Sunday, October 07, 2012

Natural Gas Exports to Asia

Since the Fukushima nuclear power plant disaster last year, Japan has been importing more and more liquefied natural gas (LNG) to fuel its thermal power plants to keep the lights on and the wheels of industry moving, as one-by-one the country’s operating nuclear power plants have shut down. That could change if Japan could tap into huge American gas reserves.

As an island nation with few if any energy sources of its own, Japan has to buy natural gas in its most expensive form, as liquefied gas in refrigerated tankers (unlike /Europe which imports gas from Russia via pipeline) mostly from Malaysia and the Middle East. Consequently prices have gone through the roof. They were one reason Japan slipped into a trade deficit last quarter for the first time in decades.

Moreover, Tokyo has played ball with Washington in its obsession over tightening sanctions against Iran because of its suspected nuclear weapons program. Though Japan used to get a considerable amount of its petroleum from Iran, it has progressively curtailed imports and investments there in the collective interest of keeping Tehran from getting the bomb.

So here is a situation where the US could help out a critical ally by selling it surplus gas that it is now getting from the “shale gas revolution” created by the emergence of new extraction techniques such as “fracking”, or injecting water to pressure the gas out. It has led to an unprecedented fall in gas prices in North America.

Japan’s LNG imports now run about $16-$18 per million BTU (British Thermal Units, the standard measurement of gas commodities),. In the United States the price has fallen to under $2 per million BTU. Even if one were to add on $6 for the cost of liquefying and transporting the stuff, American imports theoretically would be less than $10. It represents a huge savings.

One of the reasons Japan pays so much for natural gas, in addition to the costs of transporting the stuff, is because gas pricing has been linked to crude oil. Back in the 1970s when Japan started importing LNG, petroleum was the main source of fuel for power generation. Linking to crude made sense then and it has become the de facto norm. South Korea and Taiwan followed suit.

Another reason: Some of the suppliers, especially in the Middle East have been using Japan’s desperate energy situation to gouge prices. This year Japanese firms importing LNG from Yemen were having to pay more than $20 for gas.

South Korea is feeling the punch of rising natural gas prices too. Last week taxi drivers in Seoul went on strike, protesting, among other things, the requirement that they use liquefied petroleum gas instead of diesel, a mandate designed to carbon emissions. The prices has risen 28 percent over three years cutting into the cabbies’ profits.

While importing natural gas from North America seems like a win-win proposal on both sides of the Pacific, there are still considerable obstacles, technical, legal and political, that have to be overcome before the gas starts flowing to Asia in significant quantities.

The most obvious impediment is lack of LNG exporting facilities in the US. Aside from one small refinery in Alaska selling gas to Asia there are no terminals in mainland US capable of liquefying gas. Being neither an importer nor an exporter, America never had a need for them. Natural gas is transmitted across North America by pipelines.

In April, Chemiere Energy of Houston received the first permit to build the first major natural gas export facility in the mainland US, located near Sabine Pass in the state of Louisiana. LNG terminal developers, many backed by major Japanese companies, such as Mitsubishi, Sumitomo and Tokyo Gas have proposed a dozen more projects, capable of supplying about 100 million tons per year in exports..

“The dawn of LNG [exports] has arrived,” wrote Neil Beverage of Sanford and Bernstein in a report.“We expect Sabine Pass [to be the first of several LNG projects to be approved in North America, which will become a major LNG exporting region,” he concluded.

That sounds optimistic, but the pathway to exports is still cumbersome. Gas sales are regulated by the Natural Gas Act, which was passed in 1938 at a time when the main aim was to husband what was then considered a scarce commodity. The easiest way forward for any potential exporter is to sell gas to a country with a Free Trade Agreement (FTA) with the US.

That’s the reason why the first exports from the new Louisiana terminal will probably go to South Korea and not Japan. In this regard Seoul has good reason to celebrate its long effort to achieve an FTA with the US. But if US gas cannot go directly to non-FTA countries, such as Japan, some countries, such as Singapore, could serve as transshipment hubs

There is also political opposition to increased exports from many different interest groups, from municipal utilities, wanting to keep prices low for their customers, to environmental groups who want to limit fracking. Others want to husband gas to run automobiles (though the infrastructure is lacking), while energy companies would be happy to see prices rise as their present rock bottom hnder further exploration.

It hardly needs saying that gas imports are now high on the agenda when Japanese leaders meet with their American counterparts Industry minister Yukio Edano says the government will lobby Washington hard to okay exports. Prime Minister Yoshihiko Noda broached the subject in his last meeting with President Barack Obama. So far the current administration is coy about further export permits.

While it may be difficult to predict whether the Obama administration will approve additional terminal permits, given the opposition from current end users and other groups, some of them critical to the president’s re-election prospects, the odds still favor additional exports. That prospect assumes that US gas prices remain low, an more so if the free-trade Republican party wins the November election.

If crude prices stay low, it may not be economical to import that much from the US. But in the long run it can’t  help but benefit Japan and other Asian countries to increase its stable of suppliers in order to assure long-term supply of gas at competitive prices.


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