Russia’s LNG Rush Gives Japan Strongest Bargaining Chip
Japan, the world’s top importer of liquefied natural gas, has its best opportunity to bargain for lower prices since it started buying the power-plant fuel 44 years ago. One reason is Russia.
OAO Gazprom (GAZP), OAO Rosneft (ROSN) and OAO Novatek (NVTK) plan to build more than 50 million metric tons of LNG capacity in the next decade. That’s 58 percent of the record 86.9 million tons Japan bought last fiscal year after the 2011 nuclear disaster in Fukushima idled all but two of its atomic reactors.
Even if Russia doesn’t build all those plants, Japan will start LNG imports from Inpex Corp. (1605)’s $34 billion project in Australia in 2017 -- the same time as shipments may start from U.S. and Canadian shale gas. Cargoes from Mozambique will set sail in 2018. Japan, South Korea and China are the world’s top three importers of LNG.
The surge in supply will give buyers more say in price talks, according to Evergreen, Colorado-based research company Bentek Energy LLC. It will “increase Japan’s bargaining power on new contracts and on renegotiating existing ones,” Javier Diaz, an analyst with Bentek, said by e-mail.
Global LNG capacity will jump to 450 million tons by 2025 from 296 million tons, according to data compiled by Bloomberg New Energy Finance. The U.S. could offer as much as 50 million tons, or a third of that expansion, said Charles Blanchard, a BNEF analyst.
Demand will also rise, reaching 440 million tons by 2025, energy adviser Wood Mackenzie Ltd. said in an April report. That’s why projects due to start between 2018 to 2022 will face a tough time chasing customers, the Edinburgh-based company said.
‘Pick and Choose’
“To some extent, buyers can pick and choose their preferred projects,” Wood Mackenzie said.
Japan and South Korea, which bought 52 percent of the world’s LNG last year and offered the highest profit for suppliers, are in the best negotiating position, Blanchard said.
Forcing down LNG prices has become essential for Japan as its trade balance went into a record deficit last year because of energy imports, said Akira Ishii, senior researcher at state-affiliated Japan Oil, Gas & Metals National Corp.
From 2008 to 2010, Japan paid more than twice what China did for LNG and slightly less than South Korea, the world’s second-largest buyer, according to the Organization of Arab Petroleum Exporting Countries. In 2008, the average price for LNG to Japan was $12.5 per million British thermal units, compared with South Korea’s $13.8 and China’s $5.4, the OAPEC said in a February report.
In 2011, the year of the Fukushima disaster, Japan’s costs had jumped to an average $14.7 per million btu, South Korea $12.5 and China $9.1, OAPEC data show. By December 2012, China’s price was double the 2008 level at $10.7 per million btu, while Japan paid $15.40, or 70 cents more than South Korea, OAPEC said.
China will be the growth driver for the fuel through 2025, though Japan will remain its biggest buyer, and “the overall balance of the LNG market over the next three years will depend on Japanese consumption,” BNEF said in an April 22 report.
Few gas exporters have pursued Japan as much as Russia, which saw exports to Europe fall 7 percent last year as the sovereign debt crises reduced demand. Meantime, the U.S. has approved the first of a possible 20 projects seeking to ship shale gas abroad that would compete with Russia’s supply.
“We are now conducting active talks on sale of LNG from the planned projects,” Russian Energy Minister Alexander Novak said in a June 6 interview with state Rossiya TV. “The window for contracts is from 2016 to 2020, so if we don’t make decisions soon we will lose the chance and Asian countries will agree to contracts with others.”
Russia plans to produce 40 million to 50 million tons of LNG by 2020 for a 10 percent share of the global market from 4 percent now, Novak said.
Since March, Tokyo has hosted visits from Novak and the chief executive officers of Rosneft and Gazprom -- both based in Moscow and Russia’s two biggest state-owned energy companies. The CEO of Siberia-based Novatek, a non-state producer developing the Yamal LNG project in Russia’s Arctic region, also visited for talks.
Rosneft is “enjoying long-standing successful cooperation” with Japanese companies, the company said on its website during the visit of CEO Igor Sechin to Japan in May. Novatek has received interest from Mitsubishi Corp. and Mitsui & Co. (8031), Japan’s two biggest trading companies, in the $20 billion Yamal LNG project, CEO Leonid Mikhelson said in a March interview in Tokyo.
Gazprom is expanding its Sakhalin II plant, the only operating LNG facility in Russia with about 10 million tons of capacity, and promoting a new LNG project in Vladivostok, a day’s journey from Japan by ship. Gazprom CEO Alexei Miller declined to comment to reporters during his Tokyo visit in April.
There is “steady” interest in the Vladivostok LNG project, Miller told reporters in Moscow on April 9.
Gazprom Vladivostok LNG will offer as much as 49 percent participation to foreign companies that will buy gas of not less than 6 million tons, Gazprom Deputy Chief Executive Officer Vitaly Markelov told journalists in Moscow today.
Rosneft is working with Exxon Mobil Corp. (XOM) to enter the industry with another LNG plant on Sakhalin island, the tip of which is 40 kilometers north of Japan.
“We have more choice now” as the export monopoly of Gazprom looks set to be split between several energy companies, Masami Iijima, the CEO of Japan’s second-largest trading firm Mitsui & Co., which owns 12.5 percent of Sakhalin II, said at a briefing in Tokyo last month.
Russia’s overtures to Japan are spurred by potential competition from the U.S., said Samuel Brothwell, Bloomberg Industries analyst. Freeport LNG Development last month won approval to export the fuel to Japan.
The U.S. entry “gives Japan greater pricing leverage but only to a point,” Brothwell said.
“The U.S. is not going to become the world’s natural gas Wal-Mart,” he said. “Others that have gas to sell round the world -- read: Russia -- will not simply let us take away the world’s biggest market even if we could.”
In a market where the supplier must secure buyers for its LNG plant before it can be built, oversupply will not mean that “there are ships full of LNG sailing around looking to unload Somewhere” and driving down prices, BNEF’s Blanchard said.
“Oversupply means not all projects will get built,” Blanchard said. The ones that lose out now will need to wait “until demand grows enough to justify the higher prices.”
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