The United States has decided to permit exports of its liquefied natural gas (LNG) to countries with which it has not concluded free trade agreements. As part of the move, the U.S. has approved exporting LNG to Japan, one of the countries that have not signed FTAs with the U.S.
The U.S. decision has a potentially huge impact on Japan’s economy, promising lower prices and assured supply. Equally significant, a long-term arrangement of this nature can transform the Japan-U.S. relationship, more tightly coupling our two countries and ensuring continuing U.S. engagement in East Asia.
Rising prices and the development of new technologies have transformed global energy markets. With the use of techniques such as hydraulic fracturing and horizontal drilling, once unusable reserves of oil and gas are now being tapped.
Since 2006, U.S. production of shale gas — so named because it originates in shale rock formations — has risen from 28.3 billion cubic meters to 220.8 billion cubic meters in 2011. That number is forecast to continue climbing to 472.9 billion cubic meters, a 114 percent increase, by 2040. By then, shale gas will account for more than 50 percent of all U.S. natural gas production.
New supplies of this volume will have a huge impact on global energy supplies. Currently, U.S. natural gas costs about one-quarter of what Japan is paying for its LNG imports. Even with more robust global growth — by no means assured in today’s tough economic environment — a price differential will persist.
Yet even if Japan does not buy U.S. gas, its availability will give Japan leverage in negotiations with other suppliers. In 2012, Japanese LNG imports totaled ¥6 trillion, up from ¥3.5 trillion in 2010, impacting its trade account. Japan suffered the first annual trade deficit in 31 years in 2011.
Given the many unknowns surrounding Japan’s energy policies in the wake of the nuclear accident at Tokyo Electric Power Co.’s Fukushima No. 1 nuclear power station, the one thing that is certain is that Japan will need every option to ensure that its economy is not crushed by high energy prices. No wonder then that Japanese trade minister Mr. Toshimitsu Motegi said he welcomed the U.S. decision “from the bottom of my heart.”
To ensure that it gets a share of this new boom, Japanese companies are investing in LNG facilities in the U.S. Currently, three major projects on the U.S. mainland will provide about 15 million tons of LNG annually.
In one, Chubu Electric Power Co. and Osaka Gas Co. have joined Freeport LNG Development L.P. to export a total of 4.4 million tons of LNG annually for up to 20 years. Exports are scheduled to begin in 2017, although another agency, the Federal Energy Regulatory Commission, must also approve the deal.
In another, Mitsui & Co. and Mitsubishi Corp., along with GDF Suez, a French company, have decided to each take a 16.6 percent stake in an LNG export plant being built by Sempra Energy in Louisiana. This project is expected to begin operations in 2017 too.
Nineteen other applications are awaiting approval by the U.S. Department of Energy. While they will be processed on a case-by case basis, depending primarily on market impact, the initial approvals suggest that more will follow.
While the decisions to permit exports are welcome, they are no silver bullet for Japan’s energy woes. LNG facilities are expensive to build and prices are volatile. The profitability of those investments can rapidly change. The development of shale oil technology is a case in point. Japan opted not to invest in that field four decades ago because of economic and business considerations. Now, that decision looks like a mistake.
Yet more changes in global energy markets could still be in store. In March, hopes were raised in Japan when Japan Oil, Gas and Metals National Corporation said it had successfully extracted natural gas from methane hydrate deposits under the seabed off Aichi Prefecture. This was a potentially major breakthrough since “burnable ice” — as the material is sometimes called — is an extremely dangerous but exceptionally abundant energy resource in Japanese territory.
According to some forecasts, the Eastern Nankai Trough may hold as much as 1.132 trillion cubic meters of methane, the equivalent of 11 years of gas imports. But Japan should not forget the need to reduce greenhouse gas emissions, which contribute to global warming, and should not use the availability of U.S.-produced LNG and methane hydrate around Japan as an excuse to put a brake on the development of renewable energy sources.
Often overlooked in the discussion of new energy futures is the geopolitical element. The emergence of new sources of supply has potentially powerful consequences for international relations. The availability of U.S.-produced LNG could lessen Japan’s reliance on Middle Eastern oil, minimizing its susceptibility to instability in that volatile region. Since that dependence has profoundly influenced Japan’s foreign policies toward that region, new sources of energy provide new diplomatic opportunities as well.
Similar considerations could affect relations with Russia, another important energy producer and a country that has shown no hesitation about using its leverage in other forums.
Equally significant is how these deals can strengthen ties between Japan and the U.S., and the U.S. and Asia in general. There is some fear that in the aftermath of the Iraq and Afghanistan wars, with new budget realities and seeming gridlock in Washington, the U.S. might pull back from overseas commitments. Japanese investment in the U.S. and long-term supply contracts give U.S. decision makers a greater stake in developments in Asia. They tighten the bonds between our two nations and ensure continuing close relations, lubricating a critical partnership.