Diversifying LNG supply sources

As Japan’s reliance on thermal power generation increases following the Fukushima nuclear crisis, and as the possible blockade of the Strait of Hormuz cannot be ruled out due to the conflict between the West and Iran over Tehran’s nuclear program, Japan must strive to diversify sources of liquefied natural gas imports. The efforts must be pursued even though the United States will exempt Japan and 10 European countries for 180 days from its new financial sanctions against Iran.

At the same time, since their profit margin is fixed, Japanese power companies have no incentive to purchase LNG at lower prices compared with other countries. They know they can automatically pass their increased fuel costs on to consumers. The government should change this system so that power companies make serious efforts to buy cheaper LNG and lower electricity prices.

About 60 percent of LNG imported by Japan is for use as fuel at thermal power stations and about 20 percent comes through the Strait of Hormuz. More important, Japan relies on the Mideast for 90 percent of its crude oil, and most of it comes through the strait.

Tokyo Electric Power Co. imported about 30 percent of its LNG from Qatar and the United Arab Emirates in fiscal 2010. In fiscal 2011, about 60 percent of the LNG for Chubu Electric Power Co.came from Qatar. If an emergency situation occurs in the Strait of Hormuz, the import of a considerable portion of LNG for use by power companies will be halted, and the prices of LNG will shoot up, leading to severe power shortages and steep rises in electricity bills. Gas bills will also go up.

One problem is that Japan does not have an official stockpile policy for LNG to prepare for an emergency. It is said that if LNG imports from the Middle East are halted, Japan will run out of LNG in about 20 days. It is logical for Japan to make strenuous efforts to prevent the occurrence of an emergency situation in the Strait of Hormuz as well as to diversify the sources of LNG imports.

Another problem is that the prices of LNG that Japanese firms import under long-term contracts are linked to the prices of crude oil and oil products. Japanese firms should negotiate with exporters to sever the links between LNG and oil prices.

The good news is that shale gas production has increased in the United States. Since the U.S. strictly controls shale gas exports, the Japanese government must push talks with the U.S. so that Japan can import liquefied shale gas from there.