Japan's fragmented island geography and lack of natural resources have made the country highly dependent on imported energy, especially liquefied natural gas. Japan has been the world's largest importer of liquefied natural gas every year for more than a decade.
Its already high levels of liquefied natural gas consumption increased dramatically in the wake of the Fukushima Daiichi nuclear power plant disaster in March 2011. The loss of nuclear power as a domestic energy source caused consumption and imports of natural gas to increase to 120 billion cubic meters per year — 30 percent more than in 2010.
The loss of the Fukushima Daiichi power plant is considered a watershed moment in Japan's reliance on its domestic nuclear power consumption. Still, the total and relative energy output of the Japanese nuclear sector has been in decline since the early 2000s due to technical delays and a lack of capacity replacement. Whether the government should restart the country's nuclear energy program is an issue of intense debate in Japan. However, in either case, additional investments would be needed to offset the trend of nuclear energy's decline, and Tokyo will not likely make those investments.
Estimates for Japan's natural gas imports in 2020 depend on whether Japan restarts its nuclear plant program and hover between 100 billion and 117 billion cubic meters per year. Japan is poised to remain the world's largest importer of liquefied natural gas and one of the top five overall natural gas importers well into the next decade. By comparison, China's liquefied natural gas imports are not expected to exceed 60 billion cubic meters per year by 2020, and that number could drop further if Beijing succeeds in tapping the country's shale gas reserves.
Changes in Japanese Supplies
In 2011, Japan imported its liquefied natural gas from five major suppliers: Malaysia (19 percent), Australia (18 percent), Qatar (15 percent), Indonesia (12 percent) and Russia (9 percent). The Japanese market is resource poor and highly industrialized. As a result, it is the most sought-after market for liquefied natural gas exporters. These exporters have tried to lock Japanese utility companies into relatively expensive long-term contracts.
While the rapid increase in liquefied natural gas demand following the Fukushima event has increased the number of short-term and spot deliveries, Japan has traditionally relied on long-term contracts for 80 percent of its natural gas imports and is expected to return to those levels by 2015 as the Fukushima demand spike stabilizes. Alongside other Asian customers, Japan pays some of the highest prices in the world for these liquefied natural gas contracts — Tokyo pays upward of 50 percent more than the United Kingdom in certain contracts — because it lacks alternative options.
Increasing Export Capacity
Some traditional exporters, such as Indonesia and Malaysia, are not expected to increase export volumes because their own consumption is rising while production decreases. Nevertheless, the rapid development in the past decade of the Asia-Pacific liquefied natural gas consumer market has translated into a slew of new regional production projects aimed at servicing growing demand in Japan, China and South Korea. Australia, with seven new export terminals currently under construction, is expected to add close to 80 billion cubic meters per year of liquefied natural gas export capacity by 2020. Additional development projects are also taking shape in Russia, Papua New Guinea and possibly in the United States.
The upcoming global natural gas glut and the growing volatility surrounding Tokyo's future policy on nuclear power have prompted major suppliers to seek additional long-term contracts with Japan in an effort to lock the country in at peak natural gas prices.
Qatar has been able to rapidly absorb a great share of the Japanese and broader Asian demand increase. Qatar is a significant spot market supplier and the country's production capacity and delivery flexibility are currently unparalleled. Since the Fukushima accident, Qatar has signed three long-term contracts (from 15 to 20 years) accounting for a combined volume of about 20 percent of Japan's liquefied natural gas imports — thus significantly boosting Doha's share of Japan's natural gas consumption.
The immediacy of Japan's energy needs has allowed Qatar to impose high prices and a pricing structure that links natural gas prices to those of oil. That last provision has caused national outcry in Japan over what critics consider Doha's monopolistic pricing practices and has prompted Tokyo to seek alternatives to Qatar for future long-term contracts.
Russia's Window of Opportunity
Despite Qatar's dominance in the liquefied natural gas market, Japan has sought to avoid developing a dependence on a single natural gas provider. Much like in the United Kingdom example studied in the first part of this series, Japan has yearned for an energy conduit anchored to its mainland; this would insulate Japan from the supply risk of energy shipments. Russia is the only significant exporter of natural gas on the Asia-Pacific Rim and has made significant strides toward developing its exports to Asia as part of Moscow's efforts to counterbalance structural changes in the European market.
Russia's attempts to build infrastructure for natural gas exports to China have been slow and fraught with technical and political pitfalls. It has become clear that China has chosen Central Asian natural gas over Russian exports, so Moscow has now shifted its attention to the Japanese and South Korean markets.
So far, Moscow has concentrated the majority of its efforts on developing offshore Pacific fields for liquefied natural gas exports. The Sakhalin project, operational since 2009, is Russia's first (and currently only) liquefied natural gas export facility — and one of the most expensive projects in the Kremlin's energy portfolio. Despite its proximity to targeted Asian markets, and the associated lower shipping costs, the high price of offshore exploration in the adverse conditions of the Sea of Okhotsk has canceled out the price advantage Russia would need in order to displace Qatar as the main supplier of natural gas consumption growth in the Asian-Pacific economies.
Russia's comparative advantage remains in its onshore operations and its ability to create a pipeline infrastructure at relatively low costs to ensure direct, high-volume deliveries of natural gas. Moscow's strategy in the East has shifted toward this direction with the ongoing development of the Eastern Siberian
natural gas fields, which, despite technical challenges, remain significantly less expensive than the Sakhalin megaproject. Russia is currently developing the Kovykta natural gas field. The field, scheduled to begin production by 2015 or 2016, could bring around 50 billion cubic meters of natural gas for export to the East. The challenge is to create a pipeline network that leads from Kovykta to the Pacific Ocean some 2,000 kilometers (about 1,200 miles) away — something Russia is expected to begin constructing in early 2013.
The development of high volumes of natural gas in the East forces Russia to decide how it will reach its target markets. Moscow has so far favored the development of an additional liquefied natural gas export facility in Vladivostok, but the major liquefied natural gas glut under way in the Pacific may challenge this plan.
One alternative is for Russia to do in the East what it does best in other markets: direct pipelines to reach target markets. A direct pipeline to Japan would allow Russia to deliver significantly cheaper piped natural gas and would undercut liquefied natural gas competition from other exporters. Plans for such a project have existed for more than a decade, but the East's growing importance for Russia's energy strategy, as well as the development of regional fields in Eastern Siberia, have brought the idea back to the fore.
Japan has shown its support for the construction of a pipeline from Russia — Tokyo has even offered to finance part of the project — but Moscow has been reticent. The initial investment costs would be staggering — close to $20 billion at a time when Russia has just begun construction of the $16 billion South Stream pipeline
and has concluded the $5 billion expansion of the Nord Stream project, both to Europe. Additionally, Moscow faces considerable constraints in planning the route for the pipeline. Moscow needs to balance the costs of underwater construction with the political pitfalls inherent in constructing an overland route through the Korean Peninsula.
Despite these impediments, the increasing availability of liquefied natural gas in the market will continue to pressure Russia to use its comparative advantage in delivering natural gas by pipeline.
Upcoming Changes in the Global Market
Increased competition in the European and Asian markets from liquefied natural gas producers, such as Algeria and Australia, and also from Russian piped natural gas exports is shifting Qatar's traditional terms of engagement with its customers.
In this rapidly changing environment, Qatar will be pressured into adopting a more moderate and business-friendly approach toward long-term contracts and pricing with its European consumers or else risk pushing its consumers toward alternative suppliers — as shown by the United Kingdom's consideration of Russian supplies. Similarly, Japan and Russia have been considering building a natural gas pipeline to stem the archipelago's dependence on high-priced liquefied natural gas imports, although the idea faces significant financial and political hurdles.
Qatar's immediate position is secure, but it has a relatively brief opportunity during which it can try to secure long-term contracts and fend off Russia's ability to undercut its liquefied natural gas prices with cheaper, piped natural gas. Qatar's relatively recent boom in natural gas revenues has given it the ability to pursue an ambitious foreign policy program throughout the Arab and Islamic world that belies its small size.
If left unchecked, Russia's challenges to Qatar's control over the liquefied natural gas supply of large, insular markets could impede the long-term stability of Doha's regional and foreign policy ambitions, potentially reverting Doha to its former status as a minor regional player. Qatar can therefore be expected to be much more accommodating in helping London secure favorable, long-term liquefied natural gas contracts. Doha will also likely soften its long-term pricing structures in order to secure additional Japanese contracts before the oncoming liquefied natural gas glut in the Pacific.