Japan’s LNG PoliciesHenry-Hub linked pricing of non-US LNG(Trinidad and Tobago, Egypt) 2. May 2014, Kansai Electric and Cheniere 3. June 2014, Chubu Electric and Cheniere Start of

Japan’s LNG Policies and Japan-Argentina Cooperation

December 2014

Source: Compiled by METI through power company hearing etc

The nuclear power ratio in domestic power generation has decreased after the Great

East Japan Earthquake due to the long-term shutdown of nuclear power plants.

On the other hand, the thermal power ratio has increased to 90%. Currently, LNG

thermal power alone accounts for nearly 50% of domestic power generation.

Trend in Domestic Power Generation Ratio

High Dependency On Fossil Fuels For Power Generation

1

23%23%

25% 28% 27% 26% 27%

32%43%

48%48% 51% 52% 53%5%

12%16%

13% 11% 10% 9%

8%

9%

9% 9% 11% 12% 11%

32%

12%2% 1% 0% 0% 0%

32%

12%

2% 1% 0% 0% 0%

60%

79%

89% 90% 89% 88% 89%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY2010 FY2011 FY2012 FY2013 FY2014 April May June

Coal LNG Oil, etc Hydro, etc Nuclear Nuclear Thermal

0

1

2

3

4

5

6

2010FY 2011FY 2012FY 2013FY

Others

Nuclear

Hydro

Gas

Oil

Coal

Source: The Institute of Energy Economics, Japan

（1015 kcal）

2010FY to 2013FY

Increase by 20 M tons

71 MTA

Natural Gas price trend（US$ / MMBTU）

After the Great East Japan Earthquake, Japan’s LNG demand increased by 24% due to the shutdown of nuclear power plants.

（2010FY 71 MTA → 2013FY 88 MTA） In addition, Japan’s LNG import price, linked to crude oil import price, has soared. As a result, Japan recorded a trade deficit for the first time in 31 years.

83 MTA 87 MTA 88 MTA

Japan’s Energy Demand

Increase in LNG Demand and LNG prices

2

0

5

10

15

20

25Japan's crude oil import price (JCC)

Japan's LNG import price

EU Gas price (NBP)

US gas price (Henry Hub)

8.31$/MMBTU

18.0$/MMBTU

3.92$/MMBTU

15.6$/MMBTU

2010 2013 Difference

Trade Balance

6.6 - 11.5 - 18.1

Net Import Costs

LNG 3.5 7.1 +3.6

Crude Oil 9.4 14.2 +4.8

Petroleum Products

2.4 3.7 +1.3

Coal 2.1 2.3 +0.2

-15

-10

-5

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013

Trade balance

Current account balance

Trade deficit (2013)11.5 Trillion yen

Changes in trade balance and current account balance （trillion yen）

The overall cost of LNG imports to Japan has increased from 3.5 trillion yen (2010) to around

7 trillion yen (2013). ※1 trillion yen = $10 billion

Japan recorded a trade deficit for the first time in 31 years. Trade deficit for 2013 was 11.5

trillion yen, which is not a sustainable level for Japan.

Japan Suffers Huge Trade Deficit

3

Japan has mitigated supply disruption and secured stable supply by diversifying supply

sources. In June, Papua New Guinea became a new supplier of LNG to Japan.

Japan has a diversified portfolio with the largest supplier only accounting for 20% of total

supply and the Middle East Dependency at 30%.

Enhancing Gas Security – Diversifying Supply Sources

4

(Canada)

LNG Canada Project

Pacific Northwest LNG Project

Kitimat LNG Project

(U.S.A)

Sabine Pass Project

Freeport Project

Cove Point Project

Cameron Project

(Australia)

Ichthys LNG Project

Wheatstone LNG Project

(Mozambique, Tanzania, Nigeria)

Rovuma Area 1, Area 4 Project

Brass LNG Project

(Southeast Asia)

PNG LNG Project

Donggi Senoro Project

( Russia)

Vladivostok LNG Project

Far East LNG Project

(Alaska)

Alaska LNG Project

Paradigm Shift: Impact of the Shale Gas Revolution

The development of fracking technology and the rapid increase in

shale gas production in the US has brought drastic changes to the

supply-demand structure and the pricing mechanism in the global

LNG market.

Three Key Impacts of the Shale Gas Revolution are:

1. Abundant supply

2. Competitively priced LNG and Introduction of gas-link pricing

3. Emergence of Potential LNG Suppliers

Japan is taking proactive actions to fully enjoy the benefits of this

“Revolution”.

5

Abundant LNG supply from the US to Asia

Currently approved projects amount to 80 MTA

=> Scheduled to be exported to Japan and other Asian markets as early as 2016

=> Equivalent to half of Asia’s current LNG demand (160 MTA)

Japan’s LNG claims from US projects totals 17 MTA

(Equivalent to 20% of Japan’s annual LNG imports).

6

Progress has been made in developing an array of different LNG pricing formulas in Asia.

The emergence of US LNG projects has played a key role in this movement:

1. Gas-linked pricing formulas (Henry-Hub link) will be introduced for the first time

to the Asia-Pacific Market.

=> Asia will be able to enjoy the fruits of the Shale Gas Revolution

US LNG to Asia are expected to be 20-30% lower than current LNG import prices

=> Non-US LNG contracts to Asia are being signed using HH link pricing formulas

2. Hybrid pricing which blends both oil-linked and gas-linked pricing are emerging

Japanese Government strongly supports this trend to diversify pricing formulas with the hope

that having a range of different formulas could help lower LNG prices and reduce volatility

Long term contracts remain an important role for the continuous growth of the LNG market

7

1. Nov 2012, Kansai Electric and BP

Henry-Hub linked pricing of non-US LNG(Trinidad and Tobago, Egypt)

2. May 2014, Kansai Electric and Cheniere

3. June 2014, Chubu Electric and Cheniere

Start of US LNG exports to Japan to be moved up from 2017 to 2016

4. Sep 2014, Tokyo Electric and BP

Henry Hub linked pricing

Example of new trends

Diversification of LNG Pricing Formulas

Cooperation with Potential LNG Suppliers

US Gulf

Mexico

US West

Coast

Western Canada

Canada

• Sep 2013: Summit Meeting between Prime

Minister Abe and Prime Minister Harper.

• Oct 2013: Memorandum between METI

and NRCan

• Dec 2013: Memorandum between METI

and BC Government

Mexico

• July 2014: Summit Meeting between Prime

Minister Abe and President Nieto.

• MOU between PEMEX and JOGMEC

Argentina

?

Rank Country Tcf

1 China 1,115

2 Argentina 802

3 Algeria 707

4 U.S. 665

5 Canada 573

6 Mexico 545

The development of fracking technologies will provide new opportunities for countries with

shale gas reserves like US, Canada, Mexico and Argentina.

Japan will work to further enhance the security and stability of its supply sources through

cooperation with such potential LNG suppliers.

Technically Recoverable

Shale Gas Reserves (EIA 2013)

Cooperation Between

Japan and Argentina

8

Metals Strategy &

Exploration, and

Technology

Development

Mine Pollution

ControlStockpilingOil & Gas Upstream

Investment and

R& D

Mission

Securing Stable Supply of Oil, Natural Gas, Coal and Mineral Resources for

Japanese Industries and Citizens

Japan Oil, Gas and Metals National Corporation (JOGMEC)Established: February 29, 2004 [succeeded the functions of Japan National Oil Corporation(JNOC)]

President: Hirobumi Kawano

Capital: 689 Billion Yen (As of July, 2014) = around 5.8 Billion US$ (118US$/Yen)

Activities

Coal Strategy &

Exploration, and

Technological

Support

Geothermal

Resources

Development

What is JOGMEC?

9

As of December 1, 2014

Liability Guarantee (13 companies)Equity Capital (45 companies)

Oil Sands

Methane

HydrateDeep-Sea

Heavy Oil

Shale Gas

IOR / EOR

Deep-Sea

Arctic

Oil & Gas Exploration & Production supported by

JOGMEC

E&P Projects WorldwideE&P Projects Worldwide

10

4 projects

in the west of Canada

JOGMEC’s Current Activities in Shale Gas Development

Mitsubishi Corp.

Cordova Basin

Mitsubishi Corp.

Cutbank Dawson Land

INPEX

Horn River, Cordova, Liard

JAPEX

North Montney Land

Financial

Support

Increase of the asset

values

• Cost reduction

• Productivity

optimization

• Core Analyses

• Geomechanics

• Seismic

Joint

Research

100 um

SEM image of shale sample3D Model of shale pores

11

Towards Japan-Argentina Cooperation in unconventional resources

Integrated Shale Study

Project Optimization

Geomechanical studyIntegrated G&G studySeismic and Related Study

Laboratory study Deep understanding of shale

properties.

Frac Design Optimization Sweet Spot Mapping

12

13

METI説明世界地図

G&G / Core / Frac

(on-going)

Canada MontneyCore Analysis (2012)

Shale Core at

Horonobe in Japan

Core Analysis (2012)

Onnagawa in Japan

Core analysis (2012)

Cooper Basin

Core Analysis

(on-going)

Marcellus

Frac Simulation +

Reservoir Simulation

(Cordova)

Core Analysis

Horn River

Well Stimulation

(2012-14)

Onnnagawa in Japan

Frac Simulation

(on-going)

Eagle Ford

Plan

Done / On-going

Study Area of JOGMEC’s Shale R&D

13