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Pacific Currents

Pacific Currents is a discussion forum on Asia-Pacific economic issues. We welcome submissions from all stakeholders including academics, researchers, thought-leaders, civil society, business leaders; and other policy experts. Submissions should cover issues related to economic policy and integration in the region. Articles should be written for a general audience and not technical but should have a foundation in objective policy analysis. Articles should also conform with PECC nomenclature - if you are not familiar, the editor will provide you with appropriate guidelines. Acceptance of articles is entirely at the discretion of the Editor. Articles should be in an op-ed format of around 1000 words but longer submissions are also occasionally accepted. Submissions are done in the name of the author and represent their individual opinions and not those of the institutions that they work for. To submit an article, please send in Word format to:

The global implications of sending gas to Japan

Professor Christopher Findlay
Executive Dean of the Faculty of the Professions at the University of Adelaide
Vice-Chair of AUSPECC

Republished from the East Asia Forum

Commentators on these pages have been pondering the implications of the Fukushima explosion on Japan’s energy policy and its strategy for international purchases. Samuels suggests an extensive re-examination of energy policy in Japan and a possible shift toward renewable energy. Vivoda pointed to a scenario in which the share of nuclear power in Japan’s total electricity consumption could fall. This share previously accounted for 30 per cent of consumption, and even as little as 12 months ago the plan was to raise this to 50 per cent.

An increase in the share of gas and coal in the short to medium term and a switch to renewable energy sources in the longer term is now expected: Peter Drysdale referred to the growth of LNG imports this year and its likely further growth in 2012. That nuclear power is not so cheap when the costs of meeting safety or dealing with incidents are taken into account is the key driver behind these developments, as Len explains. Still, expectations about a switch to gas, at least in the short term, are a source of anxiety in Japan. The main gas suppliers to Northeast Asia are Southeast Asia, the Middle East and Russia — nothing comes from the Pacific. There are also expectations that two major suppliers — Malaysia and Indonesia — will switch to net imports. Consequently, obtaining more gas without paying a higher price is not going to be so straightforward. And there is also the possibility of having to deal with a smaller number of suppliers.

The scope for growth in trans-Pacific gas trade was addressed in a report for the Pacific Economic Cooperation Council (PECC). The scope to shift toward gas is driven firstly by the reassessment of natural gas reserves in North America. If shale gas deposits are included, the North American share of world reserves could rise from 5 per cent to around 36 per cent. Further, there is a big price gap between the East Asian and North American markets, which have been segmented. Before Fukushima, this gap — based on indicators in both markets — was around US$6.40/MMBtu, but it is now about US$12.50/MMBtu. These margins are attractive to both US and Canadian producers, although Canada has a considerable location advantage. But the US could then focus its resources on replacing the need for such imports, including those from Canada.

There are stumbling blocks to this scenario, and the PECC report points to these. One is the capacity of gas terminals in North America, particularly those in Canada. There may also be local community resistance on the grounds of environmental impact, although Canada has an advantage in that its terminals will be in relatively isolated areas. Another issue is the use of the fracking process in the gas’ recovery and the subsequent reaction of communities in North America. Resistance to investment in export-related projects by the present buyers of natural gas in North America, who fear the impact on domestic prices, is a third issue.

Another implication is the growth in investment by Asian economies in North American gas projects. The PECC report provides some examples, referring to China, South Korea and India partaking in gas projects, which add up to nearly US$14 billion. Investors in other current export countries like Indonesia and Australia might think about how to get a return on their expertise in exporting LNG, one way or another. And finally, a thicker market in gas might lead to a change in the pricing mechanisms for natural gas, which is now mainly traded under long-term contracts. An alternative could be the greater use of spot markets that complement structures for managing risk.

The reassessment of global gas supplies creates new opportunities for trade, but does not diminish the role of regional cooperation. The trade, infrastructure, finance and investment components of the response are all talking points in the short term, and even if the US picks this up in its role as APEC chair, the incoming Chair (Russia) will most likely give the topic even further attention. There is one more thing to consider: relative prices will move against Australia — despite the regional growth in energy demand — because of the long-term supply response. This said, Australia could ultimately maintain its volumes, but at lower prices — even in the face of North American competition.

Links: Supplement to the PECC State of the Region report: Prospects for Transpacific Energy Trade

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