U.S.: No exception for Japan on exports of natural gas

By Eric Watkins

LOS ANGELES, May 31 – The Obama administration is said to be reconsidering a recent decision to deny exports of liquefied natural gas to Japan, given the country’s need to find a replacement fuel following closure of its nuclear facilities.

Several U.S. companies, including Sempra Energy and Dominion Resources Inc., are behind efforts to seek permits from the Department of Energy to export gas to countries – such as Japan – that lack free-trade agreements with the U.S.

But the chances of reversing the decision on Japan are especially slim right now, despite a bit of soft-shoe from an administration spokesperson.

“I think it’s going to require more people taking a look at it,” said one unnamed official of the Obama team. “We’re very sympathetic to Japan. They’re in a very difficult situation.”

DIFFICULT SITUATION

Japan is indeed in a very difficult situation, given that its imports of LNG in fiscal 2011 rose 18% over 2010 to a record 83.18 million tons due to the shutdown of the nuclear reactors.

The extra imports of LNG gave Japan its first trade deficit for 31 years, and one that is expected to continue in fiscal 2012. SMBC Nikko Securities Inc. estimates that Japan’s imports of LNG in 3Q12 will grow by 300 billion yen to 1.62 trillion yen.

Ken Koyama, chief economist at Japan’s Institute of Energy Economics recently explained his country’s interest in U.S. exports of LNG and how Japan might be able to lower its procurement costs while also ensuring a stable fuel supply.

“Japan’s LNG import prices are now around $16-$17 per million British thermal units (BTU) on a long-term contract basis, and the spot price has recently topped $18 per million BTU,” Koyama told Nikkei business daily. “By contrast,” he said, “major benchmark prices for natural gas in the U.S. stand at $2.”

According to Koyama, the “huge gap” in prices is attributable to different pricing methods: “In the U.S., the supply-demand balance determines natural gas prices. LNG prices for Japan, meanwhile, are linked to crude oil prices.”

MARKET GLUT

At the same time, Koyama noted that growing production of shale gas in the U.S. has contributed to a market glut, which in turn is pushing down gas prices. By contrast, higher crude oil prices have sent LNG prices higher in Japan.

Koyama spelled out the difference in price by noting that the first U.S. exports of LNG for Asia will be sent to South Korea from Louisiana, and the price will be set based on the U.S. benchmark price.

“Suppose that the benchmark price is $2 and it costs $6 for liquefaction and transport, the price will be $8-$9 when the gas reaches Asia, much cheaper than the current $16-$17,” Koyama said.

Given the enormous potential savings, there can be little wonder that Japan’s Prime Minister Yoshihiko Noda raised the gas-export issue with President Barack Obama at an April 30 meeting in Washington, D.C.

No decision was made back then, and Japanese officials attributed this week’s decision to the current political situation in the United States.

PRESIDENTIAL ELECTION

“It is difficult for the U.S. to say yes [to exports] because of the presidential election,” said Hirohide Hirai, director of the petroleum and natural-gas division of Japan’s economy ministry. “There won’t be any deal with any country before November.”

To a certain extent, that may be true. Debate over U.S. natural gas is alive and well in the country, with advocates saying there is more than enough to meet domestic demand, while others insist that the gas should be available only for domestic consumption.

While that argument rages on, the real reason for turning down Japan’s request seems more related to its position on accepting U.S. exports of automobiles, beef, and insurance – issues that Obama raised with Noda at their summit in April.

Japan wants to join the Trans-Pacific Partnership, a free trade grouping that includes the United States, Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.

MANY BARRIERS 

But approval of Japan’s bid hinges on obtaining consent from Congress and U.S. industry – especially U.S. automakers. They say that Japanese regulations bar them from penetrating the nation’s auto market and that the bilateral trade imbalance will widen if Japan joins the tariff-cutting framework.

“The many barriers that have kept imports out have to be corrected before Japan can be seriously considered to be a partner in any trade agreement,” said Stephen Biegun, Ford’s vice president for international governmental affairs.

“Japan is the third-largest auto market in the world,” Biegun told the Nikkei, “but has barely 5% of the market penetrated by imports.”

PAUSE TO REFLECT 

“The TPP is a key element of the Obama administration strategy to make U.S. engagement in the Asia-Pacific region a top priority,” according to U.S. trade officials.

Cheap U.S. natural gas is a carrot, a form of energy diplomacy,  to encourage countries around the globe to take up better trade relations with Washington. For that reason alone, one could hardly expect the U.S. president to make an exception over LNG for Japan — it would contradict his own policy.

But especially in the run-up to this year’s presidential election, no candidate would want to risk the ire of the U.S. auto industry: whether the votes of the United Auto Workers or the campaign funds of the Big Three.

Worse, a “Yes” on exports of U.S. LNG for Japan would likely bring the UAW and the Big Three together in opposition. That’s a combination powerful enough to give any candidate pause to reflect.

© Glamma Productions Inc. 2012

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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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