However, this also bears significance for other energetically vulnerable European Union states such as Italy and Greece, since although they have already built major LNG terminals in order to diversify their energy sources, Russian gas still plays a significant role in their domestic markets. Therefore, for the next several years Europe should be carefully monitoring the domestic energy policy developments of the country that lies over eight thousand kilometres away.
It can be argued that once Japan decides to alter its current domestic energy policy and restart its numerous nuclear energy plants that have been shut down since the Fukushima crisis, it will be able to reduce the colossal amounts of LNG gas it currently imports. In turn it is very likely that the benchmark price of LNG will dip, thus allowing aspiring European states to acquire LNG at a much more competitive price. The outcome of this series of events would provide energetically vulnerable European Union states with the ability to improve their energy security vis-à-vis the Russian Federation which offers relatively cheap gas via pipelines, because a much lower cost of LNG would provide a greater flexibility in the perpetual price versus security debate.
Due to unfavourable geological conditions Japan is poised almost entirely to rely on natural gas imports from abroad. Natural gas, which in Japan is predominantly used to generate electricity, experienced a massive boost in demand after the Fukushima Daiichi nuclear accident prompted the Japanese government in 2011 to close all 48 nuclear energy reactors for further security checks. With the closing of all nuclear reactors, Japan lost its main cheap electricity source, which accounted for around 30% of its overall demand and had to turn to liquefied natural gas to offset this loss. Whereas in 2010 it imported 70m tons of LNG, in the year 2013 the imports rose up to 87.5m tons. To put this into a wider perspective and illustrate its global significance, it must be noted that Japanese LNG imports in 2010 accounted for around 30% of the global market share and in 2013 it rose to around 37%.
The dramatic rise in the Japanese gas consumption had also a profound effect on LNG prices, especially in Asian countries. According to the PLATTS Japan Korea Marker (JKM), which indicates the benchmark price for LNG cargoes delivered into Japan and South Korea, following the Fukushima crisis, the price has increased well over 20%. While in 2011 the price of LNG was $12.5, since 2012 it has fluctuated between $15 and $16 per million British thermal units.
So how is the current status-quo about to change?
Although nuclear energy remains largely unpopular with the general public, Japanese Prime Minister Shinzo Abe has been adamant in pursuing an energy plan that includes restarting mothballed nuclear reactors. This move has been motivated by the rising costs of electricity, the loss of thousands of jobs that energy plants had provided and a stagnating national economy. The exact restart dates for the bulk of the nuclear plants are still to be announced, because the Nuclear Regulation Authority (NRA) is still reviewing their security. However, it is expected that by mid-to-late 2015 at least some of them will be again fully operational. Even if, admittedly, this process is slow and tedious due to a plethora of popular and bureaucratic reasons, and it is also unclear how many of the 48 nuclear reactors will restart at all, it nonetheless provides the future prospects of increased Japanese energy independence.
The direct implications of this impending change of Japanese nuclear energy policy in addition to the fact that short to medium term LNG supply will probably outstrip the demand, it is reasonable to expect a decrease of LNG prices worldwide.
First of all, when the Japanese nuclear industry returns to at least a partially functional capacity akin to the one displayed prior to the Fukushima disaster, it is only logical to expect that its LNG imports will be slashed tremendously. The majority of the additional 17.5 million tonnes of LNG imports gained after the Fukushima crisis should lead to a reduction of the whole market.
Second, while it is estimated that other countries such as China with its gargantuan demand for energy will partially offset the market vacuum left by Japan, it is still to be seen in practice. It is estimated that in the near future China might increase its LNG imports by possibly around 9 million tonnes as it intends to open 6 medium-sized regasification facilities. However, this particular estimate should be taken with a grain of salt, because these facilities do not necessarily operate on a full capacity and the quantity of LNG imports varies greatly on a seasonal basis.
Moreover, from a global perspective, it is estimated that the global LNG demand currently standing at around 240 million tonnes will grow by around 5% annually until 2025. Therefore, judging by the numbers, it is clear that at least in the near future the global LNG demand would be able to replace Japan, because based on current estimates, it would require over 7 years of continuous growth for the LNG market to erase the Japanese-inflicted differential.
Third, it is expected that the supply side in the coming years will experience an enormous growth, which also raises the odds of reduced LNG price. For example, Australia is aiming to become one of the largest LNG exporters in the world, as it is currently either constructing or already commissioning a working capacity of exporting around 60 million tonnes of LNG per year. Additionally, the United States is also expected to become a significant player in the LNG market. Fuelled by its unconventional shale gas boom, it is estimated that between 2016 and 2017 the US might be able to supply between 18 and 51 million tonnes of LNG per year. These two countries alone will be able to satisfy around a third of the global LNG demand in the years to come.
Provided this scenario follows through without any major irregularities, the rather surprising victors of this chain of events could be the northern European countries with LNG import capabilities, currently dependent on relatively cheap gas provided by Russia. The reduction of the global LNG market, followed by a vast increase of production in the Pacific and Atlantic region, might bring down the prices of LNG, which due to its production, storing and shipping method is traditionally seen as a much more expensive alternative to the conventional gas pipelines. Hence, no longer would energy-vulnerable states be forced to sign long-term contracts with Gazprom in order to acquire a cheap source of energy. In the end, this would provide the governments of the aforementioned countries with the hitherto unseen luxury of not compromising energetic security for economic considerations.
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