Fukushima and the Japanese LNG market

In the wake of Japan’s Fukushima disaster, nuclear plants have be operating at decreased capacity.  As of Dec of 2011, the average operating rate of nuclear plants was at 15 %, down from 68 % in Dec of 2010.  In an effort to fill the gap, the use of other major energy sources has increased.  The following information shows the increase in consumption of 4 energy sources by Japanese utility companies for the Decembers before and after the Fukushima disaster.  (From Bloomberg News, here)

Other fuels aside, a 32% increase in LNG consumption is significant.  This means that Japan has been and is likely to continue to absorb almost all of the world’s surplus LNG supply.  This has been creating a tighter market which has in turn been driving up prices.  The futures market confirms this.

This is not favourable news for the European Union as it has been having enough trouble with energy security as it is.  (Read ‘Sanctions on Iran, Russian instability, and European Energy Security‘)  Bending over backwards in an attempt to secure central-Asian oil and gas access, the European Union has been losing many potential LNG shipments to Japan.  They can expect to continue to see this effect into the future as Japan continues to seek out additional contracts from around the globe.  Companies seem to be willing to squeeze any excess capacity they can out of existing infrastructure.  If they are able to do so, it means that they will be able to sell new quantities for today’s new, higher LNG prices.  North America, however, should continue to remain unaffected as the shale boom should continue to offset the need to import any LNG.

Since the Fukushima phenomenon seems to be lagging into the long term, anticipated LNG prices will continue to drive exploration and investment decisions.  Gazprom’s Alexei Miller, for example, has been eyeing Japan as of late as a key future LNG export target as the Shtokman field is to begin production in 2017.  This is only going to take further potential LNG away from Europe.

Russia’s Sakhalin-2 is the biggest loser?

It pains me to say this, but next to Japan itself, Sakhalin-2 is the biggest loser among this whole Fukushima-LNG-conundrum.  In a previous article on Russia’s Sakhalin-2 project, I broke down the ~20 year sales contracts into the following chart.  (Please read ‘Sakhalin Offshore Oil and Gas Reserves‘ for information and maps)  These contracts were all finalized before the Fukushima event occurred.  Sakhalin-2 gas is therefore being sold at a significantly discounted price.

Sakhalin-2 will still be attempting to increase outputs in an effort to accomodate Japan’s new thirst.   Any new increased output will be able to be sold on the market, or re-contracted to Japan for the new, higher market price of LNG.

Sakhalin-2 “plans for a further increase of at least another 5 percent, which could be achieve by  debottlenecking an 800 km pipeline that links the Lunskoye offshore gas field in the Okhotsk Sea to the Prigorodnoye LNG plant in the south of Sakhalin island.”

“Sakhalin-2 may also build a third 5mn t/yr liquefaction train at the site if Gazprom agrees to provide extra gas resources from the nearby Sakhalin 3’s Kirinsky block, which is being explored.” … “Shell has called for an investment decision on Sakhalin 2’s expansion to be taken as soon as possible, to take advantage of increased gas demand after Japan’s Fukushima-Daiichi nuclear crisis last year.”

(Source – ArgusMedia.com)

It would make sense for Russia to sell and continue selling as much gas as possible from the Sea of Okhotsk to Japan as the Sakhalin-2 Prigorodnoye export terminal is literally just a skip across the water from Japan.

What does it take to supply Japan with LNG?

Japan’s LNG imports in 2011 were an impressive 78,532,000 metric tons.  (From LNG World News)  Domestic production only makes up for a few percentage points of total LNG sources, and is thus negligible.  Since there is no gas pipeline that connects Japan to the mainland, all LNG must arrive at any of Japan’s 28 operating LNG terminals.  From there, LNG is re-gasified (vaporized) into it’s gaseous state and is then transmitted and distributed through the three partially privatized Tokyo Gas, Osaka Gas, and Toho Gas companies.  (Information on Japanese LNG terminals and distribution networks from EnergyDelta.org)

To get an idea of what 2011’s import volume would look like, one can look at it in terms of LNG tanker capacity.  If one assumes a LNG density of 450 kg / cubic metre, and that the average LNG tanker has a capacity of 130,000 cubic metres (both reasonable assumptions), one can make the following calculations;

Japan thus imported enough LNG in 2011 to fill roughly 1,342 of these 130,000 metric ton LNG tankers (78,532,000/58,500 = 1,342).  This is equivalent to ~4 LNG tankers unloading at any of Japan’s 28 operational LNG terminals each day.  This value might be larger or smaller as some LNG tankers have capacities of up to 260,000 metric tons.

I have also added a calculation in order to show what one LNG tanker worth of LNG would become once re-gasified.  From what we can see, at an amazing compression ratio of 1:600, the average LNG tanker is able to carry 76,000,000 cubic meters of natural gas, which is enough to supply around 180,000 households for a year.

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