Japan accounts for 37 percent of the global LNG market and remains the world’s leading importer by a wide margin.
Over the past decade, the country has provided a source of steady demand growth, posting larger jumps in imports whenever a slug of new liquefaction capacity comes onstream.
However, the sudden surge in the nation’s LNG imports in 2011 had nothing to do with the addition of liquefaction or regasification capacity.
In spring 2011, the magnitude-9.0 earthquake and resultant tsunami that devastated Japan’s Tohuku region and crippled the Fukushima Daiichi nuclear power plant prompted authorities to temporarily shutter the bulk of the nation’s nuclear reactors.
Two of Japan’s nuclear power plants resumed operation, but all of the nation’s 48 reactors have remained offline since the No. 3 and No. 4 reactors at Kensai Electric Power’s Oi plant closed for maintenance in September 2013.
To offset the loss of about 30 percent of Japan’s baseload power, the country’s 10 largest electric utilities have stepped up their consumption of coal, heavy fuel oil and LNG.
With Japan’s LNG imports surging unexpectedly in 2011 and growing further in 2012, the so-called Fukushima effect has intensified competition for volumes in the spot market and elevated prices to levels that incentivize producers and traders to redirect volumes from Europe to Asia.
This inflection point is clear when you compare the recent price histories of natural gas at the Henry Hub in the US, the UK National Balancing Point and the average price that Japan pays for its liquefied natural gas.
For example, LNG imports to Europe in 2013 declined for the second consecutive year, tumbling by 28.5 percent and sinking to their lowest level since 2005. The price competitiveness of coal-fired power plants and the Continent’s ongoing economic malaise ensured that Europe once again served as the source of swing volumes to meet Asia’s robust demand.
If we compare Japan’s LNG imports to the volumes covered by existing contracts in a given year, we can approximate the extent of the nation’s activity in the spot market for natural gas. (This rough calculation assumes that Japanese importers received all their agreed upon LNG shipments and doesn’t account for any potential supply disruptions or shortfalls).
Japan’s LNG imports fell short of contracted volumes in 2009 and 2010, reflecting reduced demand during the global economic downturn. However, the gap between the nation’s contracted LNG volumes and total imports widened to 17.39 million metric tons in 2012–almost 3 times 2008 levels and 11.3 percent of the Asia-Pacific market.
The question looming over the LNG market: When will Japan’s shuttered nuclear reactors come onstream, and how many will be in operation?
Only nuclear power plants deemed safe after a rigorous inspection by the Nuclear Regulatory Authority will be allowed to restart.
The government has also indicated that nuclear power plants must be decommissioned after 40 years of operation and has instituted a ban on the construction of new nuclear reactors and the expansion of existing facilities.
On April 11, 2014, Japan’s cabinet approved an energy policy reversing the previous government’s plans to shutter nuclear power plants gradually.
However, the document didn’t set a target for nuclear power’s contribution to the nation’s energy mix, and questions remain about exactly how many of the nation’s 48 reactors will return to service.
Based on questionnaires and interviews with industry experts and comments from Japan’s 10 plant operators, Reuters earlier this year estimated that Japan would restart about 14 of its reactors and pegged another 17 as likely closed forever. The jury is out on the remaining 17 units.
Although the timing and magnitude of reactor restarts remains uncertain, these decisions and long-term policies regarding the country’s energy mix will hold significant ramifications for international LNG prices in the next few years and global demand in the long term.
Japan’s utilities have already reduced their consumption of crude oil and heavy fuel oil–the most expensive feedstock for electricity generation–by ramping up their coal consumption.
Although short on details, Japan’s plan to restart some of its nuclear reactors serves as a reminder that too many industry observers conveniently take the prevailing abnormal supply-demand picture for granted in their assessment of international LNG markets.
We will continue to monitor this situation.
Elliott and Roger on Jan. 29, 2019
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.