security Program National Bureau of Asian Research JAMES JENSEN Principal Jensen Associates, Inc. HIDEHIRO MURAMATSU General Manager, Washington Office Japan Oil, Gas and Metals National Corporation SHOICHI ITOH Senior Researcher Institute of Energy Economics (Japan) * * * * * ANDERSON COURT REPORTING 706 Duke Street, Suite 100 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 2 JAPAN-2014/01/14 P R O C E E D I N G S MR. EBINGER: Good afternoon, ladies and gentlemen. I’m Charlie Ebinger, the Director of the Energy Security Initiative here at Brookings and we are particularly delighted today to have such a distinguished panel with us to talk about the implications of the U.S. unconventional hydrocarbon renaissance and potential impact on Japan, of course a vital ally. All of us would, of course, like to the degree possible, if we had control, to make sure that our hydrocarbon revolution helps the Japanese, but of course, these are determined by market issues and private sector concerns. But we’re here with a very distinguished panel. I’m only going to introduce them very briefly because you have their bios, I believe, in your packets. Is that right? Everybody has bios? But truly we have a tremendous array of expertise represented on the stage today. We’re going to commence with Mike Herberg, who is, of course, research director of the National Bureau of Research’s Energy Security Program, who has many, many years dealing with Asian energy issues and many years in successively important positions at ARCO, which, of course, going back to some of the early interests in Alaskan Energy for Japan, I know Mike was deeply involved in those. He is a frequent correspondent in a number of journals and ANDERSON COURT REPORTING 706 Duke Street, Suite 100 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 3 JAPAN-2014/01/14 newspapers and is quoted extensively throughout the energy trade press always on energy issues. He’s going to be followed by Jim Jensen, who, of course, is one of the leading energy economists particularly given his well known expertise on liquefied natural gas issues, not only in Asia where he is indeed an expert, but also the rest of the world. As I always say, since Mr. Jensen was particularly nice to me when I was a budding young scholar -- I don’t want to tell you how many years ago that was -- but he is well known, participates in many activities at the Oxford Energy Institute and throughout the world, and as I always like to say, Mr. Jensen has forgotten more about LNG than most of us have ever known and has particularly insightful views on what’s going on in Japan. He will be followed in turn by Mr. Muramatsu, who is the general manager of the Washington Office of the Japan Oil, Gas, and Metals National Corporation or JOGMC, and that was, of course, formed in 2004 with the merging of the former Japan National Oil Companies with the former Metal Mining Agency of Japan. He has served as counselor of Japan’s permanent mission to the European Union and as director of the European division at the Trade and Policy Bureau for METI and he is extremely well known in not only, obviously, Japan, but throughout the ANDERSON COURT REPORTING 706 Duke Street, Suite 100 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 4 JAPAN-2014/01/14 United States and major oil and gas producing regions. And finally we will turn to Shoichi Itoh, who is the manager and senior analyst at the Institute for Energy Economics. Shoichi is a longstanding friend of the Brookings Institution having served a stint here with us and also at our sister institution, the Center for Strategic and International Studies. Prior to joining IEEJ, he has served in a number of important positions in the Japanese government and is well known on energy forums relating to Japan throughout the world. And is also, I should mention since I share his view, a sterling believer that Alaska needs to play a much more important role in our bilateral relations going down the road. The forum will be that each speaker will try to limit to 15 minutes, hopefully, so we have plenty of time for questions. I will then ask just one or two questions to get the discussion going, and we want to hear from the floor at that point. So, Mike, you want to go first? MR. HERBERG: Thank you, Charlie, for that kind introduction. Some of us, if we hang around long enough, even I can become respectable -- if you hang around long enough. There’s a more colorful saying like that, but I won’t use that with this distinguished ANDERSON COURT REPORTING 706 Duke Street, Suite 100 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 5 JAPAN-2014/01/14 audience. Thank you for inviting me to speak to such an interesting group and on such a very distinguished panel. Charlie asked if I would confine myself really to the oil side of the equation of the unconventional boom and what it means for Asia and Japan. So, I’ll try to stay in my lane and leave the LNG issues to Jim. I think the broad statement would be that in the oil side, in a very indirect and in some ways direct way, the U.S. oil production boom has been enormously beneficial for Asia, broadly Asia’s energy security and obviously, specifically, for Japan’s energy security. It’s a bit indirect, as we all know, the U.S. doesn’t export crude, we export product, but we can’t export crude, so there’s no direct flows of crude oil towards Asia or towards Japan. But in indirect ways, in terms of a global market for oil, this enormous binge of production from the U.S. oil side has been broadly beneficial for Japan and Asia, I think, in terms of energy security. It’s worthwhile to think of three groups of countries in Asia when you think about this, the deep importers that import virtually all their oil and gas, and to some extent, coal, that’s Japan, South Korea, Taiwan. Obviously, they’re going to benefit enormously from anything that adds oil supplies to the marketplace and keeps oil prices from rising too high. So, ANDERSON COURT REPORTING 706 Duke Street, Suite 100 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 6 JAPAN-2014/01/14 those are the most direct beneficiaries. Then you’ve got the producer/importer side, and that would include obviously China and to some extent India. China, of course, benefits on the oil side as well. It may benefit on the gas and LNG side as well. We’ll have to wait and see on that, but I think China benefits on the oil side. They’re the biggest oil importer from the Middle East. I think now they’re the largest oil importer in the world according to some of the latest statistics, surpassing the U.S. So, anything that adds supplies to that global oil marketplace and keeps prices down is beneficial to the Chinese. The other side I’ll leave to Jim, but the gas/LNG exporters in the Asia region -- Russia, Australia, Southeast Asia -- you know, it’s a different picture for them, all this potential LNG coming out of the U.S., but as I said, I’ll leave that to Jim. I think the oil market benefits show up pretty early, in other words, we’re seeing the benefits for Asia and Japan already. On the shale gas side I think the benefits are a little further down the road. We have some immediate benefits; we’re exporting cheap gas to Europe in the form of coal, cheap coal already, so the molecules are going, they’re just a lot dirtier. So, I think there are immediate benefits, but I think the shale benefits for Asia tend to take a while to show up. ANDERSON COURT REPORTING 706 Duke Street, Suite 100 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 7 JAPAN-2014/01/14 So, let’s talk specifically about the oil side. Japan, South Korea, all heavily oil import-dependent, and when you look at the incremental production in the U.S., the numbers are truly staggering, the incremental addition to the global market. U.S. incremental oil production has risen 3.5 million barrels a day since 2008. This year it’s risen by a million barrels a day according to the latest EIE data, they’re expecting another million barrels a day increase next year. And another 700,000 or 800,000 barrels a day increase in production in 2015. But even as we speak, 2008 to 2013, 3.5 million barrels a day of incremental crude supply in the marketplace. So, that has offset an enormous set of problems with production from a whole set of other countries. I mean, you’ve added the equivalent of Iraq or Iran to global production, the second largest producers within OPEC incremental production. So, I mean, that’s a huge incremental addition to the marketplace.