Japan rethinks its LNG policy

Intensified global warming is propelling a seismic shift in global energy use. The destructive effects of fossil fuels have prompted governments to accelerate the transition to renewable energy sources and those that cause less damage to the environment: Prime among them is natural gas. This has profound implications for Japan, not only in its energy policy but in its foreign policies as well.

Japan’s energy policy has been driven by two imperatives: reducing vulnerability arising from reliance on foreign suppliers and promoting environmentally-friendly sources. Both objectives were met by a resort to nuclear power, a decision that has been subject to increasing scrutiny since the Fukushima nuclear disaster on March 11, 2011. That disaster spurred Japanese companies, consumers and the government to turn to alternative sources of energy and one of the most important options has been liquefied natural gas (LNG).

A surge in demand for LNG in the aftermath of that crisis turned Japan into the world’s largest importer of the fuel, importing about 83.5 million tons annually. Future projections are uncertain, however. Initial forecasts anticipated decreases as nuclear power plants come back online, Japan reduces reliance on fossil fuels (while cleaner than others, natural gas is a fossil fuel) and the use of renewable energy sources such as solar power increases. The nuclear plans are increasingly subject to question, and concern about volatile energy prices is prompting Japanese utilities to lock in longer-term contracts that could sustain demand. Now, gentle growth is forecast for the next five years or so.

Yet there is also increasing competition for LNG. Japan, China and South Korea account for 60 percent of global LNG demand. China recently surpassed South Korea as the world’s second-largest importer and will likely overtake Japan within a decade. China’s hunger for LNG is driven by a desire to clean up its environment. While its increased demand could raise LNG prices for Japanese consumers, the global impact of China’s transition to cleaner fuels is a net benefit.

Japan’s demand for LNG has spurred a diversification of its energy suppliers — and any policy that reduces reliance on the volatile Middle East and the exposed sea lines of communication from there that have become the lifelines of the Japanese economy is to be applauded. Japan is already the largest importer of Australian LNG and is investing in new facilities there. Japanese companies have also committed to buy LNG from fields in Mozambique that are being developed.

Last month at a conference in Russia, Prime Minister Shinzo Abe said that Japan is considering financial participation in a project in that country. That would help build relations with Moscow and remind decision makers there that there are consumers and markets in the region other than China. It is important, however, that Japanese negotiators remember that they have leverage in talks and not be used by Russian counterparts as a way to extract concessions in their discussions with Chinese investors and consumers.

Perhaps most important, though, is the prospect of increased LNG imports from the United States. Imports from the U.S. having quadrupled since 2010, and Japan is now the fifth-largest importer of U.S. LNG. Japanese companies have been allowed to invest in U.S. facilities and that should further swell U.S. exports to this country. That not only meets Japanese energy needs, but is also a much-needed source of imports from the U.S. at a time when the U.S. administration is playing such close attention to the trade balance. Projections make clear that the U.S. does not have — and will not have, even with Japanese investment — sufficient capacity to even out the imbalances, but progress is critical.

Japan’s readiness to invest in global LNG projects is a critical shift. Since 3/11, Japan has eschewed long-term commitments because the spot market has had ample supplies to meet Japanese needs. But LNG facilities demand a long-term outlook — the African investments Japan is considering will not come online until 2040 — and a reluctance to invest has meant that capital has been short and projects slow to materialize. That outlook is changing as Chinese demands grow and environmental concerns are magnified.

Long-term trends also point to a growing role for renewables in Japan’s domestic market, which means that Japanese investments in overseas facilities meet an international need, not just that of Japan itself. That is an important demonstration of international leadership: helping to build the infrastructure of global energy supply. Last October, Japan announced plans for a $10 billion public-private effort to build LNG terminals, power plants and other facilities to help meet rising energy demand in Asia. That strategy is intended to help grow demand for natural gas in East Asia and ensure that Japan is at the heart of that expansion. It is a far-sighted approach that should be encouraged.