Why Japan’s Liquefied Natural Gas Demand Will Increase

Why Japan’s Liquefied Natural Gas Demand Will Increase

Japan is the world’s largest LNG importer at about 35% of global demand, or 12.7 Bcf/day, with pretty much all of the country’s gas use met via LNG. Japan’s LNG imports fell 6.2% in in the fiscal year that ended March 31. And as a mature LNG market with a declining population base and the slowest predicted economic growth in all of Asia, the common assumption is that Japan’s incremental demand is either flat or negative. In fact, a Japanese government estimate itself has LNG use falling 30% by 2030 from the 2014 peak.

But, it’s worth noting that EIA has broken ranks with other key forecasters and has Japan’s gas demand rising by nearly 1% per year, which is really interesting because that’s double the expectation for U.S. growth (here). Sunken LNG prices and a global oversupply that will continue for at least a few more years should help. FERC reports LNG prices in Japan have dropped to $5.50 in mid-September, compared to over $14 two years ago. Indeed: “Analysis: Japan still dominates Asian LNG imports.” “Japan’s August LNG Imports Rise 9.4%.”

Japan is now probing “into whether the resale restrictions in most of its liquefied natural gas contracts violate fair trade laws may lead to the renegotiation of more than $600 billion worth of deals that run until almost the middle of the century.” It’s estimated that about 70% of Japan’s LNG supply is bought via long-term deals with destination clauses. If this can be changed, new potential suppliers in the U.S. would greatly benefit.

Not being able to re-sell is a major problem: Japan is projected to have an LNG surplus of about 1.2 Bcf/day in 2017, 0.8 Bcf/day in 2018, and 0.84 Bcf/day in 2019. In turn, Japan is advancing its strategy to lower LNG procurement costs and move away from oil-indexation to upgrade its energy security, which has been ranked nearly 20% lower than other OECD members (here).  “Japan’s Jera plans 42 percent cut in long-term LNG contracts by 2030.”

Japan is overly reliant on oil, at about 45% of all energy use, versus under 30% in the other developed nations. Japan is unique in that 12% of its electricity still comes from oil, which is very high for such an advanced economy. And coal, which has supplied some 30% of power, faces increased public criticism at home and abroad.

In fact, pressure for Japan to use less coal is the highest in Asia because both China and India, the latter in particular, are much less developed and understandably face less scrutiny in getting energy access for their huge populations.

Japan has some of the most reliable, modern gas plants in the world, with nearly 40% of its current gas power capacity constructed since 2007. To illustrate their effectiveness, gas accounts for just 27% of Japan’s capacity, but actually generates 40% of electricity, a “punching above the weight” that I have discussed in other articles. A decade ago, gas was just 20% of Japan’s power.

Japan also knows that it can easily cut GHG emissions in the industrial and commercial sectors evolving from coal and oil to natural gas (here). Remember that gas has 50% less CO2 emissions than coal and 30% less than oil. Gas is only 9% of energy use in Japan’s industry, for instance, which is far below the OECD average of 33%. Even for transport, Japan “could have 500,000 vehicles running on LNG or CNG by 2030, about 20% of all trucks.”

As for nuclear, it was LNG that compensated for the decline of nuclear power after the Fukushima accident in March 2011 and subsequent nuclear shutdown. Japan’s LNG demand quickly increased by 30% despite a near doubling in price (here). Now, “Japanese institute sees 19 reactor restarts by March 2018.” The nuclear re-start program could curb LNG demand, but there are a number of factors that go against more nuclear in Japan (here).

And the Institute for Energy Economics, Japan says the impact of the nuclear re-start will “fall entirely on oil rather than LNG “(here). Cutting oil dependence is a critical part of Japan’s goal to improve energy security: Japan relies on the precarious Middle East for about 80% of its oil supplies, unlike LNG where no single source has accounted for more than a 20% share of imports.

Indeed, “environmental concerns have led the government to encourage natural gas consumption, making LNG a fuel of choice for power generation.” Renewables are likely to be LNG’s largest competitor: “Japan’s New Energy Rules Could Make It a Paradise for Renewables.” But no, not really. As I have continually cited, contrary to what you’re being told, gas and renewables actually complement each other: “Shale & renewables: a symbiotic relationship.”


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