Overview
Japan was the world’s largest importer of LNG in 2013, with last year’s deliveries approaching 90 mt while the country’s nuclear plants remain shuttered. Japan is the world’s third-largest consumer of oil, behind China and the United States.
Because the country is resource-poor and has a small domestic oil and gas industry, it is heavily reliant on imported fuels – a dependence that only increased after the Fukushima disaster in March 2011.
Following the disaster, the country’s 10 regional utilities were forced to buy more LNG, oil and coal. While these measures – combined with government-encouraged efforts to save electricity – managed to avoid widespread blackouts, utilities have suffered financially.
The future of the LNG market is of great importance to the country as it seeks to diversify its sources of supply and reduce the ‘Asian premium’, which sees Asian importers pay some of the highest rates in the world. Gas is used predominantly for power generation, but is also supplied as city gas to industry and residential areas.
Increased worldwide demand for LNG in recent years has tightened the global supply and helped push up spot prices from $9/MMBtu to a peak of $20/MMBtu in 2013. These prices have since fallen, but the Asian LNG market remains tight during seasons of peak demand.
The disaster at the Fukushima Daiichi nuclear plant greatly affected the country’s attitude towards nuclear power. The former government’s energy policy, published in September 2012, reflected public opinion in its plan to phase out nuclear power by 2030. However, this policy was reversed by current Prime Minister Shinzo Abe’s administration. Abe’s Strategic Energy Plan released in May 2014 designated nuclear, coal, hydro and geothermal as baseload fuels.
Despite the administration’s pro-nuclear stance, the country’s plants are still offline, and utilities face entrenched public opposition and legal challenges before they can return to normal operations.
The country’s utilities need government approval to raise the price of electrical power, which the administration has been wary of doing for fear of pushing business out of Japan. However, without price increases the financial position of several utilities has continued to deteriorate. Two regional power providers needed bail-outs in 2013.
Japan is pursuing a number of options in the hope of finding a replacement for its nuclear capacity. The government is pushing diplomatically to try and open up new sources of LNG supply – particularly from the US, with Japanese buyers signed up for nearly 20 mt from the country under tolling contracts.
However, high prices have also pushed utilities towards coal, while the feed-in tariff introduced in 2012 has led to a boom in applications for solar permits for residential and commercial installations.
The crisis has highlighted the need for an Asian gas hub, which could help improve liquidity and price discovery. Several Japanese buyers have also expressed a desire to see an element of hub indexation introduced into long-term LNG contracts.
Page updated: 04/08/2014