Japan & India Share Common LNG Problems, Forging Shared Solutions

Japan & India Share Common LNG Problems, Forging Shared Solutions

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India and Japan have similar problems. Both rely heavily on oil and gas imports, and both are paying for their liquefied natural gas (LNG) at premium prices, up to five times higher than North American gas prices.

In fact, in a bid to cut the biggest item in its import bill and support the rupee, Indian officials announced last week that the government might announce more measures to curb fuel consumption later this month in addition to raising diesel prices by close to 10 percent.

Rupee devaluation causes problems for Calcutta’s energy plans

India, the world’s fourth-largest energy user after the US, China and Russia, is considering a 3-5 rupee increase in the price of diesel, which accounts for over 40 percent of its fuel use, as it looks to cut oil costs by nearly $20 billion, Reuters India reported on Saturday. Rising global prices of crude oil and a slide in the rupee have left India facing an oil bill potentially 50 percent higher than on May 1.

Likewise, India’s natural gas dilemma is mounting. Since LNG sold in Asia is still linked to oil prices, India is facing similar problem with spiking gas prices as it is with its oil imports.

India’s gas woes started in 2004 when it began to import LNG from Qatar.

Before then the country was self-sufficient in natural gas, the US Energy Information Agency (EIA) said. However since 2004 it has not been able to create sufficient natural gas infrastructure on a national level to meet domestic demand and increasingly relies on imported LNG.

Natural gas mainly serves as a substitute for coal, India’s largest fuel source, used for electricity generation. In fact, in June an Indian official said the country aimed to import up to 20 million tons of LNG a year, bringing the problem of high LNG import prices full circle.

Japan’s ongoing LNG import dilemma

Japan, which is the world’s largest LNG importer, the second largest importer of coal and the third largest net importer of oil, has very different LNG dynamics at play than India.  After the Fukushima disaster in March 2011 and the subsequent shut down of all but one of its nuclear reactors, Japan has been on a gas buying frenzy cutting supply gas deals around the globe, trying to meet electricity generation demand and consequently is desperate to reduce its financial burden for these LNG imports.

When Japanese Prime Minister Abe visited the US earlier this year, he offered a 1 trillion yen credit guarantee for US shale gas LNG development. Dr. Keun-Wook Paik, a Senior Research Fellow at the UK’s Oxford Institute for Energy Studies, said that Japanese banks are expecting that it could reduce LNG import cost around 20 percent by 2020.

Additionally, Takashi Ishizaki, the director of Japan’s trade ministry’s commerce policy division, said in March that his ministry planned to establish a futures contract for trading LNG, which would allow consumers and producers to hedge against price swings, while challenging the current method of linking LNG’s cost to oil.

Trying to cut prices

In further efforts to help remedy these problems, Japan and India agreed on Monday, September 9, to set up a multilateral group of LNG buyers to push for lower gas prices. They also plan to ask other importers to join the coalition.

At an LNG conference in Tokyo the following day both countries asked fellow importers such as South Korea and Singapore to join the multilateral Joint Study Group on LNG. Japan is the largest LNG importer in the world, followed by South Korea, the UK, Spain and India.

The Japanese-Indian plan is a likely response to this summer’s scorching temperatures in Asia, which has increased electricity consumption therefore forcing rises in LNG demand.

The Wall Street Journal said that utilities in Japan and South Korea increased purchases due to the unusually high temperatures, with prices rising above $18 per million British thermal units (mmBtu) compared with around $3 mmBtu in North America.

American solution

Another remedy for Japan and India as well as other Asian LNG importers is tapping into American gas. On May 17, The US Department of Energy (DOE) gave the Freeport LNG facility in Texas conditional approval to export domestically harvested natural gas. The export license allows the Freeport project to sell LNG to Japan, India and other countries that do not have free trade agreements (FTAs) with the US. Osaka gas and Chubu Electric Company, two of Japan’s largest utilities announced 20-year contracts to have Freeport liquefy about 4.4 million metric tons of natural gas in 2017 from the project’s first phase.

Also, on Monday Freeport LNG signed two more deals to export gas to Asia. The Financial Times said that Toshiba of Japan and SK of Korea, two industrial groups, have each contracted to use Freeport to liquefy 2.2 million tons of LNG per year, which at prevailing Asian prices is worth about $1.6 billion.

Likewise, BG Group, Gas Natural Fenosa, GAIL (India) Limited, and Korea Gas Corp (KOGAS), have signed 20 year supply contracts with Cheniere Energy’s Sabine Pass LNG terminal in Louisiana, the only LNG project to be fully approved by the US government to sell gas to non-FTA countries so far.

However it is hard to judge the effect American gas will have on future LNG prices in Asia. Simply put, in four years (when the first gas is to be exported) nobody knows where prices will go. Additionally, many analysts state that it’s will be hard for Asian countries to have gas prices linked to US prices due to the added price that liquefying US gas, then transporting it across the Pacific Ocean, and then regasification would add. Hopefully, Japan and India’s recent endeavors, for their sakes at least, will bring some relief.

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