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Japan's economy in crisis as LNG imports soar

Japan’s economy is in crisis as the cost of increased liquefied natural gas (LNG) imports – necessary to help power generation companies make up for the loss of nuclear capacity – has pushed the country to its first trade deficit in 31 years

Even before the March 2011 earthquake, which saw the reactor at Fukushima Dai’ichi nuclear plant melt down, prompting the shut in of Japan's nuclear capacity, Japan was the world's largest importer of LNG. Japan's LNG demand jumped up from 70 million tonnes a yeat (t/y) in 2010 up to 90m t/y in 2012, the country's energy minister Yasuhiro Matsuyama said, creating “a huge burden” for Japan's economy.

“The situation is very serious in terms of economic policy. This big burden is mainly due to the increase hugely in our purchases of fuel for power plants and half of it is from LNG,” Matsuyama said. “Trying to lower purchasing costs of fuel for power plants is a top priority for the government.”

Speaking at the World LNG Summit in Barcelona, held in late November, Matsuyama said that Japan's trade deficit last year, its first in 31 years, reached 6 trillion yen ($700m). This figure is expected to double by the end of the year because of the country’s continued need for LNG.

Since the Fukushima disaster, Japan has had to replace the 30% share nuclear had in the country's energy mix with LNG and coal. Almost all of the country's nuclear capacity still remains offline.

The government said in September it would phase out nuclear power entirely by 2030 but, Matsuyama admitted, it has no clear idea of what will replace this generation capacity. And with a general election to be held on 16  December, the issue is at the top of the country’s political agenda.

In the short term, costs for Japan's LNG imports continue to escalate, reaching more than $60bn last year, up more than 50% year-on-year. This could increase even further if the US dollar continues to appreciate, which some baks believe is likely.

According to US bank Citi Group, the US dollar will appreciate by between 10-12% next year, making commodities such as oil and natural gas, more expensive for countries which purchase in different currencies.

Matsuyama said reducing Japan's import bill is a top priority and if the public will not accept nuclear power, the government will have no choice but to source cheaper gas.

“The challenge for us is to make [LNG suppliers] compete with each other. [Producers] need buyers and the appetite of Japanese buyers is not unlimited,” Matsuyama said. “Without nuclear power generation, it’s a huge cost for Japan. There is a need to accelerate the discussion between consumers and suppliers,” he added.

Japan is looking to the US and Australia for increased supply, although neither of these options will necessarily mean cheaper gas. While Henry Hub prices are currently trading at less that $4 per million British thermal units (Btu), compared to the $15/m Btu spot LNG is trading at in Asia, export costs will significantly ramp up prices.  Exporting gas from the US to Asia will add at least $6/m Btu onto the cost, according to BG's vice president Betsy Spooner, and it will be “no panacea” for Japan.

In Australia, development costs for new LNG projects are soaring, due partly to fluctuations in foreign exchange rates. Development costs for Australian LNG projects have risen by as much as 50% in the past year alone, according to a recent study by consultancy Wood Mackenzie. This cost increase will be passed along to customers.

However, Spooner said there will be a slowdown in LNG supply growth between now and 2015. She said there will be an LNG supply deficit of 175m t/y by 2025, while demand, mainly from Asia, will continue to rise. Global gas demand will rise by almost 20% the next five years, according to the International Energy Agency, driven mainly by growing Asian consumption. 

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