Fukushima Nuclear Disaster Impact on Global LNG Prices

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  • 1. Fukushima Nuclear Disaster Impact on Global LNG Prices Ece DINCASLANIntroductionFukushima Nuclear Disaster led a crisis that creates domino effect which is fuelling price rises forliquefied natural gas (LNG) and causing dissent between importers and exporters. World nuclearpower generation could fall by up to 15 per cent by 2035 following the Fukushima disaster, accordingto the International Energy Agency. Also, the rapid economic growth of China and India had alreadybeen pushing up LNG prices on the international market, because of their energy hunger. 1 However,moves in Europe away from nuclear power in light of the Fukushima disaster are lifting the priceseven higher. 1- LNG (Liquefied Natural Gas) At a first glance, in order to explain the relation between why Fukushima disasteraffect LNG prices, LNG need to be defined. Thus, liquefied natural gas (LNG) is natural gasthat has been cooled to about -260°F for shipment and storage as a liquid.2 When comparingto LNG with its gaseous form, the volume of the liquid is about 600 times smaller. It is aproduct for customers in industry and tourism that natural gas pipelines cannot reach, whichprovides cost advantages to the customers. Also, it is an environmentally friendly productwith low emission rates. Besides, its environmentally friendliness, LNG is an alternative fuel type with its highcombustion efficiency, clean and ecological fuel feature. In addition, it is economical, safeand practical to use. In terms of transportation, LNG is more expensive than natural gas,because it provides a means of moving it long distances where pipeline transport is notfeasible, that requires special tank shipping.1 Based on the following three IEA scenarios: current energy policies; incorporating broad energy policy commitmentsalready made to address climate change and energy security; and including policy commitments but where gas plays aparticularly prominent role in meeting future energy needs.2 http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_lng
  • 2. 2- LNG Importers Indonesia, Malaysia and Australia were the three biggest suppliers of LNG to Japan in2009, according to Cedigaz data, followed by Qatar, the UAE, Russia and Oman. 3 Indeed,LNG is mostly used in Asia Pacific region as there aren‟t any pipelines connected. 2- About Fukushima The nuclear industry‟s potentially bright future blackened considerably on March 11, 2011,when a natural disaster disabled the Fukushima Daiichi Nuclear Power Station in Japan and underlinednuclear power‟s role as the world‟s most polarizing energy source. The first shock of a magnitude 9.0 earthquake knocked out all offsite electric power sources tothe Fukushima plant, forcing it to run on emergency diesel generators. 41 minutes later, a tsunamistruck the rugged plant, overwhelming emergency generators and destroying the water take pipe usedto cool the reactor. The loss of coolant resulted in serious damage to four reactor cores, explosions,and a huge release of radioactive material. The Fukushima disaster received the highest possible rating of seven on the InternationalNuclear and Radiological Event Scale. Japanese officials estimated it may be more than 20 yearsbefore residents can safely return to the area. Unfortunately, the long-term ecological and socialimpacts also remain unclear. “The earthquake and Tsunami knocked out nuclear reactors that account for an estimated 8%of Japan‟s peak electricity production, and replacing this capacity will not be easy or quick. Much ofthe gap is likely to be filled by increased imports of liquid natural gas (LNG), but there is a limit tohow much gas Japan will be able to buy (or burn) in the short term” 4 3. Fukushima Nuclear Power Plant Fukushima demonstrates that stable „shut-down mode‟ is impossible if a plant loses gridpower for more than a few hours. Without power, the circulation of cooling water at high pressurethrough distribution pipes is impossible. It doesn‟t take an earthquake to knock out grid power. Morecommon loss can have the same negative and bad effects, including billions of dollars in damage tothe site itself, let alone radiation damage far beyond.3 Japan Oil & Gas Report Q4. Business Monitor International Ltd. Pp. 25-32. (2011)4 The Economist Intelligence Unit Limited 2011, Business Asia April 18th 2011. Pp. 2-6
  • 3. Already, nuclear power plants are designed to provide continuously reliable electricity andgenerate no direct greenhouse gas emissions. The only other sources that can provide constant, orbase-load, power are hydropower, natural gas, and coal. Renewables like solar and wind are a must ina carbon-constrained future but for now are intermittent sources that require backup power. Therefore,a low-carbon, base-load source is an essential one in any future clean energy portfolio. 4. Responses of the Countries to Fukushima Energy analysts pointed out that Germany‟s nuclear phase-out will add up to 40 million metrictons of carbon dioxide emissions annually because utilities will be forced to rely on fossil fuel sourcesduring the transition to renewables. If other countries remove nuclear power from the picture, themultiplier effect makes showing climate change even more difficult. Nuclear power provides nearly 70percent of electricity in France, 30 percent in Japan (before tsunami) and about 20 percent in Germanyand the United States, where it is the largest source of low-carbon electricity. A rapid nuclear phase-out will have major energy security and grid reliability repercussions, including likely increaseddependence on foreign fossil fuels. Japan is mix to increase liquid natural gas imports to meet demand,and Russia stands to benefit as the primary source of natural gas to Europe. Following Fukushima, many countries put their nuclear power policies on hold or underreview and some, including Germany and Switzerland, opted out of the technology entirely. Political responses to Fukushima are changing the future of nuclear power globally. GermanChancellor Angela Merkel, once a proponent of nuclear power declared that, withdraws of thatnation‟s 17 nuclear plants by 2022. So that, there has no other nation has gone so far. PresidentObama requested safety reviews for existing nuclear facilities but made clear that nuclear powerremains in play. Most European Union countries are also focusing on safety reviews and researchingnew technology. Chinese officials promise immense safety standards but still intend to add 40 ggw ofnuclear power by 2020. But the renewal periods of those long-term contracts are coming up, and LNG exporters planto take advantage of the rising demand as well as moves away from nuclear power. Besides Germany,other European countries will review their dependence on nuclear power. If that trend continues,demand for LNG will further increase. Which is indicated the above, also, there is an assumption or prediction that Chinas importswill increase to 40 million tons a year in 2030," said an official of Sojitz Corporation. China hasalready bumped heads with Russia over LNG prices. According to Russian informants, China offeredRussia a price of $250 for LNG to be supplied from western Siberia to the western China. However, at
  • 4. a summit held on June 16, China and Russia did not reach an agreement on the price. China iscurrently importing LNG from Central Asian countries at prices approximately from $165 to $190.The aftermath of these, Chinese President Hu Jintao and Kazakh President Nursultan Nazarbayevagreed to fasten cooperation for the construction of oil and LNG pipelines connecting Central Asiawith border areas of China. However, Moscow still ignored to budge in negotiations with Beijing. Other growingcountries are expected to enter the fray. India has also been a latecomer to the LNG market. But in2010, it imported 9 million tons of LNG under short-term contracts alone. Even oil-producingcountries in the Middle East are now using large quantities of LNG. Worries over nuclear power havealso increased in the United States, suggesting Washington to take a closer look at shale gas for itsenergy policy. The U.S. government started to work out plans to export shale gas, whose supplyrecently exceeded demand in the country. 5. Three Mile Island Neither the Deepwater Horizon oil spill in April 2010 nor the Fukushima disaster a year laterhave led to a serious reconsideration of regulatory risks and national energy priorities in the UnitedStates. Still, flatly rejecting nuclear power leaves the world less able to cope with climate change.Instead, we need an effective policy that balances nuclear power‟s environmental and health costsagainst the costs of climate change. According to the IEA, without further action to reduce carbon emissions in the next five years,the world will be locked into irreversible climate change. We must start aggressively improvingefficiency and deploying clean energy now. The debate will continue on how “clean” and cost-effective nuclear power is. New nuclear power plants could provide short-term reductions in carbonemissions by displacing coal plants and provide the back-up necessary for an increase in renewableenergy. Despite, investment in new nuclear plants is not foreseeable without immediate and substantialinvestment in less visible and urgently needed measures to improve end-user efficiency, regardless ofenergy source.
  • 5. 6. According to IEA, Annual Energy Outlook, 2011 The report said its Low Nuclear Case was not a forecast, but "is intended to illustratewhat a pessimistic view of the prospects for the nuclear power industry might entail." "Theshare of nuclear power in total generation drops from 13 per cent today to just seven per centin 2035, with implications for energy security, fuel-mix diversity, spending on energy importsand energy-related CO2 emissions." The report said that Fukushima had "shaken the countrysenergy sector" and that "the prospects for nuclear power are now much more uncertain thanbefore the Fukushima nuclear accident" and that it had "greatly increased the uncertaintyabout the future role of nuclear power in meeting the worlds energy needs." According to Annual Energy Outlook, 2011, the report said its Low Nuclear Case was nota forecast, but “is intended to illustrate what a pessimistic view of the prospects for the nuclear powerindustry might entail.” „„The incremental demand for oil in Japans power sector in 2011 is estimatedbetween 150 and 200 thousand barrels per day while demand for LNG (liquefied natural gas) isexpected to rise by 11 billion cubic metres (bcm)," the report said. This is about 0.2 per cent of globaloil supplies and 0.4 per cent of natural gas supplies, according to the report. These utilities include Tokyo Electric Power Co., operator of the Fukushima plant, and ChubuElectric Power Co., which has halted all operations at its Hamaoka nuclear power plant in ShizuokaPrefecture. Kyushu Electric Power Co. and Kansai Electric Power Co., which have been unable toresume operations of nuclear reactors that were suspended for regular inspections, are also seekingLNG. The utilities reflect monthly changes in the prices of oil, LNG and coal in consumers electricitybills, meaning that the fees for consumers will likely rise because of the demand for LNG. Russia, theworld largest LNG exporter, is looking to profit heavily from the situation. In an internationaleconomic forum held in St. Petersburg on June 17, several participants predicted the LNG price per1,000 cubic meters in Europe in 2013 would stay in the range between $300 and $400. 7. Impact on LNG Prices The current price is $352 on average; it is about 1 million British thermal units (BTUs).However, Alexey Miller, president of the Russian government supported Gazprom, the worlds largestLNG producer; pre- assumed the price will rise to $500 by the end of this year. Gazprom forecasts thatEuropean imports of LNG will increase to 440 billion cubic meters in 2030. Some experts predictRussias supply of LNG to Europe will jump from about 140 billion cubic meters at present to 210billion cubic meters in 2030. Forecasts from Russia could have a profound effect on China, which hasbecome a huge importer of LNG. According to major trading house Mitsubishi Corp., Japans LNG
  • 6. imports stand at around 70 million tons a year. China, which only started importing LNG in 2006, nowimports 10 million tons a year. LNG accounts for only 4 percent of Chinas energy needs, but Beijingplans to lift the ratio above 10 percent by 2020. "The price will skyrocket in next winter," said Akira Ishii, a special adviser to the government-affiliated Japan Oil, Gas and Metals National Corp. (JOGMEC). "Japan will compete hard againstEuropean countries and South Korea to procure fuel for heating equipment. The price will begin torise in autumn and could reach nearly $20." Since the nuclear disaster started, Japanese electric powercompanies have been trying to procure LNG for thermal power generation, leading to price rises inshort-term trading. Prices under long-term contracts are based on formulas linked to a reference rate – usually thelagged price of crude oil. Accordingly, the price per unit of LNG increases (decreases) when spot priceof crude oil rises (falls), usually with a set lag of a few months. However, because these contracts areprivately negotiated the exact formulas are not publicly available. Across Asia, LNG contract pricesare typically linked to the Japan Customs-cleared Crude price (JCC). Historically, it has been commonfor contracts to have formulas that are non-linear, incorporating an „S-curve‟ that moderates the impactof both high and low oil prices upon the LNG price.5 In contrast, spot LNG prices tend to track natural gas market fundamentals more closely. Spotprices are most easily observed at major gas trading hubs, where competing sources of gas (bothpipeline and LNG) are priced. Of particular note are the Henry Hub in the southern United States, andthe National Balancing Point in the United Kingdom (which is not actually a physical location). Thesehubs act as the pricing and delivery points for natural gas futures contracts. Because of the diversity in pricing arrangements, the segmented nature of the global market,and differences in gas quality, the best LNG prices can vary significantly around the world. Whileonly limited data are available, the highest reported LNG import price in 2010 was around three timesthe lowest reported price (on an annual average basis).6 In contrast, there is much less variation incrude oil prices across the world. In fact, gas and electricity bills have been increasing since April due to higher prices for LNGand crude oil. LNG prices in long-term contracts, generally preferred by Japanese importingcompanies, are also expected to jump in the near future. These prices are calculated based on theaverage price of crude oil around the time of payment, and have nothing to do with the supply-and-5 Jensen (2011) notes that S-curves have become less prevalent in recent years.6 Jensen (2011) discusses arbitrage in the LNG market.
  • 7. demand situation of LNG itself. The international market has an ample supply of LNG, but Japaneseelectric power companies have bought LNG at the highest prices to ensure stable supplies. Moreover,in the US, due to gas to gas competition, the gas price is determined by the domestic gas market price,and imported gas is also linked to the domestic gas price (Fukushima, 2009). While still dominated by long-term contracts, there has been a gradual shift to more flexiblearrangements as the LNG market has grown and become more diverse. Trade on a spot basis andunder short-term contracts (of less than four years) has risen from around 5 per cent to 20 per cent oftrade over the past decade.7 In some cases, this reflects projects electing not to sell their entire outputunder contract in advance due to production uncertainty, and selling any above-contract output on thespot market. Spot and short-term trade has been relatively prevalent in the Atlantic market, accountingfor one-third of trade in 2010. Among Atlantic importers, LNG is small relative to pipeline trade andlocal gas production, and has to compete with these alternative gas supplies. Spot trade also accountsfor a large portion of inter-basin LNG trade, with cargoes in recent years tending to flow from Atlanticproducers to Asia-Pacific buyers.7 According to GIIGNL (2010) and IGU (2010).
  • 8. ReferencesBP Statistical Review of World Energy, June 2011Business Monitor International Ltd, Japan Oil & Gas Report Q4, 2011EIA (Energy Information Administration) (2011a), Annual Energy Outlook 2011, USDepartment of Energy, Washington DC.Fukushima, Ryo (2009), „LNG Market Integration from the Asian Perspective‟, IGUMagazine, 218-31.GIIGNL (International Group of Liquefied Natural Gas Importers) (2010), The LNG Industry2010, ParisIGU(International Gas Union) (2010), World LNG Report, Oslo.Jensen JT (2011), „Asian Natural Gas Markets: Supply, Infrastructure, and Pricing Issues,‟Paper presented at the 2011 Pacific Energy Summit, „Unlocking the Potential of Natural Gasin the Asia Pacific‟, Jakarta, 21–23 February“Liquified Natural Gas: Understanding The Basic Functions”. U.S. Department of Energy.Pp. 1-24. (2005)The Economist Intelligence Unit Limited 2011, Business Asia April 18th 2011.http://www.bbc.co.uk/news/business-15658278http://www.bloomberg.com/news/2011-09-19/lng-price-boom-seen-as-japan-vies-with-china-while-exxon-s-shipments-grow.htmlhttp://www.csmonitor.com/Business/The-Adam-Smith-Institute-Blog/2011/0321/How-much-will-Fukushima-impact-the-nuclear-power-industryhttp://fukushimanewsresearch.wordpress.com/2011/05/26/japan-natural-gas-prices-projected-to-rise-as-antinuclear-backlash-surges/#commentshttp://www.mongabay.com/images/commodities/charts/chart-lng.htmlhttp://www.petroleum-economist.com/IssueArticle/727805/Archive/Title.html?LS=EMS489600