Fukushima Nuclear Disaster Impact on Global LNG Prices

Ece DINCASLAN

Introduction

Fukushima Nuclear Disaster led a crisis that creates domino effect which is fuelling price rises for

liquefied natural gas (LNG) and causing dissent between importers and exporters. World nuclear

power generation could fall by up to 15 per cent by 2035 following the Fukushima disaster, according

to the International Energy Agency. Also, the rapid economic growth of China and India had already

been 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 prices

even higher.

1- LNG (Liquefied Natural Gas)

At a first glance, in order to explain the relation between why Fukushima disaster

affect LNG prices, LNG need to be defined. Thus, liquefied natural gas (LNG) is natural gas

that has been cooled to about -260°F for shipment and storage as a liquid.2 When comparing

to LNG with its gaseous form, the volume of the liquid is about 600 times smaller. It is a

product for customers in industry and tourism that natural gas pipelines cannot reach, which

provides cost advantages to the customers. Also, it is an environmentally friendly product

with low emission rates.

Besides, its environmentally friendliness, LNG is an alternative fuel type with its high

combustion efficiency, clean and ecological fuel feature. In addition, it is economical, safe

and 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 not

feasible, that requires special tank shipping.

1 Based on the following three IEA scenarios: current energy policies; incorporating broad energy policy commitments already made to address climate change and energy security; and including policy commitments but where gas plays a particularly prominent role in meeting future energy needs.2 http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_lng

2- LNG Importers

Indonesia, Malaysia and Australia were the three biggest suppliers of LNG to Japan in

2009, 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 underlined

nuclear 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 to

the Fukushima plant, forcing it to run on emergency diesel generators. 41 minutes later, a tsunami

struck the rugged plant, overwhelming emergency generators and destroying the water take pipe used

to 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 International

Nuclear and Radiological Event Scale. Japanese officials estimated it may be more than 20 years

before residents can safely return to the area. Unfortunately, the long-term ecological and social

impacts 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 of

the gap is likely to be filled by increased imports of liquid natural gas (LNG), but there is a limit to

how 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 grid

power for more than a few hours. Without power, the circulation of cooling water at high pressure

through distribution pipes is impossible. It doesn’t take an earthquake to knock out grid power. More

common loss can have the same negative and bad effects, including billions of dollars in damage to

the 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

Already, nuclear power plants are designed to provide continuously reliable electricity and

generate no direct greenhouse gas emissions. The only other sources that can provide constant, or

base-load, power are hydropower, natural gas, and coal. Renewables like solar and wind are a must in

a 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 metric

tons of carbon dioxide emissions annually because utilities will be forced to rely on fossil fuel sources

during the transition to renewables. If other countries remove nuclear power from the picture, the

multiplier effect makes showing climate change even more difficult. Nuclear power provides nearly 70

percent of electricity in France, 30 percent in Japan (before tsunami) and about 20 percent in Germany

and 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 increased

dependence 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 under

review and some, including Germany and Switzerland, opted out of the technology entirely.

Political responses to Fukushima are changing the future of nuclear power globally. German

Chancellor Angela Merkel, once a proponent of nuclear power declared that, withdraws of that

nation’s 17 nuclear plants by 2022. So that, there has no other nation has gone so far. President

Obama requested safety reviews for existing nuclear facilities but made clear that nuclear power

remains in play. Most European Union countries are also focusing on safety reviews and researching

new technology. Chinese officials promise immense safety standards but still intend to add 40 ggw of

nuclear power by 2020.

But the renewal periods of those long-term contracts are coming up, and LNG exporters plan

to 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 China's imports

will increase to 40 million tons a year in 2030," said an official of Sojitz Corporation. China has

already bumped heads with Russia over LNG prices. According to Russian informants, China offered

Russia a price of $250 for LNG to be supplied from western Siberia to the western China. However, at

a summit held on June 16, China and Russia did not reach an agreement on the price. China is

currently 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 Nazarbayev

agreed to fasten cooperation for the construction of oil and LNG pipelines connecting Central Asia

with border areas of China.

However, Moscow still ignored to budge in negotiations with Beijing. Other growing

countries are expected to enter the fray. India has also been a latecomer to the LNG market. But in

2010, it imported 9 million tons of LNG under short-term contracts alone. Even oil-producing

countries in the Middle East are now using large quantities of LNG. Worries over nuclear power have

also increased in the United States, suggesting Washington to take a closer look at shale gas for its

energy policy. The U.S. government started to work out plans to export shale gas, whose supply

recently exceeded demand in the country.

5. Three Mile Island

Neither the Deepwater Horizon oil spill in April 2010 nor the Fukushima disaster a year later

have led to a serious reconsideration of regulatory risks and national energy priorities in the United

States. 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 costs

against 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 improving

efficiency 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 carbon

emissions by displacing coal plants and provide the back-up necessary for an increase in renewable

energy. Despite, investment in new nuclear plants is not foreseeable without immediate and substantial

investment in less visible and urgently needed measures to improve end-user efficiency, regardless of

energy source.

6. According to IEA, Annual Energy Outlook, 2011

The report said its Low Nuclear Case was not a forecast, but "is intended to illustrate

what a pessimistic view of the prospects for the nuclear power industry might entail." "The

share of nuclear power in total generation drops from 13 per cent today to just seven per cent

in 2035, with implications for energy security, fuel-mix diversity, spending on energy imports

and energy-related CO2 emissions." The report said that Fukushima had "shaken the country's

energy sector" and that "the prospects for nuclear power are now much more uncertain than

before the Fukushima nuclear accident" and that it had "greatly increased the uncertainty

about the future role of nuclear power in meeting the world's energy needs."

According to Annual Energy Outlook, 2011, the report said its Low Nuclear Case was not

a forecast, but “is intended to illustrate what a pessimistic view of the prospects for the nuclear power

industry might entail.” ‘‘The incremental demand for oil in Japan's power sector in 2011 is estimated

between 150 and 200 thousand barrels per day while demand for LNG (liquefied natural gas) is

expected to rise by 11 billion cubic metres (bcm)," the report said. This is about 0.2 per cent of global

oil 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 Chubu

Electric Power Co., which has halted all operations at its Hamaoka nuclear power plant in Shizuoka

Prefecture. Kyushu Electric Power Co. and Kansai Electric Power Co., which have been unable to

resume operations of nuclear reactors that were suspended for regular inspections, are also seeking

LNG. The utilities reflect monthly changes in the prices of oil, LNG and coal in consumers' electricity

bills, meaning that the fees for consumers will likely rise because of the demand for LNG. Russia, the

world largest LNG exporter, is looking to profit heavily from the situation. In an international

economic forum held in St. Petersburg on June 17, several participants predicted the LNG price per

1,000 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 world's largest

LNG producer; pre- assumed the price will rise to $500 by the end of this year. Gazprom forecasts that

European imports of LNG will increase to 440 billion cubic meters in 2030. Some experts predict

Russia's supply of LNG to Europe will jump from about 140 billion cubic meters at present to 210

billion cubic meters in 2030. Forecasts from Russia could have a profound effect on China, which has

become a huge importer of LNG. According to major trading house Mitsubishi Corp., Japan's LNG

imports stand at around 70 million tons a year. China, which only started importing LNG in 2006, now

imports 10 million tons a year. LNG accounts for only 4 percent of China's energy needs, but Beijing

plans 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 against

European countries and South Korea to procure fuel for heating equipment. The price will begin to

rise in autumn and could reach nearly $20." Since the nuclear disaster started, Japanese electric power

companies have been trying to procure LNG for thermal power generation, leading to price rises in

short-term trading.

Prices under long-term contracts are based on formulas linked to a reference rate – usually the

lagged price of crude oil. Accordingly, the price per unit of LNG increases (decreases) when spot price

of crude oil rises (falls), usually with a set lag of a few months. However, because these contracts are

privately negotiated the exact formulas are not publicly available. Across Asia, LNG contract prices

are typically linked to the Japan Customs-cleared Crude price (JCC). Historically, it has been common

for contracts to have formulas that are non-linear, incorporating an ‘S-curve’ that moderates the

impact of 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. Spot

prices are most easily observed at major gas trading hubs, where competing sources of gas (both

pipeline and LNG) are priced. Of particular note are the Henry Hub in the southern United States, and

the National Balancing Point in the United Kingdom (which is not actually a physical location). These

hubs 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. While

only limited data are available, the highest reported LNG import price in 2010 was around three times

the lowest reported price (on an annual average basis).6 In contrast, there is much less variation in

crude oil prices across the world.

In fact, gas and electricity bills have been increasing since April due to higher prices for LNG

and crude oil. LNG prices in long-term contracts, generally preferred by Japanese importing

companies, are also expected to jump in the near future. These prices are calculated based on the

average price of crude oil around the time of payment, and have nothing to do with the supply-and-

demand situation of LNG itself. The international market has an ample supply of LNG, but Japanese

5 Jensen (2011) notes that S-curves have become less prevalent in recent years.6 Jensen (2011) discusses arbitrage in the LNG market.

electric 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 flexible

arrangements as the LNG market has grown and become more diverse. Trade on a spot basis and

under short-term contracts (of less than four years) has risen from around 5 per cent to 20 per cent of

trade over the past decade.7 In some cases, this reflects projects electing not to sell their entire output

under contract in advance due to production uncertainty, and selling any above-contract output on the

spot market. Spot and short-term trade has been relatively prevalent in the Atlantic market, accounting

for one-third of trade in 2010. Among Atlantic importers, LNG is small relative to pipeline trade and

local gas production, and has to compete with these alternative gas supplies. Spot trade also accounts

for a large portion of inter-basin LNG trade, with cargoes in recent years tending to flow from Atlantic

producers to Asia-Pacific buyers.

References

7 According to GIIGNL (2010) and IGU (2010).

BP Statistical Review of World Energy, June 2011

Business Monitor International Ltd, Japan Oil & Gas Report Q4, 2011

EIA (Energy Information Administration) (2011a), Annual Energy Outlook 2011, US

Department of Energy, Washington DC.

Fukushima, Ryo (2009), ‘LNG Market Integration from the Asian Perspective’, IGU

Magazine, 218-31.

GIIGNL (International Group of Liquefied Natural Gas Importers) (2010), The LNG Industry

2010, Paris

IGU(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 Gas

in 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.

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http://www.petroleum-economist.com/IssueArticle/727805/Archive/Title.html?

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