Is Japan able to cut LNG prices?

Recently, only two of total 54 nuclear power units are operated in Japan. Thus thermal power generation has been boosted to make up for the nuclear power shortage.

Petroleum consumption by Japanese ten major electric power companies in 2011 surged 80% from a year ago to 17.76 million kiloliters, while liquefied natural gas (LNG) consumption rose 20% on year to 49.13 million tonnes, according to the federation of electric power companies of Japan.

Fuel costs for thermal power generation spent by ten major firms during April and December 2011 increased by 950 billion yen ($12 billion) from a year ago.

Expanded fuel costs were mainly caused by the volume of consumption, but higher fuel prices pushed the costs up as well.

Increased petroleum demand from Japanese electric power generation seemed to do little to lift crude oil prices. Japan has been a negative factor against the crude oil market because of its declining total demand. Tensions over Iranian nuclear development have been supporting crude oil prices for past several months.

However, petroleum is not main fuel for Japanese thermal power generation. Volume of electricity generated by LNG is 2.5 times larger than that generated by petroleum.
If LNG prices have not soared in step with crude oil, power companies' spending could be much smaller.

Since Asian LNG prices have been set by formulas based on Japan's average crude oil import prices, LNG traces price movements in the crude oil market.
The following chart shows Japan's average import prices of LNG and petroleum. LNG prices exceeded petroleum last year since electric power companies bought many expensive spot cargoes added to usual long-term contracts.

LNG prices are usually higher than petroleum prices when crude oil markets decrease sharply such as later half of 2008, but higher LNG prices compared to petroleum when crude oil markets are rising seems to be abnormal condition.

World LNG market is apparently over-supply. Even if International Energy Agency forecasts that global LNG demand will increase to 540 billion cubic meters by 2020 from 265 billion cubic meters in 2011, surplus is also predicted to expand to 90 billion cubic meters from 80 billion cubic meters during the same period.

Natural gas prices in North America, that has declined significantly after the shale gas revolution, are less than one sixth of Asian LNG prices.Aggressive supply from North America to Asia may reduce Asian LNG prices considerably as Qatar has expanded its supply capacity.

To boost supply from North America, huge investments are required to both suppliers and consumers. Also number of LNG tankers are not enough for increasing supply of spot cargoes, because LNG carriers have been built based on long-term projects.

Japanese government and power companies have to decide to choose natural gas as the future main energy source to start such investments. But many people still do not give up nuclear power and concerns over the global warming make them hesitate to boost use of fossil fuel.

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