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Japan Tries to Gain Leverage Over LNG Pricing

Japan Tries to Gain Leverage Over LNG PricingJapan Tries to Gain Leverage Over LNG Pricing

Japan’s record purchases of liquefied natural gas (LNG) show no sign of slowing as the country continues to try and fill the energy shortfall created when it took its nuclear plants offline three years ago, the Oil Price reported.  

 Japan is by far the world’s largest importer of LNG. Dependence on imported energy is sapping the country’s economy and has fueled more than two years of consecutive monthly trade deficits. This is causing the Japanese yen to weaken, making imports yet more expensive.

Japan is trying to mitigate this vulnerability, and several of the country’s largest LNG importers are joining forces to create a buyer’s pact.

The issue at hand is the quirky pricing that reigns over LNG deals. Traditionally, LNG is sold under long-term contracts with prices linked to the price of oil. But in many places of the world – the US in particular – natural gas has become significantly cheaper than oil on an energy-equivalent basis. But in Asia, importers often still pay the higher oil-linked price for LNG.

Japan hopes to change that. Two large Japanese companies, Tokyo Electric Power Company (owner of the crippled Fukushima power plant) and Chubu Electric Power Company agreed earlier this month to cooperatively negotiate contracts with LNG suppliers. By banding together, they believe they will have enhanced leverage. Together, they plan on jointly purchasing 35 to 40 million metric tons of LNG per year (mtpa), which amounts to around half of Japan’s total LNG consumption.

With its lack of substantial domestic sources of fossil fuel, Japan is cripplingly dependent on imported oil, coal, and natural gas. Before the 2011 meltdown of the Fukushima nuclear plant, Japan was the third largest nuclear generator in the world, behind the United States and France, with 54 reactors.

Those reactors were critical to cutting Japan’s fuel import bills, and accounted for 20 percent of the country’s electricity generation. But post-Fukushima, the sum total of Japan’s nuclear power plants were shuttered and imports of fossil fuels, particularly LNG, have skyrocketed.

Japan has undertaken a heroic effort to replace that lost capacity. It instituted one of the world’s most generous feed-in-tariffs for solar energy, which is essentially a guaranteed price for solar developers. That made Japan a hot spot for solar development nearly overnight: it installed 7 gigawatts of solar power for the fiscal year ending in March.

Other efforts included conservation and electricity rationing to avoid overstressing the grid. Taken together, the inspiring efforts by the Japanese people helped avoid severe electricity shortages.

Nevertheless, Japan is still importing an enormous volume of LNG to fuel its power plants. For the first eight months of 2014, Japan’s LNG imports averaged 11.85 billion cubic feet per day (bcf/d) according to the US Energy Information Administration. That is near a record high.

Financialtribune.com