Japanese money pulls in LNG

By Eric Watkins

LOS ANGELES, May 7 – There can be little doubt that Japan’s need for liquefied natural gas has soared in the wake of the country’s nuclear meltdown last year, with all of its reactors now shuttered. That means more shipments of LNG will be heading Japan’s way, even diverted from other markets, for the foreseeable future.

Concerns over the diversion of LNG shipments have been expressed in the United Kingdom, where the closure of Japan’s nuclear industry is thought to raise the threat of higher winter gas prices and bigger energy bills for UK consumers as LNG supplies are diverted to Asia.

There is support for that view, at least in the short-term, with BG Group CEO Frank Chapman last week telling investors that the number of LNG cargoes his firm sent to Japan in the first quarter quadrupled year-on-year to 16.

“We’re trying to make as much money as we can,” Chapman told investors, giving them further background on the situation of supply and demand in LNG markets over the past year, as well as going forward.


“In terms of global LNG markets, January saw record high flows from the Atlantic Basin to Pacific Basin markets as demand in Asia continued to pull increasing volumes into the region and away from Europe,” Chapman said.

“Japanese LNG imports reached record levels reflecting the effects of further nuclear units going offline, winter weather and stronger economic performance,” he said, adding that Asian spot LNG prices were significantly higher in the first quarter of 2012 at $16.00 per million British thermal units (mmbtu) versus $9.93 per mmbtu in 2011.

“Prices have however fallen somewhat from their recent peaks in the $17 to $18 per mmbtu range,” said Chapman, who predicted they will stay near current levels “if nuclear capacity remains offline for the foreseeable future.”

Quite how long Japan proposes to keep its reactors offline remains to be seen, with government officials keeping a wary eye on public opinion, which continues to run strongly against any restart of the nation’s nuclear power plants.


But the government also is eyeing projected electricity demand and supply this summer under a panel headed by Cabinet Office Senior Vice-Minister Katsuyuki Ishida.

Japan’s Nikkei business daily reported that power shortages look to be particularly serious in the service areas of Kansai Electric Power, where shortages of 15-16% are projected if strong heat waves, like those of two years ago, occur again this summer.

“Time is running out for the government to take effective measures to resolve the threat of shortages on the horizon,” the paper reported.

In an effort to balance the public’s need for electricity against the public’s rejection of nuclear power, Japan’s utilities and other firms are attempting to source as much LNG as possible – and at the lowest price

There’s no shortage of potential suppliers either.

Officials of Russia’s state-owned OAO Gazprom last week met with members of Japan’s parliament in an effort to work out arrangements for increased supplies via pipeline from developments on Sakhalin Island

According to analyst IHS Global Insight, however, about 65% of the LNG output capacity from Sakhalin Energy is already contracted to various Japanese buyers, and there are questions “as to whether Gazprom has enough gas in the region to make a hypothetical pipeline economically viable.”


But Gazprom is hardly alone in seeking to meet Japan’s demand for LNG.

US Senator Lisa Murkowski, R-Alaska, has no doubt of her state’s ability to supply the LNG that Japan needs, and has lobbied hard to ensure that supplies will be underway as soon as possible.

“Alaska’s gas is the perfect fit to meet Japan’s energy needs,” Murkowski said last week. “An LNG line from the North Slope could deliver long-term, stable energy supplies to Japan at a reasonable price,” Murkowski said.

“Japan is hoping to switch a major portion of its power generation to natural gas, but it lacks an affordable and reliable source for that gas. That presents a unique opportunity for Alaska, which has long been rich in resources, but short on markets,” Murkowski said.

While Japan may be an ideal market for Alaska’s spare gas, the problem is more immediate for Tokyo. In the wake of its own increased demand, Japan has been paying premium spot-market prices for its LNG.

That burden on the country’s economy was revealed last month, when Japan marked its biggest ever trade deficit of 4.41 trillion yen in fiscal 2011 through March.


Contributing to that gap was the sharp increase in Japan’s imports of mineral fuels, with the value of imported LNG in particular reaching a record high 5.40 trillion yen in fiscal 2011, up 52.2% over 2010, while imports of crude oil gained 21.9%.

In an effort to head off anything like that for the current fiscal year, Japanese officials are hoping to organize a meeting of private and public sector officials from LNG producing and consuming countries.

Officials expressed the hope that the meeting, provisionally scheduled for September in Tokyo, will promote dialogue aimed at expediting the development and trade in LNG with a view to lowering prices.


Indeed, some officials said that Japan wants to advance coordination among LNG-consuming countries and cultivate consuming nations’ bargaining strength over producers through the conference.

If that really is the aim of Japan’s officials, then they are engaging in wishful thinking. In today’s market, producers recognize that demand is still taking the lead over supply – and that means little or no break on prices.

Nor will there be much break on prices if Japan does decide to keep its nuclear reactors permanently switched off.

Indeed, at the moment, producers and consumers alike are waiting to see what Japan’s long hot summer brings by way of insight into the market for LNG for fiscal 2012. Demand drops if the reactors are switched on. It rises if they are not.

In the meantime, LNG users the world over will need to remember that trade follows markets, not flags. That trade follows prices, not demand. As BG’s Chapman said, his firm is out to make as much money as possible.

If Japanese buyers have the money and UK buyers don’t, then there’s really no doubt where the gas will go.

© Glamma Productions Inc. 2012


About Eric Watkins

Eric Watkins is a consultant specializing in oil diplomacy. A former journalist, Mr. Watkins's work has appeared in numerous leading publications including The Wall Street Journal, The Economist, The Financial Times, and specialist media such as Oil & Gas Journal, Middle East Economic Survey (MEES), and Lloyd's List.
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