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.

Sanctions on Iran, Russian instability, and European Energy Security

How will the West continue to impose crippling sanctions over Iran, all the while avoiding to put the world’s energy security at risk?  As concerns over Iran escalate, ArcticEconomics is going to be looking into some of the potential energy implications.

The European Union, Russia, and the West are all part of a delicate tightrope exercise.  The West is attempting to impose crippling sanctions over Iran while Europe looks to preserve any energy security possible given the instability of their main Russian source of energy imports.

Europe and it’s Energy Strategy

It is worth painting a picture of Europe’s complex system of energy reliance with the following statistics.  In 2007 38.7% of the European Union’s natural gas originated from Russia.  In 2007, 6 European countries received over 90% of their gas supplies from Russia.  (See Russian natural gas deliveries by country)  Russia simply seems to have credibility issues with the rest of the world, in that as per general consensus, her exports are unstable among other things.

Europe has been focusing, as of late, on securing long-term supplies of natural gas from non-Russian sources.  This is due, in part, to the unstable power-grip that Russia seems to hold over it’s energy exports.  In september of 2011, for example, the European Union went so far as to mandate that a negotiation occur between the EU, Azerbaijan, and Turkmenistan in order to construct a Trans Caspian Pipeline system.  (From the European Commission)  Avoiding Russia, the pipeline would work to provide stability to a Union in looming crisis.

Nabucco Gas Pipeline

The Nabucco Pipeline

As an alternative to Russian imports, the European Union has also been focusing on the Azerbaijani Shah Deniz.  Situated amongst the deep water shelf of the Caspian Sea, the Shah Deniz is one of the world’s largest gas-condensate fields with over 1 trillion cu metres of gas.  The European Union, along with proposed pipeline planner Nabucco, have been working to secure gas transport infrastructure that would connect Azerbaijan to Europe.  (the current Shah Deniz pipeline goes only as far as Turkey)  If Europe is going to have gas security, it is going to have to diversify.  Without running through Russian or Iranian territory, a proposed pipeline such as Nabucco’s would be one of few possible options.  (Visit Nabucco’s website here for more information)

Iranian Involvement with Shah Deniz

The intent of the above mentioned energy solution proposals are both modest and straight-forward in nature.  Current sanctions on Iran, however, may impede on any projects that are associated with Shah Deniz, as the National Iranian Oil Company owns a minority 10% stake in the project.  Due to the nature of sanctioning the  UK and the EU have been lobbying tirelessly in an effort to prevent roadblocks such as these.  EPCEngineer.com reports the following;

The project might have been hit by a bill by representative Ileana Ros-Lehtinen banning any company in business with Iran to also operate in the U.S. But lobbying by BP, the EU and the U.K. led lawmakers to tweak the bill. The current version includes language that says it won’t affect efforts “to bring gas from Azerbaijan to Europe and Turkey,” or to achieve “energy security and independence from Russia.”

(Read the entire article here)

So long as new bills are caught on time, the United States should remain sympathetic toward any region that wishes to both aid in sanctioning efforts and preserve it’s energy security in the face of an unstable Russian exporter.  This fact does not mean there will be no comparable problems within the foreseeable future.  Issues with Iran may still escalate and take much more of a toll on world energy security.  This is just one example of many issues.

A potentially bright future for Europe amid present concerns

One cannot necessarily say that Europe will be forever reliant on Russian exports or ‘controversial source’ exports such as Iran.  Europe is in fact situated amongst prime oil & gas transport real estate.  Greenland, Iceland, and the Faroe Islands have all recently opened up licenses for exploration.  These are as recent as 2008-10.  The same goes for the Shetlands of the UK.  There could be many new potential ‘record breakers’ to the tune of Russia’s Shtokman field amid any one of those.  Norway made, just this past year, 2 new game changing discoveries in the Barent’s Sea.  Russia is going to be exploring within it’s section of the Barents Sea as well.  These regions have one thing in common.  They are all in the line of sight of Europe.

Of course pipelines wont cut it if we are going to be referring to any new fields off of Greenland, Iceland, and the Faroe Islands.  These supplies will all have to be shipped via LNG and oil tanker.  It is possible, though, that these to-be-discovered fields will be able to satisfy demand requirements to the same degree as Norway, who in 2010 had the capacity to export 30, 26.5, 12, and 10 billion m^3 of natural gas to the United Kingdom, Germany, France, and the Netherlands respectively.  As always, the answers will be revealed with time.