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Japan Is Bargain Hunting As LNG Prices Slump

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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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2020s Will See A New LNG Market Maker

Japan, the world’s largest liquefied natural gas (LNG) importer, is likely to lose its top buyer status to the current number-two—China—as early as 2022, energy consultancy Wood Mackenzie said in a new report this week.

While the Chinese case for increased LNG demand and imports has been quite clear for a few years now—the massive switch from coal to gas-fired household heating and energy supply, Japan’s energy policies over the past decade have been shaped by the shock of the Fukushima nuclear disaster in 2011 that led to the shutdown of almost all nuclear reactors in the country, which used to provide around 30 percent of Japanese power supply.

Japan has restarted some of the reactors and more nuclear capacity is set to return online over the next decade. Yet, in the wake of Fukushima, resource-poor Japan boosted enormously its LNG and coal imports and consumption.   

“In 2013, a mere two years after Fukushima, Japan was generating 42 percent of its electricity from gas, while oil accounted for 15 percent and coal 31 percent,” Iain Wilson, Senior Editor at BloombergNEF, wrote in an analysis on Japan’s energy future in March this year.

According to WoodMac, Japan will continue to import high volumes of LNG, but the super-chilled fuel will face competition from returning nuclear capacity, from rising renewable capacity (including hydropower), and—unlike in other developed nations—from coal.

By 2022, Japan’s imports of LNG are forecast to drop by 12 percent to 72.8 million tons per annum (mmtpa) compared to 2018, while China’s imports are set to increase by 37.5 percent to 74.1 mmtpa, the consultancy has estimated.  

“The decline in Japanese imports will be driven by competition from coal, nuclear and renewables in the power sector and slow macroeconomic growth,” Wood Mackenzie’s senior analyst Lucy Cullen said. Related: The Real Cost Of Renewables In The U.S.

In China, continuously growing power demand and the coal-to-gas switch are driving LNG imports. In Japan, there isn’t an evident mass coal-to-gas switch, except for rare seasonal decisions of some utilities.

“There does not appear to be a clear trend in fuel switching from coal to gas. However, as the summer begins and power demand increases, we could start to see a disproportionate switch to gas if LNG spot prices stay low,” market intelligence firm Genscape said last month.

Some utilities have considered burning LNG instead of coal this summer, because the spot LNG prices in Asia in the spring dropped to a ten-year low, Bloomberg reported in early June.

However, due to the fact that long-term LNG supply contracts are indexed to crude oil prices—which are up this year—coal is still the cheapest energy source for Japanese utilities, a Reuters survey showed earlier this month.

Contrary to the trends in nearly all developed Western nations, coal ‘is still king’ in Japan.

Growing public and government resistance to new coal-fired capacity, however, could be a boon to LNG demand going forward, WoodMac says.

“The tide appears to be turning with increasing restrictions on financing and building coal. As such, we expect this policy target and such a robust share of coal in the generation mix will be increasingly difficult to sustain. This would improve the outlook for LNG,” WoodMac’s Cullen said.

The consultancy is also more optimistic than the Japanese government about LNG because WoodMac expects Japan to restart fewer nuclear reactors than the official target.

“While nuclear restarts generally dampen gas generation, our lower nuclear number implies a more optimistic view of LNG demand compared to the government,” Cullen commented. Related: Is This The Next Big Oil Disruption In The Middle East?

It’s not all doom and gloom for Japan’s LNG demand. But it will be China that will drive the world’s growing consumption of the fuel.

Thanks to the coal-to-gas switch, China became the world’s second-biggest LNG importer in 2017, surpassing South Korea and second only to Japan. Demand for natural gas in China will continue to grow in the coming years as Beijing favors increased use of cleaner-burning natural gas to clamp down on stifling pollution levels.

According to the International Energy Agency (IEA), China is set to surpass Japan, with Beijing’s imports expected to surge to more than 100 bcm in 2024.

While the U.S. will be the biggest LNG exporter within five years, China will become the top LNG importer, outpacing Japan, IEA’s Head of the Gas, Coal and Power Markets Division, Peter Fraser, said last week.  

“China will be the main driver for gas demand growth, though slower than in the recent past as economic growth slows, but still accounting for about 40% of total gas demand increase to 2024,” the IEA said in its Gas 2019 report last month.

By Tsvetana Paraskova for Oilprice.com

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