Japan Scrambles the Planet Looking for Gas Deals

Japan Scrambles the Planet Looking for Gas Deals

By Tim Daiss

Since the March 11, 2011 Fukushima nuclear disaster and Japan’s subsequent shut down off all but two of its 50 nuclear reactors, the country is frantically trying to secure natural gas for electricity generation. However this has proven problematic for Japan, who has virtually no hydrocarbon resources of her own. For starters, Japan’s electricity sector relies mostly on imported LNG. Yet, LNG in Asia (which is still tied to oil prices) is expensive, more than three times the price of natural gas in North America where prices are mostly tied to supply and demand.

Consequently, Japan has scrambled the planet looking for and striking gas deals from the US to Australia, Africa, the Middle East, and Southeast Asia. A natural place for Japan to also look is neighboring Russia. Though relations between the two have been historically chilly, they compliment each other perfectly. Japan needs natural gas and Russia needs new gas customers.

Russia, an energy heavyweight, relies on hydrocarbons to power its economy, and most of that demand comes from Europe. But that has become a quandary for Moscow. The Eurozone has just entered a double dip recession and gas demand is dropping. The price of gas in Europe is also falling, which is taking a toll on Russia’s coffers.

Japanese pipedream

The latest gas news between Japan and Russia broke in November when a Japanese consortium announced plans to build a 1,400-kilometer (869-mile) gas pipeline from Russia’s Sakhalin Island to Metro Tokyo.

According to a feasibility study, the offshore pipeline would cost 300 to 400 billion yen ($3.65 billion to $4.87 billion) with a 5-7 year completion time.

Yet this is not the first time that an energy company has tried to build a pipeline from Sakhalin to Japan.

“As early as 1999 US-firm Texaco was trying to supply pipeline gas from Sakhalin to Hokkaido,” Dr. Keun-Wook Paik, a Senior Research Fellow at the Oxford Institute for Energy Studies, and author of Sino-Russian Oil and Gas Cooperation: The Reality and Implications, told Energy Tribune on Tuesday.

Paik said that the review result of the technical and commercial aspect of the pipeline was sound but that the next step was not taken since the utility companies in Hokkaido “gave a cold hand to the proposal.”

Fast-forward a decade plus and the scenario has changed dramatically. This time however it may not be the unwillingness of Japanese utilities stopping the project dead in its tracks, but lack of governmental approval.

The Asahi Shimbun reported that the Japanese government plans to give priority to a separate project to import LNG from Vladivostok. In September, Russia and Japan signed an agreement to develop plans for a $7 billion LNG plant on Russia’s Pacific coast.

A focus will be whether Moscow and Tokyo will back the pipeline side-by-side with the ongoing LNG project.

Dr. Paik points to problems with the proposed LNG plant and whether it will come to fruition. “It is up to Vladivostok LNG’s price competitiveness and the supply availability of the gas,” he said. “Already Russian bankers indicated the gas price at Vladivostok will be almost $14 / mmbtu. After converting it as LNG, the price cannot compete against the LNG from North America.”

Paik added that the proposed plant needed a special [government] policy to make the price competitive.

“It will be Russia’s while elephant,” he said.

As far as the pipeline is concerned, there must be supply availability from Sakhalin 3 for it to be viable.

“Currently the targeted production from Sakhalin 3 is around 4-5billion cubic meters per year (bcm/y) and Gazprom [Russia’s state-owned oil and gas giant] indicates the production could hover 15-20 bcm/y by 2020. If this production is guaranteed, the option of Sakhalin gas to Tokyo Bay could be a serious possibility,” Paik said.

He added however that even if there is a supply guarantee there are a number of other additional hurdles to overcome. The first is establishing a consensus from powerful Japanese utilities like Tokyo Electricity and Chubu Electricity.

“As the main vested interest group of using LNG supply, the dominant utilities could object to the large-scale pipeline gas supply from Sakhalin to Tokyo Bay. It could force the utilities to renegotiate the gas price for the Japanese consumers,” Paik said.

Another hurdle, according to Paik, is powerful lobbying from the Japanese fishing industry, since the pipeline will be laid along the Japanese coast.

However, a pipeline partially on land is not feasible due to high costs. In fact, the Asahi Shimbun reported that an offshore gas pipeline would cost up to 75 percent less that a land pipeline, which would also require costly purchases of land right-a-ways.

Not only is Japan trying to secure LNG and cut pipeline deals to diversity its gas supply and lower prices, it’s also trying to form a LNG gas futures market. On November 13, Japan’s Economy, Trade and Industry Minister announced plans to meet with 18 companies, including Tokyo Electric and Tokyo Gas for details of a futures market.

Many analysts however doubt that a LNG futures market will ever come to fruition.

In light of these developments, Japan’s LNG import numbers continue to rise. The Federation of Electric Power Companies disclosed that the country’s ten regional power utilities imported almost 4.5 million tons of LNG in October, up from 3.9 million tons for the same period last year.

A glimmer of hope for Japan however may be on the horizon. On November 21, the International Energy Agency’s (IEA) executive director Marie van der Hoeven said that Asia should start to benefit from the convergence of global LNG markets amid signs of change for its pricing structure linked to oil. In other words, LNG prices could be unlinked from oil and based more on regional gas exchanges.

If so, Japan can use all the help it can get – LNG agreements, pipeline deals, and a proposed LNG futures market may not do the trick.

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