Japan Banks on LNG

Japan’s scramble to replace generation lost from nuclear power plants that were shuttered after the March 2011 Fukushima Daiichi nuclear accident has forced it to rely on pricey imports of fossil fuels—and soaring energy costs are hammering the world’s third-largest economy.

This January, Japan’s Finance Ministry posted another record trade deficit of $1.74 billion, blaming the gap on a bloated bill for importing liquefied natural gas (LNG) plus a weaker yen. The island nation that is bereft of its own natural resources (and, critically, interconnected international power grids) has become the world’s largest buyer of LNG since the Fukushima disaster. In 2012, it imported a record 87.3 million metric tons (mt), up 11.2% year on year, but its LNG imports last year cost an average of $864.07/mt ($16.60/MMBtu), up 13.4% from 2011. Import prices for LNG, meanwhile, continue to soar, surging from about $550/ton in 2010 to $750/t in 2011, and $850/t in 2012.

The country’s electric utilities—which say they had not expected nuclear power plants to be suspended for more than a year following Fukushima—are carrying the bulk of that cost burden. Their interim financial results for fiscal year (FY) 2012 show that many have fallen deep in the red due to increased costs for oil and LNG (in lieu of relatively low-priced coal, presumably for environmental reasons) as a result of the loss of nuclear generation. Numbers from the Institute of Energy Economics, Japan (IEEJ) estimate that the average power generation unit cost has risen 1 yen/kWh ($0.01/kWh) since FY2011 to about 12.6 yen/kWh ($0.14/kWh). According to the IEEJ, thermal power generation unit costs rose from 9.8 yen/kWh in FY2010 to 11.5 yen/kWh in FY2011—and fuel costs accounted for 82% of total unit costs.

Things aren’t looking better, says IEEJ researcher Yu Nagatomi. Of the nation’s 50 viable nuclear reactors, only Kansai Electric Power’s Ohi Units 3 and 4 are operational. At least nine other nuclear power plants may go online in 2013; their stress test reports are currently being reviewed. That still means Japan will rely on fossil fuels for 93% of its energy this year, remaining vulnerable to risks in the supply of fossil fuels from the Middle East and elsewhere. The country’s dire electricity supply situation, meanwhile, is expected to worsen if the economy recovers sharply, as projected, seeing 2.5% growth in real gross domestic product.

The longer term looks just as uncertain. The Innovative Strategy for Energy and the Environment, Japan’s latest draft energy policy, calls for a complete phase-out of nuclear power generation by the 2030s, but the Cabinet has not approved this strategy. Then, there are geopolitical risks associated with LNG and oil supply: The Arab Spring, Iran’s nuclear weapons development, terrorist attacks in Algeria, and other problems in the Middle East and North Africa have shaken Japan’s energy security. Amid those issues, moreover, are the country’s heightening tensions with LNG-hungry China, which some experts say could have even graver impacts on fuel supply than issues in the Middle East and North Africa because an escalated dispute with China could disrupt maritime LNG transport.

That’s why, according to some experts, the U.S. shale gas revolution could critically transform Japan’s energy future. In a February research note, the Development Bank of Japan suggested Japan could cut its LNG import costs by between 7% and 15% by 2020 if Japanese companies were able to procure a large amount of LNG from planned U.S. export projects, with prices tied to Henry Hub gas prices. The bank pointed out that Japan’s 2011 and 2012 record trade deficits—the first two in more than three decades—were pegged in part to rising LNG import costs, because LNG prices were linked to oil price indexes. It suggests that by 2020, the country could meet its projected 2020 LNG demand of about 84 million mt/year by buying American LNG at $13.20/MMBtu to $14.5/MMBtu (down from average import costs of $15.5/MMBtu in December 2012).

Still, that scenario is cloudy, the bank noted. The U.S. does not have a free trade agreement with Japan. Although the Department of Energy (DOE) has approved several applications to export LNG to countries that have a free trade agreement with Washington, it has only greenlighted export to non-agreement countries from Cheniere Energy’s Sabine Pass project in Louisiana.

As Japanese government officials continue to lobby the U.S. Congress, Japan’s Prime Minister Shinzo Abe urged President Barack Obama to approve U.S. gas exports to Japan during bilateral talks at the White House on Feb. 22. Washington’s response has been vague. Michael Froman, White House deputy national security adviser for international economic affairs, has reiterated that the DOE is in the middle of a public comment period for two economic studies that examine the impacts of LNG exports on natural gas prices and American businesses.

Meanwhile, Sen. Lisa Murkowski (R-Alaska), the top Republican on the U.S. Senate Energy and Natural Resources Committee and a vocal proponent of expanded exports, is reportedly discussing opportunities to send Alaskan gas to Japan. Alaska is the ideal source of natural gas for the country, she said, noting that at least 85% of oil and 25% of LNG imported by Japan comes through the 24-mile-wide Strait of Hormuz between Iran and Oman. “Between Alaska and Japan there are no chokepoints, no pirates, no third nations with territorial claims—only wide open water,” Murkowski said. “And we certainly have plenty of gas to sell.”

Sonal Patel is POWER’s senior writer (@POWERmagazine, @sonalcpatel).