U.S. May Export Natural Gas to Japan

Brian Hicks

Written By Brian Hicks

Posted March 5, 2013

In late February, Japan’s Prime Minister Shinzo Abe and U.S. President Barack Obama met over shale talks, and in short, Japan would like to import U.S. gas.

Given that Japan is already the world’s largest purchaser of liquefied natural gas (LNG) and that the U.S. is experiencing an ongoing glut of natural gas, such a meeting of minds seems almost inevitable. As the U.S. moves toward exporting rather than importing, it is causing a fundamental shift in the world’s gas markets. In other words, LNG has suddenly become a hot political topic.

Much of this is focused on how LNG is priced; typically, it’s been linked to long-term supply contracts of crude oil pricing. But with the ascendancy of gas, this traditional balance could change.

From the Financial Times:

“Long-term, we’re going to move from oil-indexed to gas-linked contracts,” says Dale Nijoka, head of Ernst & Young’s global oil and gas practice. “It’s here – everyone’s talking about it.”

Asia’s rising nations demonstrate an extravagant appetite for LNG, and U.S. oil and gas producers are rushing to oblige, petitioning the government to allow for more export terminals and loosen decades-old legislative restrictions.

These developers are pegging their LNG prices to the Henry Hub rather than Brent or even the WTI. Right now, Henry Hub prices mean $3-4 per million British thermal units. Compare that to the prices in Asia, which are more than fourfold higher, as the Financial Times reports. Naturally, Asian nations have become keenly interested in U.S. exports.

Japan especially has reason to pay close attention. After Fukushima led to the government turning off nearly all the nation’s nuclear reactors, it has to compensate for a steep energy deficit—and it is relying on LNG to do most of the heavy work. 17 projects within the U.S. have applied for export permits (that is, to countries without existing free-trade agreements), but only Cheniere Energy (NYSE: LNG) has won one for its Sabine Pass project, according to the Financial Times.

However, momentum is growing forcefully, and it is widely expected that more export licenses will be granted soon. Japan’s Tepco stated last month that it has reached a supply agreement with Louisiana’s Cameron LNG. Meanwhile, Kansai Electric Power has reached out to BP (NYSE: BP) for an LNG contract, again, linked to the Henry Hub. And Tokyo also put up around $10.9 billion in credits that would go to Japanese companies investing in shale gas development.

But the market is still very much in a developmental stage, since it remains unclear just how much gas the U.S. administration is willing to see shipped off to Asia.

After all, the U.S. still imports some of its gas—the Christian Science Monitor reports that through November 2012, it imported 12.5 percent, largely from Canada. That’s of course a lower figure than the average of 15.7 percent over the preceding two decades, but it also means the U.S. isn’t entirely energy-independent.

This paradoxical situation has actually led to the formation of a lobby that is protesting the undoing of export restrictions. While Europe and Asia continues to pay around $12 and $17 (respectively) for each thousand cubic feet of LNG and the U.S. enjoys prices around $3-4, the worry is that mass exports of LNG will drive up prices to comparable levels.

But despite the glut of natural gas production, the severely low prices have, in fact, caused a leveling off in the growth of such production. That, at least, is simple economics—there is little point in making investments and ramping up growth when prices are so low as to barely guarantee any real profits.

In the short term, the solution could be to open up exports and make use of the existing economic climate. Companies could export to Asia and make money off it, which can then be recirculated into domestic gas production ventures.

But that also misses the deeper point—there is no guarantee that U.S. gas production will continue to grow at a rapid clip. Moreover, as a Wall Street Journal blog post notes, as exports rise, so will domestic U.S. prices. It’s a fragile balance.

Proven reserves of dry natural gas within the U.S., at the end of 2010, indicated a 12-year supply if present rates are maintained. What matters isn’t really the actual amount of oil and gas in reserves, but rather how much of it can actually be used. And these numbers are in contest, with the industry citing some figures and various analyses citing others.

Also, those reserves aren’t increasing. Much is still undecided, but in the short term, it may make sense to go for exports to reel in profits, and then taper off those operations to a more manageable level.

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