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Japan Gas Binge Ties Third-Biggest Economy to One Fuel

A man walks past a liquefied natural gas tanker in Sodegaura City, Chiba Prefecture, Japan. Photographer: Tomohiro Ohsumi/Bloomberg
A man walks past a liquefied natural gas tanker in Sodegaura City, Chiba Prefecture, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

May 24 (Bloomberg) -- Japanese companies are buying natural gas assets and fields around the world, setting the nation on course to be the first of the 10 largest energy users to bet its future on a less-polluting fuel than oil or coal.

Mitsubishi Corp. led purchases this year as trading and energy explorers bought gas properties in four countries and pledged at least $30 billion to develop deposits. They’re capturing supplies to generate power after authorities idled the nation’s 54 nuclear reactors since the Fukushima disaster.

The spending plans and closures, which doubled gas’s share of the Japanese power mix to about 50 percent, tie the country to a single fuel more than any other major energy-consumer. While that leaves Japan vulnerable to rising prices in the years ahead, the world’s third-biggest economy is gaining an advantage trading the fastest-growing fossil fuel for electricity.

“The big Japanese players are moving to lock in this supply,” said Ken Courtis, founding chairman of Next Capital Partners LP based in Tokyo. “They have the ability to take on these large projects today like few others in the world,” backed by domestic banks insulated from Europe’s credit woes.

Japan’s six major trading companies, which together with Mitsubishi are Mitsui & Co., Itochu Corp., Sumitomo Corp, Marubeni Corp. and Sojitz Corp., had $62 billion in cash as of March 31. Mitsubishi’s cash pile is the highest since 1995, while Mitsui’s is close to the most in at least 20 years.

While the U.S. has used hydraulic fracturing to become the world’s largest producer of gas and is becoming an exporter, Japan is solidifying its position as the biggest liquefied natural gas importer.

Age of Gas

“When we look back in a decade, we will understand that the U.S. has moved from the age of oil to the age of gas,” Courtis said. “Japanese companies see the strategic opportunity and have the means to capitalize on it.”

Japanese companies announced 652 billion yen ($8.2 billion) in gas and oil acquisitions in the first four months of this year, close to the total for all of 2011, which set a record for at least a decade, Tokyo-based researcher Recof said.

The spending indicates Japan, due to publish a new energy policy this summer, is charting its future largely on gas after idling its last nuclear reactor this month, completing the removal of a third of its pre-Fukushima electricity supply.

Japanese utilities plan to build an extra 24,000 megawatts of gas-fired capacity, 40 percent more than now, within a decade, according to government reports. Japan will also add 10 LNG import terminals to an existing 28 in the same period, thus increasing storage capacity by 23 percent, the data show.

Risky Dependence

“Raising dependence on LNG above 50 percent will probably be thought of as risky” because of the fuel’s high price, said Shigeki Sakamoto, a researcher with Japan Oil, Gas and Metals National Corp. in Tokyo. Japan should add coal and other fuels to the mix to avoid being “ripped off” on LNG, he said.

Higher fossil fuel imports may bring Japan into current account deficit sooner than expected, which will make the yen more sensitive to events abroad and tie its rate movements more closely to that of the oil price, Barclays Capital analysts Aroop Chatterjee and Amrita Sen said yesterday in a report.

Gas-fired generation has risen to about 50 percent of the total since three reactor cores melted at Tokyo Electric Power Co.’s Fukushima Dai-Ichi power station following the earthquake and tsunami that struck Japan last year, according to CLSA Asia-Pacific Markets.

“It’s very tough to sustain that level for a long time, but you may have to if nuclear doesn’t come back online,” Penn Bowers, a Tokyo-based utilities and trading companies analyst with CLSA, said by phone.

Gas Reliant

Of the 34 countries in the Organization for Economic Cooperation and Development, five rely on gas for more than 50 percent of their electricity, with Luxembourg the most dependent, followed by the Netherlands, Ireland, Mexico and Italy, according to International Energy Agency website. Japan would become the most gas-reliant in the top 10 energy consumer countries, IEA data show.

Japan’s government has yet to win public support to restart any of the country’s idled reactors. Prime Minister Yoshihiko Noda has said some nuclear generation will be needed to ease the strain on the economy.

Even on the premise that Japan cuts half to two-thirds of its nuclear capacity and energy efficiency improves, the country will need to replace more than 20 percent of its base load power, Courtis said.

Lock In Supply

Inpex Corp., Japan’s biggest energy explorer, bought 17.5 percent of Royal Dutch Shell Plc’s Prelude LNG venture in Australia in March, in a deal Macquarie Group Ltd. valued at $700 million. Inpex also committed this year to spending $24.7 billion on developing its Ichthys LNG project in west Australia.

Mitsubishi and Mitsui, Japan’s top two traders, this month agreed to buy a $2 billion stake in the Browse LNG project in Australia, operated by Woodside Petroleum Ltd.

Last month the two joined Sempra Energy of the U.S. to fund a $6 billion LNG export facility in Louisiana. The traders are also partners in Russia’s Sakhalin II LNG project, which OAO Gazprom said in January may be expanded for as much as $8 billion.

Australia has a further $5 billion of LNG assets up for sale, Adrian Wood, a Sydney-based analyst at Macquarie, wrote in a May 2 report. Among those may be stakes in Chevron Corp.’s A$29 billion Wheatstone LNG venture and BG Group Plc’s $20.4 billion LNG project in Queensland, he said.

“Australia is a preferred supply source, but they are also starting to look beyond Australia,” said Neil Beveridge, a Hong Kong-based analyst with Sanford C. Bernstein & Co.

Demand Shortfall

Japan will probably need to obtain a further 20 million tons of LNG annually by 2018 to meet demand, Noel Tomnay, head of global gas research at Wood Mackenzie Ltd. in Edinburgh, said in a phone interview.

Replacing all 49,000 megawatts of nuclear capacity with the same of gas-fired generation would require buying an extra 49 million metric tons of LNG, according to calculations by Osamu Fujisawa, an independent energy economist in Tokyo. Japan imported a record 83 million tons in the year ended March 31.

Japan’s investment activity in energy has always been high and the nuclear shutdown is only part of the reason for the recent up-tick, said Michael Joyce, a partner at Norton Rose (Asia) LLP in Tokyo, who advises Japanese companies on foreign asset purchases.

The companies are enjoying the situation in which the yen has gained 53 percent against the dollar in the past five years while the rivals of the Japanese companies struggle to raise finances, Joyce said.

Mitsubishi Confidence

Ken Kobayashi, the chief executive officer of Mitsubishi, Japan’s biggest LNG importer, said he sees investing in gas as having little downside. Global LNG use is likely to grow 50 percent by 2020 from 2011 and Mitsubishi could market its foreign gas both domestically in the production country and in Japan and the rest of Asia.

Mitsubishi has increased its own LNG capacity to 705,000 metric tons last year, up 42 percent from 2007. The company accounted for 41 percent of all Japan’s LNG imports in 2010, which includes production and trading volumes. Mitsubishi also wants to diversify LNG sourcing geographically and make take on operating roles in new development, Kobayashi said.

“On a 10-15 year horizon, LNG is going to continue to be Japan’s core energy source,” Kobayashi said in a meeting with analysts May 11 in Tokyo.

Ballooning Costs

Whether Japanese companies buy more assets or not, they are already committed to “ballooning development costs” at their current assets, Jogmec’s Sakamoto said.

Japanese companies may need to speed up gas investment because traditional suppliers such as Indonesia are lowering the volumes as their fields become exhausted and more of the fuel is needed domestically, CLSA’s Bowers said.

Many of the new investments are aimed at the U.S. and Canada on the premise that both countries will gradually lift restrictions on exporting the fuel since vast quantities of gas have been found in shale rock formations.

The gap between U.S. gas, which is mostly priced at Henry Hub, and Asia’s oil-linked rates has widened to a record $13 per British thermal unit, heightening interest in LNG exports from North America to the world’s most populous region, Barclays Capital analysts Shiyang Wang and Michael Zenker said in a May 15 note. Were U.S. gas to trade at the Asian price the sellers would earn an extra $1 billion a day, Wang and Zenker said.

Gas Glut

Marketed U.S. gas production may climb 4.4 percent this year from a record 66.22 billion in 2011, the Energy Department said May 8 in its Short-Term Energy Outlook.

Sumitomo and Tokyo Gas Co in April agreed to buy 2.3 million tons of LNG a year from Dominion Resources Inc. in the U.S. with the price linked to Henry Hub. The arbitrage with Asian gas prices would allow the companies to sell the fuel in Japan for under $10 per Btu, Kunio Nohata, a senior general manager at Tokyo Gas, said April 27. That’s more than 40 percent less than what Japan currently pays.

The sales contract is also dependent on the U.S. approving Dominion Resource’s Cove Point facility for export activity.

“People talk about Henry Hub and what it can do for Japan, but there’s absolutely price risk to that over the long-term,” CLSA’s Bowers said. “It could be good, it could be bad.”

With the north American gas market at a fledgling stage and the premise vast, buying gas assets today is the equivalent of acquiring oil reserves about a decade ago when crude traded at $10 a barrel, Courtis said. Oil futures in New York are trading around $91 a barrel today.

To contact the reporters on this story: Yuriy Humber in Tokyo at; Yuji Okada in Tokyo at

To contact the editor responsible for this story: Rebecca Keenan at

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