Expectations are high for U.S. shale gas-based liquefied natural gas, which has started flowing into Japan. Traders hope the unconventionally produced gas might become a game changer as it could help diversify suppliers and allow for more flexible terms. The problem? The product is not as cheap as expected.
According to trade statistics, Japan imported some 210,000 tons of LNG from the U.S. in January. A third of it went to Chubu Electric Power’s Joetsu thermal power station in Niigata Prefecture, in central Japan. Another third went to Tokyo Electric Power Co. Holding’s Futtsu thermal power station in Chiba, just east of Tokyo. The rest was taken to Kansai Electric Power’s Sakai LNG terminal in Osaka, in western Japan.
What caught the eye of energy traders was the price of the gas. All of the gas in question was produced by Cheniere Energy at its LNG plant in Louisiana and was priced 60-70% higher than the average price of other LNG that arrived in Japan that month.
The gap is due to different pricing systems. The prices of Southeast Asian and Australian LNG are linked to crude oil prices. American LNG prices, by contrast, are linked to benchmark gas prices in the U.S.
Given stagnant crude oil prices in recent years, traders had expected U.S. LNG prices to be higher than Southeast Asian and Australian ones. Still, such a high premium was “beyond our imagination,” one official said.
Japan first became interested in American shale gas because of its low price. After the accident at TEPCO’s Fukushima Daiichi nuclear power plant in March 2011, when it was severely damaged by a huge earthquake and tsunami, all of the nuclear power stations in Japan eventually shut down for scheduled maintenance, and most have not been restarted. The country’s reliance on thermal power generation soared and so did demand for imports of oil and LNG, causing Japan to log its first trade deficit in 31 years.
Shale gas was supposed to help Japan reduce fuel costs. Utility companies and traders rushed to invest in U.S. LNG producers. The government lobbied the U.S. to allow shale exports to Japan as soon as possible. A Japanese government panel asked power companies that had requested approval for rate hikes to consider future decreases in energy prices in part due to cheaper shale gas imports.
It is ironic that shale gas imports not only failed to cut costs but rather increased them. If this misfortune was due to slumping crude oil prices, things may reverse course as oil prices bounce back. U.S. shale gas will not lose its appeal just because it is now more expensive than Asian rivals. Its pricing mechanism, which is not tied to the price of oil, and flexibility, which allows importers to choose destinations freely, will continue to attract traders.
For the time being, though, Asia’s LNG market is expected to overflow with excess supplies until the early 2020s. “With prices where they are today, importers in Asia will probably think twice about getting their first shipments from the U.S.,” an official at a trader said.
LNG production at producers that Japanese companies have invested in is set to start this year and next across the U.S. But it will be too costly to bring home all of the contracted gas — 2 million tons to 4 million tons a year will be available to each Japanese importer.
Some of the excess gas will have to be diverted elsewhere, like Europe, as one major energy company has decided. But that plan enraged the Ministry of Economy, Trade and Industry. A senior ministry official reportedly refused to meet with the company’s president.
But there is no time for such bureaucratic inflexibility. It is imperative that Japan quickly cooperate with companies at home and abroad to facilitate smooth trading of its natural gas by boosting the liquidity of the market. That should allow Japan to benefit from emerging LNG production and export bases in the U.S.