Japan’s LNG Price Tag Not Likely to Change in Near Term

Japan’s LNG Price Tag Not Likely to Change in Near Term

Japan in many ways is still reeling from the March 2011 9.0 magnitude earthquake and Tsunami that for all intents and purposes shut down its nuclear industry and its ability to continue to meet nearly one-third of the country’s electricity generation capacity that atomic power comprised in years leading up to the disaster.

Since that time not only has the country’s nuclear sector continually come under fire, both at home and abroad, the ordinary Japanese citizen is picking up the tab due to much more expensive liquefied natural gas (LNG) used for power generation. In the past two-and-half years Japan, already energy anemic and meeting less than 15% of its own total primary energy use from domestic sources, has imported record amounts of LNG.

In 2012 Japan consumed about 37% of global LNG supply, according to the US Energy Information Administration (EIA), importing 87.3 million tons of LNG at a price of ¥6 trillion ($64 billion), a new record. The gas cost an average $16.70 British thermal units, nearly six times more than the $2.83 average price of gas traded in the US for that period.

And just last month Japanese power companies used a record amount of LNG as the country continues to turn to the fossil fuel to offset lost output from ideal nuclear reactors, Bloomberg reported on November 15.

Japanese utilities consumed 4.6 million metric tons (mt) of LNG, the highest for October, up 8% from last year, Japan’s Federation of Electronic Power companies reported. Bloomberg said no electricity was generated from nuclear power after Kansai Electric Power Company shut its reactors three and four at the Oi plant in Fukui Prefecture in September for maintenance.

In light of Japan’s increasing LNG usage, Osaka Gas President Hiroshi Ozaki said last week that the current system for spot LNG trading might be sufficient going forward if the utility can increase its freedom to trade by having more deals without destination contracts.

“We can continue our practice of [spot LNG trade] even if we don’t have the [spot] market as a system,” Ozaki said at a press briefing in Tokyo. His comments were picked up by both national and international media. He said that another way spot LNG trading could be done is by establishing a trading and clearance system.

Platts said Ozaki’s comments came about a week after the Tokyo Commodity Exchange announced its plan to launch an over-the-counter creation of a trading and clearing market for LNG as part of a joint venture with Ginga Petroleum. The joint venture, Ginga Energy Japan, will be set up by the end of the year to operate new LNG and oil product markets in Japan.

LNG Spot prices spike

Ozaki’s remarks are noteworthy for several reasons. Though he did not mention what percentage of spot trades are acceptable for his company, LNG bought on the spot market in Asia can constitute some of the highest prices in the world. However, since long-term contracts traditionally prohibit changing deliveries to other locations while spot purchases can allow this; perhaps he is factoring in this advantage. Spot purchases also quickly fill supply gaps.

On November 15 Reuters said Asian LNG spot prices surpassed long-term, oil-linked prices for the commodity that week as low nuclear availability and China’s switch from coal to gas drove LNG demand, re-opening trade routes between Europe and Asia. Prices rose to around $18.30 per million British thermal units (mmBtu) for January delivery compared with $17.75 mmBtu last week. “Buyers in Asia are increasingly leaning on long term supplies to avoid paying high spot LNG prices,” Reuters said, adding that the scale of demand nevertheless necessitated spot purchases.

Amid this increased demand, a more systemized LNG spot market is starting to materialize. Spot and short-term LNG trade now represent around 20% of the total global LNG market. According to a Poten & Partners report, short-term LNG trade volumes are projected to increase at an average rate of 11% per annum for the period up to 2015. This growth rate is higher than the total growth rate for the LNG market.

Likewise, on October 31 The Wall Street Journal said as a raft of new LNG projects from Australia, Mozambique, the US and Canada are set to start up in coming years, a spot market has recently started to take shape. The report added that the big trading houses are starting to ramp up desks to deal in LNG. In effect, these trading houses hope to make profits on price arbitrage, the price differential between LNG sold in various locations, with some of the greatest profit opportunities in Asia.

These trading houses fit into the Tokyo Commodity Exchange’s plans of developing a trading and clearing system in conjunction with Japanese power companies. However, whether or not it provides the much needed price break Japan needs is another matter entirely.  As a former BP executive bluntly told me a few months ago when asked if it was fair that Japan is stuck paying such a high LNG price tag, “too bad for Japan if they don’t have the resources,” he said. He added that LNG exporters will try to make as much profit as they can and the fact that Japan has limited resources is not the exporters’ problem.

Another variable in the equation came two weeks ago when QatarGas, the world’s largest LNG exporter, said that the LNG market will hinge on long-term trades not spot deals. The company’s CEO Sheikh Khalid al-Thani said LNG producers will find it difficult to take on the price risk that is associated with the spot market in reaching investment decisions. These long-term contracts are still linked to oil-prices.

In light of these factors, it appears there will be limited reprieve for Japan’s high LNG bills; at least until US natural gas starts to hit the export market. However, that is still several years away.

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