Grupo de Economia da Energia

Impacts of the earthquake and the japanese nuclear crisis on the international natural gas market

In LNG, natural gas on 18/04/2011 at 00:20

By Marcelo Colomer & Edmar de Almeida 

One of the few existing consensus among energy experts at the moment is the recognition that the energy crisis, in particular the nuclear crisis in Japan after the great earthquake of March 11, will tend to benefit the international natural gas market. Many experts were in rush to point out a rapid redemption of the natural gas market after nearly three years of depressed prices. In fact, the price of natural gas and oil suffered a sharp drop from the 2008 crisis, remaining at a very low level, even after the recovery of price of oil in 2009. This expected price recovery in the gas market is considered as great relief by sector agents, although a more careful analysis of the current context of the market reveals that recovery may take longer than expected.

The belief that the disaster in Japan will affect the gas market is based on the high importance of the country’s imports in the LNG market and because gas is the best alternative at short and medium term to restore the electricity supply in Japan. In 2010, for example, Japanese’s LNG imports was 35% worldwide. This figure is even higher (50%), if we consider only imports in the Pacific Basin and Middle East region.

With regard to the infrastructure of power generation, it is estimated that around 20 GW of nuclear and coal generating capacities have been affected by 9/11 while the infrastructure of natural gas generation has been very little affected. In fact, only a small regasification terminal, Shin Minato, was closed due to the earth tremors in March.

Two other factors contribute to explain the importance of gas in case of critical electricity demand in Japan. The idle capacity of natural gas thermal generation near consumption centers and the reduced cost of gas generation compared to oil generation suggests that there is no oil in the short and medium term, the best alternatives to natural gas to compensate for the loss of electric generation capacity.

Initial estimates calculate the increase in Japanese LNG demand in 40 million cubic meters per day (Mm ³/day). In other words, if natural gas is used to make up 50% of capacity generation lost, an additional import of approximately 40 million cubic meters per day would be required. Thus, it would be necessary to send about 12 additional LNG shipments to Japan monthly. These figures may impress initially; however, a careful analysis of the current market situation suggests that the short and medium term impacts on prices may not be very significant.

First, it is important to consider that the additional demand for natural gas may not be as relevant as the preliminary estimates state. This is because in the medium term there is a recovery of part of the infrastructure for nuclear and coal generation that is now out of operation. In fact, it is estimated that only 6.8 GW of nuclear and coal generation has been permanently lost, which significantly reduces the additional natural gas demand for electricity generation in the medium term. Another issue to be considered is that the effects of the earthquake of March 11 on the industrial park and Japanese economy are still unpredictable, which poses a big question about the evolution of energy consumption and even natural gas in non-generating sectors for the next years.

However, even though initial estimates of demand are confirmed, the current context of the LNG market lets Japanese emergency consumption to be easily supplied without major pressures on price levels. This can be explained by the high idle capacity currently existing in liquefaction plants and LNG transportation.

The global LNG industry has invested heavily in the expansion of liquefaction from 2005 to 2007, when prices of oil and natural gas rose drastically in the international market. However, many of these projects went into operation only after the 2008 crisis, when the gas market was found in a low demand which further contributed to reduce prices. Additionally, the domestic production of American natural gas recovered from the shale gas which further pushed down prices in the international LNG market. The result was the capacity of liquefaction and transportation in excess. In 2010, for example, the idle capacity of liquefaction in the Pacific Basin and Middle East reached 18% of installed capacity while in the Atlantic Basin the idle capacity reached 17%. In relation to transport capacity, the utilization factor in 2010 was around 60%.

Not coincidentally, Russia, Qatar and Indonesia supplied firstly Japan with emergency LNG. These countries have much of the current idle capacity of liquefaction. Overall, it was accepted to meet additional demand from Japan at the same price of contracts previously executed and indexed to oil. In other words, the price agreed in the contracts already executed with Japan will be extended to emergency LNG loads. Therefore, it is expected that Japan will not be able to reverse, by itself, the current context of gas market in the short and medium term.

In the long term, however, structural changes in the world energy matrix, arising from the nuclear crisis in Japan, can bring lasting effects on the natural gas market. The likely moratorium on the expansion of nuclear generating capacity will lead Japan and many other countries with scarce renewable energy resources to employ natural gas to expand generation capacity. In other words, in a context of few generation technology alternatives, regarding security (nuclear) and emissions (coal) issues, natural gas presents itself as the best option. In this sense, it is believed that the main effects of the earthquake of March 11 on the natural gas market should occur in the long term and will depend much of the political struggle about the nuclear issue than cyclical demand pressures.

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