Japan first imported U.S. liquefied natural gas (“LNG”) from the Kenai facility in Alaska in 1969. Kenai is now mothballed and Alaska officials have asked ConocoPhillips to consider resuming exports. But the real story comes from the second-largest U.S. state: Texas, as well as its neighbor Louisiana. In both states, LNG facilities that were originally slated to bring gas into the U.S., but lost that opportunity after the shale revolution dramatically increased U.S. natural gas output, now seek a new lease on life as LNG export stations. Cheniere, Sempra LNG and Freeport LNG aim to bring their plants on the Texas and Louisiana coasts into commercial production starting 2016/2017, and could eventually export more than 40 million tonnes of LNG annually, making the U.S. one of the world’s largest suppliers of the fuel.
Japan’s Energy Dilemma
These new LNG supplies are music to the ears of Japanese power plant operators as the country continues to struggle with radiation leaks and other problems at the Fukushima power plant damaged by the March 2011 tsunami. As of September 15, 2013 Japan had shut down its entire nuclear reactor fleet, which formerly produced 30 percent of the country’s electricity. LNG demand has risen substantially as a result. Now, Japanese power companies must sometimes pay as much as $20 per million BTU for LNG imports – around twice the cost of delivering gas from the U.S. Gulf Coast – because there are no other energy sources large enough to quickly replace lost nuclear power.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Japan has enough coal-fired power generation capacity to power more than 6 million homes during peak summer demand, but there won’t be any more large coal plants coming online until 2023 and the country must also power a massive industrial and commercial sector and keep electricity prices low enough for Japanese businesses to stay competitive in the global market. This leaves expanding gas-fired generation capacity and burning more LNG as the only viable large-scale options to keep the lights on and the economy humming.
Indeed, Japanese power companies are on pace to consume around 90 million tonnes of LNG in 2013, which will likely account for approximately one third of global demand. To help secure LNG for this massive market, Japanese investors are scouring the globe. They are even looking at projects such as Novatek’s Yamal LNG development in northern Russia, despite the fact that when pack ice closes the Northern Russian sea route to LNG tankers, Yamal lies more than 25,000 km by sea from Japan. Japan’s leaders clearly realize that energy security comes in part from diversity of supply. But Japanese buyers also prefer to obtain LNG supplies from a stable region without pirates or terrorists, one where Japanese investors can buy gas reserves in the ground, and where LNG purchases will deepen already tight strategic and economic bonds with a vital ally.
This brings us from Tokyo to Texas and the Gulf of Mexico. The U.S. offers Japan a stable LNG source with a much more secure physical, economic and political environment than any other Asia-focused global LNG exporter. American LNG supply potential grows out of a number of geological, geographic and legal/regulatory advantages.
First, the U.S. has world-class unconventional gas reserves that were proven and demarcated during the 2008-2011 phase of the shale revolution. Second, it has dozens of sophisticated producers who, if the market looks favorable, can quickly ramp up supply to support additional LNG projects beyond those already under construction. Third, producers enjoy access to a truly national gas pipeline grid that makes gas fungible and means that production increases anywhere in the U.S. can quickly be translated into greater exportable gas supplies. Fourth, the many underutilized U.S. LNG import terminals can be converted into liquefaction facilities at a much lower cost than building LNG export plants from scratch, as competitors in Australia and other areas must do.
Fifth and finally, the Panama Canal expansion will facilitate U.S. LNG trade with Japan and other Asian consumers. LNG exports from the U.S. can move through the expanded Panama Canal and either directly to Japan or to Singapore LNG’s trading hub, located only roughly a week’s sail from the Tokyo area. LNG cargoes were not previously carried through the Panama Canal, but the expanded Canal, slated to open in 2014, will be deep and wide enough to accommodate more than 85% of the existing and prospective global LNG tanker fleet, thus opening a new trade route between exporters in the Gulf of Mexico and Caribbean and the Asian market.