Japanese Demand May Fuel American Natural Gas Prices

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Researched by Industrial Info Resources (Sugar Land, Texas)--With its nuclear fleet's uncertain future, the world's largest importer of liquefied natural gas (LNG), Japan, is turning toward natural gas as its power generation fuel of choice for the mid-term. In an effort to encourage development among small-size power producers, Japan is considering a new pipeline project reaching from Sendai in the tsunami-blasted northeastern region of the main island, Honshu, to the northern end of Kyushu, which lies off the most southwestern tip of Honshu. While the route has not been decided, the Japanese Ministry of Economy, Trade, and Industry (METI) has already announced that it intends to import LNG from the American market, where prices are much lower than in Japan.

To meet this demand for natural gas, the U.S. has two new export-oriented terminals in development on the West Coast with a total planned export capacity of more than 2 billion cubic feet per day (bcf/d). These two projects, located in Oregon, have been in development for several years, since before the steady decline of natural gas prices after January 2010. Natural gas prices were at their peak in 2008 at $14 per million British thermal units (mmBtu). The terminals originally were intended to be import terminals that would bolster natural gas supplies for an American economy with an unsure supply. However, since the perfection of the method of shale-gas extraction called hydraulic fracturing, or "fracking," American gas supplies have increased dramatically, contributing to the continuing decline in its price to about $2.70/mmBtu today. As a result, these projects were forced to reinvent themselves to remain profitable, and thus turned their focus on foreign markets, such as the Japanese market where natural gas is nearly $17/mmBtu.

Competing with these two terminals is the Canadian Kitimat liquefaction plant project in British Columbia, under development by a group of companies headed by Apache Canada, the Canadian subsidiary of Apache Corporation (NYSE:APA) (Houston, Texas). Kitimat will have an estimated 700 million cubic feet per day of export capacity. Combined with the two plants in Oregon, the western coast of North America is looking at about 2.7 bcf/d of export capacity by the end of 2017, pending regulatory permits and smooth construction activities.

The U.S. West Coast is not the only region in which Japan has an interest, however. In April, Sumitomo Corporation (TYO:8053) (Tokyo) and Tokyo Gas Company (TYO:9531) (Tokyo) secured supply contracts with Dominion Resources (NYSE:D) (Richmond, Virginia) for LNG supplies from its planned Cove Point LNG liquefaction plant. The existing storage terminal is currently in the permitting process, but if all goes well, Dominion should be able to meet its contractual obligation to begin supplying these two companies with LNG from 2017.

In 2011, Japan consumed 80.1 million metric tons of LNG, and is expected to have consumed more by the end of 2012 due to the lack of nuclear power. Between Cove Point, Kitimat, and the two plants in Oregon, not to mention the other liquefaction plants that have been proposed to or identified by project sponsors to FERC, North America stands poised to be able to supply to international markets with more than 27 million metric tons per year, roughly one third of Japan's annual consumption.

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