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Investing in Japan's LNG Demand

Brian Hicks

Written By Brian Hicks

Posted October 30, 2013

Shale energy production has been a win-win for producers and the American economy. But when I see bureaucratic sluggishness holding back the energy economy from its full potential, I am a tad concerned for our energy future.

We’re already seeing the unofficial cap on natural gas exports to non-FTA countries, which is an outdated concept considering the major markets that are opening up around the world. If the process is this slow in approving more liquefied natural gas (LNG) exporting facilities, what is the process going to be like when we have to begin exporting shale oil abroad to keep prices at profitable levels?

LNG terminalProducers in the Marcellus shale on the East Coast have been itching for new markets to open up, but these markets are right under our noses. Countries like India and South Korea have growing demand for LNG imports.

Take Japan, for instance.

Ever since the Fukushima Daiichi tragedy, all of Japan’s nuclear reactors have had to shut down, causing utility companies like Tokyo Electric Power Company (TYO: 9501) to scramble for more LNG imports.

TEPCO is in dire straits in supplying power to Japan after being unable to power its nuclear reactors. And the utility company is under pressure from the Japanese government to reduce the price of LNG imports.

Japan paid $15.74 per million British thermal units in July, The Hill reports. And on average, the nation pays $12 mm/BTU for its imports.

Now compare that to $3.57 mm/BTU in the U.S.

Japan is hoping to increase U.S. imports to set American natural gas prices as the new standard in future contracts – something that has Australian LNG suppliers a bit nervous.

But even though the DOE approved American exports to Japan, restrictions on LNG exports are preventing the U.S. economy from fully catering to Japanese demand.

Time is running out. Japan is looking to other nations for supply.

Runner-Up Nations

If the DOE does not get its head out of the sand and approve more facilities, other nations will fill the demand void in Japan and other high-demand places around the world.

Osaka Gas Co. (TYO: 9532) is looking to increase LNG imports from Russia, Japan’s fourth largest supplier. It already receives a large amount from Australia, Qatar, and Malaysia. Osaka Gas has increased Russian imports from 260,000 tons in 2012 to 390,000 as of March of this year.

Russia has been gearing up for more natural gas imports to Asia by aiming to liberalize its energy market. The Russians may remove monopoly favor from energy giant Gazprom OAO (MM: GAZP) by allowing other Russian energy firms like Rosneft OAO (MM: ROSN) and Novatek OAO (MM: NVTK) to export more heavily to Asia.

With the U.S. contending with a natural gas supply glut and deflated prices, it is a shame we are nowhere near as close to being a top supplier to Japan.

Mozambique is another nation that is expected to be a heavy competitor against Japan’s top suppliers, as the African government there seeks to develop its heavy-bedded reserves to bring in more revenue. However, Japanese-Mozambique energy dealings may take a decade to become fully mature, since the small African nation needs to construct the necessary infrastructure.

The Canadians are certainly taking advantage of rising demand in Japan as well, with Prime Minister Steven Harper hoping to win Japan’s business. The island nation certainly seems receptive. Prime Minister Shinzo Abe came to Canada recently in his first visit to strengthen business ties.

Unlike the U.S., Canada has no regulations on shipping LNG to non-FTA countries.

Although no major deals have been finalized between Japan and Canada, it is a troubling sign for the U.S. if we do not become more engaged in the international energy scene.

LNG Investing

There’s no doubt about the great opportunity the U.S. has to strengthen its economy with LNG exports.

But there must also be a balance in not shipping too much LNG abroad so as not to drastically drive up prices. The U.S. will have to remain cost-competitive, since we are facing growing competition from other nations.

In this regard, we must follow the Canadian model and uplift restrictions on LNG exports to non-FTA countries. Bottom line, the market will inevitably decide how much LNG will be exported when it comes to maintaining reasonable price levels.

But there are trade-offs.

We must also be aware of the political fallout from natural gas prices being too high for utility consumers. High natural gas prices could also have an effect on manufacturing companies that rely on natural gas to power factories, and rising prices could slow down compressed natural gas (CNG) vehicle investment.

There are ups and doubts in any market, but top priority should be getting prices back up to encourage a little more natural gas production, and the number one method of doing so is through exports.

If you want to get in on LNG exports to Asia, British utility company Centrica (LSE: CNA) agreed to purchase LNG from Cheniere Energy (NYSE: LNG) earlier this year in a 20-year, $5.5 billion deal to supply power to 1.8 million homes in Britain.

Texas-based Freeport LNG has been busy with Japanese utility companies Osaka Gas Co. and Chubu Electric (TYO: 9502) for 2.2 million tons of LNG per year. Freeport also plans to supply LNG to Toshiba Corp (TYO: 6502), and it is involved in a joint venture with BP (NYSE: BP) to supply 4.4 million tons on annual basis. It also plans to supply South Korea.

Dominion Resources (NYSE: D) recently won limited approval to export LNG to places like Japan and India. Dominion has already fostered deals with Japan and has been waiting on the DOE for the necessary green light.

This all sounds great, but when you compare these recent approvals to the 63 export terminals that are being constructed around the world, we are still far behind.

The good news is that places like Oregon and Alaska are being scouted as good locations for LNG export centers.

There is still time, but there must also be the initiative to jump into the Japanese market before it is too late.


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