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AS JAPAN settles into longer-term dependence on non-nuclear energy, the impact this will have on LNG is becoming clearer.
So far in 2012, Japan has taken nearly 40% of world LNG cargoes and current and future exporters seem to see it as a target market. Although Japan may pay a high price now, there are limits to its LNG appetite.
If or when it switches its nuclear capacity back on, some exporters — such as Equatorial Guinea and Nigeria — that depend on Japan may need to seek alternative markets.
Japan is unlikely to take LNG from all planned export capacity. In this scenario, the buyer will gain a stronger hand and there is new scope for more spot trading that undermines the Asian price premium.
Exporters without long-term contracts and LNG sourced from further away are likely to be affected first. Some exporters, particularly in West Africa, are increasing their exports to Japan and may need to find alternative markets at lower prices.
So far in 2012 Japan has sourced LNG cargoes from 19 countries. Just under two-thirds came from Pacific Basin exporters, 26% from the Middle East and 11% from the Atlantic Basin. In 2010, over three-quarters of cargoes came from the Pacific Basin and only 3% from the Atlantic Basin.
Japan’s demand for LNG cargoes increased by a fifth between first-quarter 2010 and first-quarter 2012. Pacific Basin exporters have not kept pace and exporters such as Qatar, Equatorial Guinea and Nigeria have met the excess demand.
If Japan’s nuclear capacity increases and demand for LNG falls, these exporters will be most affected. Some exporters are now more dependent on Japan than others and than they themselves were a few years ago. From zero in 2010, Peru has sent nearly a third of cargoes to Japan so far in 2012.
Similarly, the share of exports going from Equatorial Guinea to Japan has grown from 17% in 2010 to 78% so far in 2012. In 2010, Equatorial Guinea’s main LNG customers were Chile, South Korea and Japan, but no one country took more than a third of cargoes. This year has seen a marked shift with Japan importing 14 cargoes and only four going elsewhere; two each to Chile and South Korea.
During this period, exports have increased from Equatorial Guinea. In the first four months of 2010, it shipped 10 cargoes, half to South Korea and half to Japan. In same period of 2012, it sent 18 cargoes and 14 went to Japan.
Nigeria, Oman, Norway and UAE have increased the share of their exports going to Japan by over 10% since 2010. The share of Nigeria’s exports going to Japan has risen from 3% in 2010 to nearly a third so far in 2012. The number of cargoes going to Atlantic Basin destinations has fallen by a quarter.
Japan’s increased demand on the LNG market has had two immediate consequences; first, tight vessel availability, due to a limited pool of spot vessels and increased voyage distances from the Atlantic Basin to Japan. Second, it has reduced shipments to Europe and the US, where the number of cargoes in first-quarter 2012 was nearly a fifth lower than in the same period of 2010.
A third impact, becoming increasingly noticeable, is the focus of new export capacity on Japan as a key target market.
This applies whether the project is about to start — as in Angola — or is planned, as in Shtokman in the Barents Sea or off east Africa.
The reason is not just because Japanese demand is high and will remain so until it decides to increase its nuclear output again, but because Japan has traditionally paid the highest LNG prices in the world.
Whatever Japan’s future reliance on LNG, it is likely to revisit the assumption that it will pay the highest prices to secure supply.
Before the Fukushima accident, the Japanese energy ministry had a long-term vision for nuclear to meet up to half Japan’s power needs. If it returns to that strategy, its demand for LNG will fall.
In this scenario, growth markets for LNG are likely to be outside Japan. Two likely candidates are India and China. Both have been reluctant to pay high prices for LNG. Export projects requiring a high unit price for LNG to justify initial investment may struggle to secure Japan or alternatives as long-term markets.
The LNG market has a positive outlook at the moment, particularly when compared with other shipping sectors.
Much of this confidence is tied to high Japanese demand, which has benefited both exporters and shipowners.
But exporters that depend on Japan taking more high-priced LNG is growing should plan for the country reducing its reliance on LNG.
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