Japan to see more demand for LNG

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THE March 11 earthquake in Japan coupled with thirty-foot tsunami inundated the country’s northeast coast with massive destruction to infrastructure, reducing its economic competitiveness and also creating a new power supply outage throughout the nation.

The situation was exacerbated by the meltdown at the Fukushima Daiichi nuclear plant. The severity of damage caused by Tokyo Power Fukushima Daiichi nuclear complex had triggered public fears in leakage of nuclear power, which supplies 30 per cent of Japan’s electricity.

About a fifth of Japanese nuclear power plant capacity, estimated at 9.702 megawatt (MW), was shut after the earthquake. Barclays Capital estimated that every loss of one gigawatt (GW) equated to one to 1.2 billion cubic feet per day of extra gas demand. Another report from Goldman Sachs Group Inc estimated that the national disaster had destroyed about 25 per cent of Japan’s nuclear power capacity.

In order to beef up the shortage in power demand, Japanese utilities have been scrambling for fuel to replace this nuclear power loss. Currently, the highly prioritised solution is to replace this capacity by building more thermal plants and simultaneously turn to supply from Australian liquefied natural gas (LNG) projects as another quick alternative.

Demand for short-term LNG cargos is expected to jump in the near term but impact has been modest so far as Japan has turned to long-term suppliers before the short-squeeze began. Nevertheless, Japan might need to import as much as 1.5 million metric tonnes of LNG scheduled for the Atlantic Basin to meet the projected demand of total 4.1 million tonnes, according to sources from Bank of America Merrill Lynch.

According to British Petroleum Plc, Japan is the biggest user of LNG and accounted for 35 per cent of global trade in 2009. Japan imported more than 70 million tonnes of LNG in 2010, with Australia being one of its biggest suppliers, along with Malaysia, Indonesia and Qatar.

In the recent post-crisis, several projects on Australia’s west coast could benefit from increased interest from Japan include Inpex’s Ichthys project, Woodside’s Browse and Sunrise projects and Chevron’s Wheatstone, as well as its expected expansion at Gorgon.

Australia Pacific LNG Pty Ltd (APLNG), a joint venture project between US energy firm ConocoPhillips and Australia’s Origin Energy, would most likely be the coal seam gas projects for Japanese buyers.

Currently, Japanese utilities like Tokyo Electric Power and Tohoku already sourced a significant portion of their LNG supplies from Australia, which was not only close to Japan, but presented far lower political risk than some other producers. Moreover, project timelines for LNG projects anchored by long-term deals were usually more stable.

Recent data showed that Japan’s oil and gas imports has been gaining sharply in May from a year ago. These energy commodities are believed to feed into fuel power plants for compensating the lost production of nuclear reactors crippled by the March earthquake. Yearly data record showed LNG imports by Japan in the last three months has jumped 26 per cent to 6.039 million tonnes and crowned as world’s top buyer.

While the radiation leakage still posts as dangerous threat after four months following the March earthquake, many Japanese local communities have increasingly oppose to the restart of nuclear reactor, thus routing the demands for LNG as a high alternative.

Currently, only 19 of the country’s 54 nuclear reactors are operating, thus turning to other sources of fuels like LNG and oil, especially in the current high demanding season of mid-summer.

In conclusion, with the power shortage in Japan and the need to ramp up demand for both domestic and industrial use in the near term, the LNG consumption is likely to increase to meet Japan electricity needs. Although we would not likely see Japan utilities getting all their LNG demand from Australia, nevertheless Australia can be a cornerstone supplier of meeting their demand both in the shorter and longer term.

Henry Seet is a professional coach in financial education. The expressions expressed are solely his own. He can be reached at www.traderpromaster.com.