Natural gas prices heading up if post-disaster Japan imports more?

Natural gas prices have climbed since the Middle East uprisings began in January. Japan may well need more natural gas to replace lost nuclear power, but US is mostly insulated from price shocks.

By , Staff writer

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    Traders of crude oil and natural gas react during early trading at the New York Mercantile Exchange on March 11.
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When Japan starts to rebuild, it will be looking to replace the nuclear-generating capacity it lost to the earthquake and tsunami – and natural gas is likely to be one of the solutions.

Already a significant importer of natural gas, Japan could rely more heavily on the fuel to run generators, which could then supply Japanese industries with electric power. Post-disaster electricity shortages have prompted many large Japanese companies to curtail production, possibly leading to a worldwide shortages of some electronics and auto parts.

If Japan does opt to import more natural gas, the shift might result in modestly higher natural-gas prices on the world markets next year, energy analysts say. But Americans who use natural gas would be spared a price shock, they predict, because the US is largely self-sufficient in natural-gas production.

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“The US natural-gas market is an isolated market,” says Vivek Mathur of Energy Security Analysis Inc. (ESAI) in Wakefield, Mass. “It is different in terms of the world supply and demand fundamentals.”

However, there is likely to be some modest effect, says Damien Gaul, an industry expert at the Energy Information Administration (EIA) in Washington. Some suppliers of liquified natural gas (LNG) to the US might instead decide to sell their shipments on the international market, reasons Mr. Gaul. “There might be a lessening of supply but not in a meaningful way,” he adds.

Since the upheaval in the oil-rich Middle East began in January, natural-gas prices in the US have crept up, says Gaul. He estimates they have increased about 30 cents per million BTU, or about 7 percent on the commodity exchanges.

This stands in contrast to July 2007, when an earthquake registering magnitude 6.8 rocked Japan and knocked out the Kashiwazaki-Kariwa Nuclear Power Plant. Prices of LNG on the spot market (purchases made without a long-term contract) soared to $20 per million BTUs. By way of comparison, prices are currently about $10 per million BTUs.

“People are hoping and expecting that will not be repeated this time,” says Justine Barden, an economist at EIA.

The impact on the US was also much greater then, says Ms. Barden, because the US was importing larger amounts of LNG. According to EIA data, the US received about 99 billion cubic feet of LNG in July 2007. As of December, US imports were down to 29 billion cubic feet for the month.

At the moment, US imports of LNG are modest because domestic natural-gas production is abundant from shale formations in places like Texas and Pennsylvania. This abundance helped to keep home heating prices down this past winter for households that use gas.

To make up for its lost nuclear power, Japan will import 10 percent more LNG than it did last year and an additional 130,000 barrels of oil per day, estimates Mr. Mathur, the energy analyst.

Japan’s increased demand for natural gas comes when there is enough spare capacity to fill the need, says Mathur. “Some could come from the United Kingdom and Belgium and other parts of the Mediterranean. Indonesia could supply some cargoes, and South Korea has agreed to supply gas if it’s an emergency,” he says. In addition, Mathur says, there is spare capacity in the Middle East that could be diverted from Europe.

If the price of natural gas were high enough, some buyers of LNG in the US might be willing to forgo their cargoes.

“Some natural gas could be reexported from the US, but it’s an expensive way to do it,” says Gaul.

In fact, the US is currently exporting natural gas from Alaska to Japan. However, the natural-gas reserves for those exports are drying up and the export facility may be shut down in the next few months, says Gaul.

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