BMI View: The rise in both LNG import volumes and cost in the world's largest LNG importer are taking a significant toll on Japan's balance of payments. In an effort to reduce th is impact the country is looking to new lower priced gas producer regions of which North America is the prime market set to benefit. Connecting the world's largest gas producers with the world's largest LNG importer could help reshape global gas pricing dynamics , bringing longer term challenges .
Japan is the world's largest LNG importer and as a result has been considerably impacted by two major developments. T he reduction of domestically produced nuclear power has led to increased LNG imports while rising oil-linked LNG prices further exacerbate cost increases . A s a result LNG imports rose 24.8% from 2010 to 2012, while over the same time period c osts increased a whopping 53.5% as Japanese LNG prices remain linked to crude.
|Source: BP Statistical Review Of World Energy 2013, Bloomberg, BMI Research|
|Average Price (US$/mnBTU)||10.91||14.73||16.75||15.23|
|Annual Cost @ Average Price (US$bn)||37.0||56.2||71.0||33.1|
Though not the sole reason, LNG costs have significantly altered Japan's balance of trade data which is expected to worsen if the current pricing structure and import trend are sustain ed .
|Commodity Costs Running Down Balance Of Payments|
|Japanese Balance Of Trade 2005-2020, US$bn|
Japan is therefore taking steps in to reduce the impact of growing import costs. Currently Japan only has two of its 50 licensed nuclear reactors online significantly increasing the requirement to import fossil fuels. Our Japan Power Team hold a bleak view for the nuclear sector, expecting that only two to three pressurised water reactors will be restarted by 2014 , making a small impact on import requirements ( see, Utilities Pursuing Nuclear Restarts, July 15 ). For this reason we expect LNG imports to remain high for the foreseeable future, though likely at a reduced rate from the 2012 record. Without being able to dramatically impact the volume of LNG imported , Japan is turning to managing the pricing structure of LNG to reduce costs.
Current strategies for reducing the impact of LNG costs include:
Reducing domestic gas demand : this has largely been achieved by restarting a number of coal power plants and taking advantage of the lower coal prices in comparison to LNG and crude. There has also been a conscious effort to alter electricity consumption habits in the country in order to reduce overall electricity demand.
Creating an LNG futures market : earlier this year Japan's Ministry of Economy, Trade and Industry (METI) outlined plans to create the world's first LNG futures contracts at the Tokyo Stock Exchange by 2015. The METI feels a futures contract will provide more stability to prices for LNG, improve the credibility of pricing information and serve as a valuable hedging tool. The government is in communication with Singapore and the US to create similar contracts in their respective markets.
Sourcing LNG from lower cost regions : this is perhaps the greatest opportunity for Japan to reduce costs as the country can take advantage of gas supplies from regions with non-oil linked pricing. Upcoming LNG supply contracts have predominantly been made with Australian companies sourcing from the mega projects being developed in the country, but more recently North America has been the target.
|Australia Dominating New Supply But North America Holds the Future|
|Significant New LNG Supply Contracts By Country 2014-2018, million tonnes per annum & %|
A growing number of deals are being struck between Japanese importers and North American exporters due to the advantages of sourcing gas from a hub based pricing system. US Henry Hub prices have average d US$3.69/mnBTU this year (January-August) compared with prices of over US$15/mnBTU for imported gas in Japan. Including liquefaction, shipping and insurance costs, and assuming Henry Hub price of around US$4/mnBTU, US LNG exporters believe they can offer prices of between US$7 and US$8 /mnBTU. Such a price difference could halve Japan's current LNG import bill, though North American gas deliveries to Japan are only expected to comprise of a maximum 20% of imports by 2017.
|Export Country||Export Facility||Importer||Import Quantity (mn tpa)||Duration||Effective|
|Source: BMI Research|
|Canada||Pacific Northwest LNG||Japex||1.2||20||2018|
|US||Cove Point LNG||Tokyo Gas||1.4||20||2017|
|US||Freeport LNG||Osaka Gas||2.2||20||2017|
|US||Freeport LNG||Chubu Electric||2.2||20||2017|
|US||Freeport LNG||Toshiba (& SK E&S)||2.2||20||~|
|US||Cove Point LNG||KEPCO||0.8||20||2017|
Most recently the Japan Bank For International Cooperation (JBIC) has signed an agreement with Alaska's Department of Natural Resources, regarding financing for potential resource development projects. The move provides upside to both the prospects for the Alaska South Central LNG project, which could raise out US LNG export forecast, and Japan's search for lower cost LNG supplies. The Alaskan mega project envisages exporting between 15 and 20mn tonnes per annum (20-27bcm) to Japan, almost double the current volume of supply contracts agreed with US companies.
The Alaskan project would be able to offer prices between US$7 and US$9/mnBTU, taking advantage of shorter shipping distances from Alaska to Japan . Furthermore, gas exports would not impact the US domestic market in the same way developing shale gas would, due to the remote location of the North Slope sourced gas , which is currently considered as stranded. The project would require an 800 mile (1,280km) pipeline from the North Slope to the Anchorage area.
Enhanced cooperation between North American LNG exporters and Japanese LNG importers is therefore expected to be of mutual benefit to both sides of the Pacific. This move could play a significant role in flattening the divergence between gas markets internationally and a move away from oil-linked gas price structures.
In reaction to this developing trend Australia, which has 61.8mn tonnes per annum (tpa) of LNG capacity under construction and a further 36.6 mn tpa proposed , has highlighted the dangers of committing to a hub pricing systems based on two main factors . Firstly, Henry Hub remains a volatile price especially over the long term. As many of the contract s arranged between Japanese and US companies are over a 20 year period this could prove a dangerous move . Over the last ten years the Henry Hub bench mark has seen considerable fluctuations, peaking at over US$15/mnBTU in 2005, while bottoming out at US$1.9/mnBTU in 2012.
|Volatility Could Bite Back|
|Henry Hub Price April 2002-September 2013, US$/mnBTU|
Recent additions to US natural gas reserves have altered the outlook for prices and will likely lead to a less volatile scenario. Despite this, we are anticipating gas prices to rise gradually , particularly in reaction to new LNG capacity coming online around 2018. Currently around 50mn tpa of LNG export capacity to non-FTA nations has been granted in the US, with a further 100+mn tpa awaiting approval. We anticipate the gas price to react to this, jumping to around US$7/mnBTU in 2018. This would increase total LNG import costs including liquefaction, shipping and insurance to around US$11-12/mnBTU.
|LNG Exports To Boost Price|
|Henry Hub Price Forecast 2013-2022|
Secondly, if a growing uptake in Henry Hub priced LNG does cause other LNG producers to lower prices, it will reduce the incentive to further invest in new liquefaction facilities. While the LNG global market is expected to remain tight up until 2017/18, when major Australian and North American projects are online , following this period demand could again outpace supply and drive global LNG prices still higher in the longer term .
Nevertheless, the US and Canada are expected to increase their piece of Japan's LNG pie from 2016. Australia and Qatar will remain major exporters, but will come under increasing pressure from new North American supplies as Japan further diversifies its LNG imports.
|Japanese LNG Sourcing By Country|
|Japanese LNG Imports By Country 2012, %|