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ECONOMY > Energy

Japan faces hidden costs from U.S. natural gas imports

  • June 22, 2018
  • , Nikkei Asian Review , 7:03 a.m.
  • English Press

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TOKYO — With the blessing of U.S. President Donald Trump, American liquefied natural gas has reached the shores of Japan, promising to diversify the Asian nation’s energy supply and cutting down the trade surplus it has with the U.S. while doing so. But the gas is coming with some unexpected costs due to combustion differences with imports from other regions.

 

In May, Tokyo Gas became the first company to import shale-based LNG from the U.S. under a long-term contract. Other gas and power companies also plan to follow suit. In the future, about 10% of Japan’s LNG supply is expected to come from the U.S.

 

American shale has a couple of advantages over Middle Eastern and Australian alternatives bought under long-term contracts. First is that its price is determined by American natural gas demand and not linked to crude oil prices, shielding it from volatility in that market. The second is that there are no destination restrictions that prevent resale elsewhere.

 

The problem is that U.S. LNG has a lower heating value when burned than new product coming out of such sources as Australia.

In the U.S., liquefied petroleum gases with high heating values like butane and propane are sorted out when excavating natural gas. Low heating value gas is expected to comprise 41% of LNG worldwide in 2030, up from 17% in 2016, says U.K. consultancy Wood Mackenzie.

 

Although low heating values will not affect import costs since gas is traded by heat content, Japanese companies will be faced with new costs since they must blend low-calorie LNG with relatively higher LPG to meet their piping standards.

 

Domestic demand for LPG for this purpose in 2022 is expected to be 34% higher than in 2017, said Japan’s Agency for Natural Resources and Energy. Gas companies will also need to invest in facilities that can blend the two fuels. New entrants may also outsource such work to established gas companies, further raising costs.

 

Some gas providers have proposed loosening standards in response to the influx of low-calorie gas, such as bands that provide a range of acceptable heating values. South Korea introduced such a system in 2012.

 

Other countries, like China, are also increasing LNG imports, with consumption of the fuel jumping 16% in the last five years, according to BP.

 

“It has become easier for low-calorie gas to flow into Asia, mainly from the U.S.,” said Masaki Mita, head of the Japan office at U.K. researcher Argus Media.

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