Nuclear freeze heats up LNG markets

With world opinion cooling towards nuclear power after Fukushima, LNG markets could benefit from the recent slowdown in nuclear capacity expansion. IFandP tracks the latest developments in the LNG market.

As the world watched Japan’s Fukushima Daiichi nuclear disaster on live TV, people and governments started to think hard and quickly about the consequences of a damaged nuclear power station and just how difficult and dangerous it is to get control of a major incident. Germany has now said that it will close its nuclear plants by 2022 with other countries slowing down or cancelling nuclear power programmes. For others like the US, France and the UK, nuclear power, which has always been a bit of political hot potato, has become considerably hotter. The only quick feasible way to replace nuclear power output in the short- to medium term is likely to be with coal, natural gas or, if pipelines are not in place, liquid natural gas (LNG). For speed, LNG may be the first selection of those nations with little choice.

Impact of a nuclear-LNG switch

For Japan in particular, LNG is now vital. According to figures recently released by the Federation of Electric Power Companies (FEPC), Japanese regional power authorities imported 5.28Mt of LNG in August 2011, an increase of 23.5% over the same month in 2010. And the desire and necessity of LNG imports for Japan is unlikely to cease anytime soon as more nuclear plants are taken offline. Reports by Bloomberg say that some 41 nuclear reactors out of a total of 54 in the country were offline at the end of August 2011, mostly because of the effects of the March 2011 earthquake and tsunami. Japan, up until recently, when it was overtaken by China, was the world’s second-largest economy and, without power, the nation could slip further. During mid-September 2011, Japan’s senior vice minister of trade and industry, Seishu Makino, met with US energy secretary, Steven Chu, to ask for more imports of LNG from the US. “I believe we gained the US’s understanding to some extent,” Akinobu Yoshikawa, deputy manager for the petroleum and natural gas division, told reporters in Tokyo, “We can’t buy LNG from the US unless the Department of Energy (DoE) approves LNG plant owners to export. There is one plant that recently won the approval and there are two others in progress.”

There is a conundrum here. Makino’s US visit coincides very closely with the International Energy Authority (IEA) senior gas analyst, Anne-Sophie Corbeau’s fascinating take on LNG’s immediate future, published on the IEA website. Referring to the IEA’s “Oil Market Report” in August 2011, Corbeau said that the IEA looked at two scenarios for nuclear power generation for 2011-12. Following the Fukushima disaster in Japan, one scenario paints nuclear reactors coming back online after approximately six months, while the other sees all of Japan’s 54 nuclear reactors offline by May 2012. In the best-case scenario, writes Corbeau, the demand for LNG in Japan would increase by 18bnm3 compared to 2010. In the worst-case scenario, Corbeau says that the country’s demand for LNG would rise to 30bnm3. In the latter case, according to Corbeau, Japan’s appetite for LNG would take almost all of the global output of LNG that is expected to come online between 2010 and 2012.

The actuality of the situation looks very close to Corbeau’s second scenario as the new Japanese minister of trade and industry, Yoshio Hachiro recently told reporters that Japan’s future was to have “zero” nuclear reactors. “Public opinion is almost unanimous about reducing the number of nuclear power plants,” said Hachiro. While there is no firm date as yet for the shutdowns, if Japan chooses to go down the LNG route for the bulk of its needs, then new LNG production is needed almost yesterday to cope with demand. Other major current users of LNG include China, where imports reportedly hit a record 1.8Mt in July 2011 and could hit around 30Mt by 2020, according to media predictions. Moreover, according to Bloomberg, LNG imports to South Korea were 2.25Mt in July 2011, an increase of nearly 9% over 2010. Meanwhile, Corbeau notes that during the last two years global liquefaction capacity expanded by 39% to a tune of 100bnm3 and in 2010 the trade for LNG surged 21% to around 300bnm3, representing 9% of the global demand for natural gas.

LNG exporters

In the big league of LNG exporting, Qatar holds the top spot, which according to Corbeau, has expanded its production to 105bnm3 in the last two years, with Indonesia, Malaysia and Australia being other significant players. Others in the LNG exporting business include Algeria, Peru, Russia, US and Yemen with Angola and Papua New Guinea expected to start LNG exporting in 2012 and 2014, respectively. With six mega LNG projects underway, Australia could be set to become the world’s second-largest exporter of LNG by 2016, with, according to Corbeau, a possibility of 60bnm3 of new capacity. For importing nations, some of the nations on the LNG export list are worrying. Algeria and Yemen particularly could yet go the same way as others in the year of the Arab Spring.

Capacity expansion

So, we have yet another game changer with LNG and everything appears fine. Well, not quite. Corbeau says that she expects the trade in LNG to increase by around a third in the next five years but does not envisage the previous massive growth to be repeated. With Corbeau doubting that much additional capacity could be built in less than five years and with around 80% of new LNG capacity concentrated in the Asia Pacific region, she says that the IEA considers that although new LNG investment decisions are expected,  there are risks and potential delays because of bottlenecks caused by lack of infrastructure and labour shortages. Part of the difficulty is that LNG plants or trains as they are called, are amongst the most technically-challenging and expensive equipment to build.
Corbeau acknowledges that the surplus of natural gas on the markets is eroding quickly and the buyer’s market of 2009 has tightened considerably in 2010. Moreover, LNG demand has risen in all markets, except the US, where shale gas surpluses have negated it. She also mentions that since the end of 2009, investors cancelled seven new LNG export plants, which would have started around 2015, a decision some of them may now be regretting as she forecasts that LNG demand will tighten further, especially in Asia.

USA – resisting temptation

For the US, with a current glut of natural gas, the temptation must be great to shift towards producing and exporting LNG to Asian markets. However, there is an already long wishlist for US gas from anything to replacing coal-powered generators to fuelling vehicles. Hence, some quarters already doubt the sufficiency of the new shale gas supply to meet growing LNG export requirements in addition to expanding domestic demand. It would make sense to look after the home market first, then export surpluses. Nonetheless, it will be tempting for potential LNG exporters to seek a DoE licence.

North of the border

Meanwhile, in Canada there are developments towards transport usage of LNG. Royal Dutch Shell, which pioneered LNG in the country, is reportedly proposing the nation’s first LNG plant to provide fuel for heavy-duty trucks –a landmark investment first for Shell too. Subject to permits, the plant will be built near Calgary, Alberta, and could be supplying LNG to filling stations by 2013.

European market

In Europe, where the EU is looking to cut carbon emissions, using more natural gas is not a very palatable option. Europe imported 88.4bnm3 of LNG in 2010 and will have to compete with Japan and others for future imports. Whether a shale gas supply “game changer” event occurs in Poland, for example, is too early to say. Russia, already a significant natural gas and LNG exporter, with pipelines running into Europe, may have natural gas capacity to spare for LNG production if the demand situation changes within Europe because of shale gas.

The future is open

It is impossible to predict the future and in February 2011, economists would probably not have imagined a non-nuclear power Japan or Germany in the short-term future. Yes, LNG demand was picking up anyway but it is difficult to see how capacity can keep up with demand, especially with a five-year time lag to build new trains and the consequences from events in Japan. Those companies and nations that are fortunate to have existing and new LNG capacity coming on-stream shortly will doubtless reap the benefits. Looking into the crystal ball for the future, anything could, and probably will happen. In theory, the demand for LNG is expected to remain strong and strengthen as long as it remains economically viable for the end-user. A boom could, however, disturb that relationship too much and end-users may be seeking for cheaper alternatives.