Energy Fact & Opinion: The G7 Energy Ministerial Meeting

Facts:

• The Group of Seven (G7) Energy Ministerial Meeting was held in Kitakyushu, Japan, on May 1–2, 2016. The ministers gathered to discuss key energy issues against the backdrop of market uncertainty and low energy prices, as well as greater global commitment to addressing climate change following the COP21 Paris Agreement.
• The ministers adopted the Kitakyushu Initiative on Energy Security for Global Growth, which outlined the outcomes of discussion on (1) Energy Investment for Global Growth; (2) Energy Security, including natural gas, cyber, and electricity; and (3) Energy Sustainability, including clean energy innovation and energy efficiency.
• The key ministerial joint actions agreed upon were as follows:
  • Facilitation of investments for secure and sustainable energy;
  • Improvement in the functioning and resilience of gas markets;
  • Facilitation of cross-regional and cross-sectoral networking on cybersecurity in the energy sector;
  • Further assessment of vulnerabilities in electricity systems;
  • Support for clean energy innovation (e.g., the Mission Innovation) and deployment;
  • Phaseout of inefficient fossil fuel subsidies;
  • Continued effort on energy efficiency;
  • Support for nuclear safety, security, and nonproliferation; and
  • Call for further reform of the Ukrainian energy sector.
• Several of the agreed-upon actions task the International Energy Agency to undertake work. These included global gas supply-and-demand data and projection, gas security resiliency assessment, and vulnerability assessment of G7 electricity systems.
• Additionally, as the G7 host country, Japan unveiled its Strategy for LNG Market Development, which aims to develop highly liquid global liquefied natural gas (LNG) markets and for Japan to become an LNG trading hub by 2025. The Japanese strategy identified three specific elements of the current LNG market situation to be addressed through select measures:
• • Tradability : Japan believes that some of the physical, technical, and contractual conditions associated with LNG trading have been hindering LNG markets from becoming more liquid. The strategy calls for measures, such as elimination of destination clauses, greater use of gas (e.g., transportation), and improved efficiency in LNG shipping business, to enhance the tradability of LNG.
  • Price discovery : Japan seeks the establishment of LNG price benchmark(s) that accurately reflect LNG supply and demand, which will not only diversify the price formula, but also facilitate LNG spot trading, which in turn can contribute to price stability. To this end, Japan plans on furthering its support for various efforts by the Tokyo Commodity Exchange, including LNG over-the-counter trading (launched in 2014).
  • Open infrastructure : Third-party access (TPA) to LNG terminals and gas pipeline networks is important for transparency in LNG trading and thus is recognized as a key requisite for a gas trading hub. Japan plans on promoting TPA in its domestic market and studying other infrastructure needs (e.g., reloading facilities and underground gas storage) in pursuit of becoming one of the regional gas trading hubs.

Opinion:

The ministerial has sent a strong signal against the danger of complacency in a time of low energy prices. The energy leaders should be commended for such a strong acknowledgment of the need for sustained upstream investment, even when elected officials and the public may prefer to focus on the fiscal strength and improved household budgets enabled by current low energy prices. The acknowledgment seems to reflect their clear recognition that the G7 economies, many of which are energy import dependent, have much to suffer from a potential price spike and increased price volatility resulting from inadequate and delayed investment in upstream activities.

Strong focus on the security of gas supply came as no surprise given the growing role of natural gas in power generation and climate discussions, as much as the past emphasis on competitive gas markets in Rome (2014) and Hamburg (2015). Clear recognition of the centrality of market liquidity in gas supply security discussions is highly welcomed. While various other technical issues, such as storage, are important to address, in the absence of market liquidity they are inadequate as a sustainable solution to supply security challenges. Needless to say, the Japanese announcement of its LNG market strategy on this occasion reinforces these messages. The aims—greater LNG market liquidity and creation of the “Japan hub”—are practical while ambitious and show that current low energy prices have not dampened the momentum toward more transparent and liquid LNG markets.

Whereas past years’ gas security discussions focused on physical infrastructure, particularly market and technical concerns related to pipeline gas trade (e.g., reverse-flow capabilities), largely in reflection of the geopolitical tension between the West and Russia, the gas discussion this year focused much more on market functions, including pricing regime.

Oil prices have declined by 70 percent since summer 2014, lowering the prices of crude and refined products like gasoline, as well as driving down the prices of oil-indexed LNG. Spot LNG prices have also been lower across the world. While the current price environment is a fiscal blessing for most, if not all, of the G7 members, the notable decline in upstream capital expenditures since last year is a cause for alarm. As there is much uncertainty about the prospects for economic recovery and the scale of climate change threat, the world’s leading economies have no time to spare in leading the global effort to strengthen resilience in our energy system, including market system, hydrocarbon delivery infrastructure, and electricity networks. The collective warning against complacency at the G7 Energy Ministerial in Kitakyushu, Japan, could serve as an important political foundation on which concrete actions by public- and private-sector stakeholders can be built.