Issues Facing U.S. Shale Gas Exports To Japan

This article explores the feasibility of exporting shale gas - in the form of LNG - from the U.S. to Japan and Korea considering the break-even gas prices and the liquefaction and transportation costs versus prevailing spot and long-term contract prices of LNG in Japan. Potential risks also are discussed.

Japan has limited energy resources and its energy self-sufficiency, even after inclusion of nuclear power, barely amounts to 16%. This is the main reason why Japan is heavily dependent on imported energy to maintain its economic growth. Following the oil shocks of the ’70s and ’80s, Japan gradually veered away from initial oil dependence of almost 80% to reach current levels of 43% in terms of primary energy supply.

While making this transition, importing natural gas from neighboring countries would have been the perfect solution except that there were no nearby sources - barring Russia - to be tapped. In the ’70s and ’80s, given the cold war conditions and Sakhalin yet to be developed, Japan obviously tilted toward importing LNG from faraway countries. Japan’s energy supply mix for 2009 is presented in Table 1. LNG imports constituted almost 91% of the total gas supply.

Table 1: Energy Supply Mix of Japan, 2009.

Today, Japan is the largest global LNG importer. Japan’s LNG import was 3.18 Tcf (65.2 million metric tons) in 2009.It is expected to reach 3.75 Tcf in 2016 and 4 Tcf in 2035. Despite a declining population (resulting in an aging work force) in Japan and meteoritic rise in LNG consumption in merging economies, Japan’s share of LNG import will still be 35% of the Pacific market and 16% of the world market by 2015. In fact, there is a distinct possibility that due to the disasters at the Fukushima I Nuclear power plant, Japan will opt for increasing its LNG import. This presents a unique opportunity for gas producers to sell more LNG to Japan.

Japan’s LNG Import Sources
Japan imports most of its LNG from a select group of countries in Asia, Australia and Africa. Table 2 shows Japan’s import by country in 2009.

Table 2: Japan's LNG Imports by country, 2009.

As can be noted from Table 2, Indonesia, Malaysia and Australia each supply close to 20% of Japan’s LNG imports. Japan is intent on diversifying the sources of LNG imports to get better control on LNG prices and attain reliability of supply in case of adverse weather/geopolitical events in any particular region of the globe.

Japan would obviously seek reliable suppliers with which it has had a long relationship who have enough spare capacity and stable political situation. Energy price and the necessity of upfront investments will be the other variables taken into consideration.

The main contenders to supply LNG to Japan are Qatar, Australia, Malaysia and Russia. Out of these, Russia’s contribution would definitely increase from 4.3% to a higher percentage when the Sakhalin-II LNG plant reaches its peak production (Mitsui and Mitsubishi together have a 22.5% share in Sakhalin-II and intend to supply Japan with an extra of 200,000 metric tons in the near future). In reality, reliability of Russian supply will always remain a big question.