Imported oil fuelled the country's rapid post-war development, accounting for as much as 78 per cent of energy needs by the early 1970s. But oil price highs and security and environmental concerns have seen Japan increasingly turn away from oil in search of alternative energy sources - and gas has become the new big thing.
'Natural gas has a healthy future in Japan,' says Ken Koyama, general manager of the Energy Strategies Department at Japan's Institute of Energy Economics (IEE). 'Not only does it offer an opportunity for energy diversification, but it has the added advantage of being a clean fuel with abundant supply potential.' Supply is one thing, transportation is another. With the absence of any gas pipelines in the region, Japan and its similarly import-reliant neighbour South Korea have had to search for alternative import methods. Liquefied natural gas (LNG) has been the only answer.
Japan's commitment to LNG is impressive. From the first lifting of 918,000 tonnes a year (t/y) from Alaska in 1969, the country's LNG imports grew to 54 million tonnes in 2002, making it the world's single largest LNG consumer. The sales are having a significant impact on the country's energy mix, with gas now accounting for about 13 per cent of primary energy supply, and more than a quarter of electricity generation.
With their close proximity and consequent low transport costs, Indonesia and Malaysia have rapidly emerged as Japan's principal gas suppliers, providing 16.4 million t/y and 11.2 million t/y respectively in 2001, over half the country's annual LNG imports. The Middle East has also become a vital source of gas supplies, with imports from Oman, Qatar and the UAE accounting for 11.9 million tonnes in 2001.
Indeed, Japan is the bedrock on which the Gulf LNG industry has been built. Japanese offtakers' long-term contracts with Gulf producers paved the way for their compatriot engineering firms to move in and build all the giant LNG processing facilities in the region. Tokyo Electric Power Company (Tepco) remains the largest single buyer, a position it has held since it became the launch customer for Abu Dhabi Gas Liquefaction Company (Adgas) in the early 1970s. The two companies signed a further agreement in 1994 for the delivery of 5 million t/y of LNG to Japan over a 25-year period. Chubu Electric started lifting LNG from Qatargas in 1997 and Osaka Gas signed up for 700,000 t/y with Oman LNG later that year.
'The development of LNG facilities is hugely expensive,' says Toshiro Kudama, general manager of Tepco's business development group. 'It is essential for developers to secure funds before embarking on the work, and the financial community needs the long-term commitment from the buyers to secure their investment.' For the utilities, obliged to supply guaranteed quantities of gas and power to their customers, the long-term contracts have, until now, offered a measure of security.
But changes are afoot in the market. 'LNG supply is burgeoning at the moment,' says Hiroshi Nagakawa, chairman of LNG Japan. 'Moreover, with expansions planned in Qatar, Malaysia, Indonesia and the Australian Northwest Shelf, we will soon be facing a situation of oversupply.' Other Asian markets' declining appetites have exacerbated matters.
After several years of sustained economic downturn, weak underlying demand is dragging down Japan's previously stalwart LNG requirements. LNG deliveries in 2002 dropped 1.4 per cent on total imports in 2001. With their traditional offtakers starting to slacken, LNG producers have begun looking elsewhere to market excess LNG supplies. 'We are entering a whole new era in LNG trade,' says Kudama. 'The first phase was dominated by a near-monopoly of East Asian consumers and we thought at the time that our LNG trade was limited to the region. However, now there are new buyers coming to the market from Europe and the US. The US is already buying up excess European demand, while Europe is moving in for long-term contracts in the Gulf.'
The phenomenon could herald a revolution in the LNG market. 'We always believed that long-term commitments were essential,' says Kudama. 'But with different customers entering the market all this could change - there's likely to be a far wider mix of short-term and medium-term contracts in the future and even the development of an LNG spot market.'
The move to more flexible contracts is coinciding with important changes in the Japanese energy sector, which are expected to lead to an increase in LNG imports. 'As increasing emphasis is placed on environmental requirements, the appeal of LNG will rise as it is a clean and acceptable energy source,' says Hiroshi Kawahara, deputy general manager at LNG Japan. 'At the same time, deregulation of the sector will lead private players to join the search for contracts and there is likely to be a move towards the reallocation of the long-term commitments presently held by the public electricity and gas utilities. LNG handling will become an increasingly complicated and competitive area.'
One factor above all others is expected to boost LNG demand in Japan. The huge public backlash that has accompanied the series of accidents and safety scandals befalling its nuclear sector is expected to sour the government's promotion of nuclear power. Plans had been drawn up to build as many as 13 new nuclear plants, but many believe political pressures will see the number fall dramatically. 'If just one nuclear plant is cancelled, an additional 1 million-1.5 million t/y of LNG is required to cover the shortfall,' says Nagakawa. 'In reality, only six or seven of the proposed plants at best will probably be built, which means we will be looking at 9 million t/y of increased demand for LNG post 2010.'
Despite the present languid demand, LNG is still seen as the way forward in Japan. 'We expect there to be some continued uncertainty over the deregulation process and the issue of nuclear power, which means that an abrupt upturn in LNG demand is unlikely in the near term,' says Kawahara. 'However, by 2010 LNG is likely to be the fuel of choice and after that we will start needing substantial volumes.'
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