The consequences of Japan’s nuclear crisis have thrust different energy sources into the spotlight. Michael Turner reports.
The ongoing Fukushima nuclear power plant crisis in Japan has caused a number of countries to question or even entirely rethink their nuclear energy policy.
Immediately after the March 11 earthquake, tsunami and nuclear emergency, China announced that it was going to run a new round of tests on its 27 reactors under construction. India, which is planning to spend around US$175bn on nuclear power by 2030, also ran another series of safety tests following the disaster. Protestors took to the streets across the globe, most notably in Japan and the US, to object to the use of nuclear power, which they claim is an untested and unsafe energy source.
The fear of nuclear isn’t confined to Asia and North America, as Germany announced in May that it will close its 17 nuclear power plants by 2022. This is a huge commitment from Europe’s industrial powerhouse as the plants produce a quarter of the country’s energy between them. German chancellor Angela Merkel claims that renewable energy will be the new focus for the country.
Renewable energy is ecologically greener and a good vote winner from an electorate that has shown a dislike for nuclear; in 2008 and well before the Japan crisis, only 46% of Germans wanted to stop the government from phasing out nuclear power. However, renewable energy is not the most economically-minded energy source if the carbon benefits are ignored. Renewable energy deals also traditionally rely on government involvement.
For the country at the centre of the nuclear crisis, the most logical replacement for the approximately 6.4 gigawatts of energy lost from the Fukushima plants alone is liquid natural gas (LNG). As of June 10, gas prices have shot up by 40% from pre-Japan disaster levels to US$14 per standard measurement of gas known as million British thermal units.
Japan will look to purchase gas from countries including Russia, Qatar and Indonesia. Analysts estimate that Japan needs between seven and 10 million metric tonnes of LNG annually on top of the 32 million metric tonnes the country already imports on average each year.
Much of this will come from Qatar, the world’s largest producer of LNG. One of the country’s two LNG producers, Qatar Liquefied Gas Co., has pledged around four million metric tonnes of extra gas. This equates to about 5.5 billion cubic metres, or to give some perspective, just under double Bolivia’s total estimated gas usage in 2008.
The situation provides Qatar with an opportunity to build a stronger relationship with Japan. Qatar is known among those involved in the LNG market as having a difficult relationship with Japanese buyers, brought about by the hard negotiations of Qatari producers in 2004. This led to somewhat of a breakdown between the two. Japan’s sudden LNG demand could be Qatar’s chance to mend the relationship. But Japan is not entirely reliant on foreign firms to provide LNG.
The country was already the world’s largest importer of LNG before the nuclear crisis, and the country’s corporates are entrenched in a number of LNG agreements with foreign companies. Japan Far East Gas Co., Marubeni Corporation, Japan Petroleum Exploration Co. and Itochu Oil Exploration Co. signed a joint agreement with Russia’s Gazprom to study the possibility of a natural gas plant project in Vladivostok, which nestles on Russia’s southern tip between China and Japan.
Newswire Reuters claimed that an unnamed source has put the project at US$7bn, but Gazprom would neither confirm nor deny this figure when contacted by GTR.
“The project of construction of an LNG plant near Vladivostok is in its pre-investment stage. It is premature to announce the cost of the project and the financing sources before a joint front-end engineering design would be completed by the partners,” the company said in an email. Even if the Vladivostok project comes to fruition, and even with Qatar’s extra four million metric tonnes, analysts are still pessimistic that Japan’s gas supply will be fulfilled.
“None of that sounds like it’s going to meet the incremental needs of Japan on top of the growth from China and India,” says Robin Baker, global head of energy project finance at Société Générale.
“We think there’s a huge growing need there which is struggling. The world changed quite quickly from a position a year or so ago when there was a bit of a gas surplus to wondering where the future supplies will come from.”
The most likely source to fill the supply gap is the relatively new LNG market in Australia. “A lot of the focus at the moment is Australia,” Baker says. “Australia has got a large number of projects with investment approval.”
One of the largest projects in Australia is the US$9.6bn Pluto LNG project in Western Australia with estimated dry gas reserves of 4.4 trillion cubic feet. The project is a joint venture between Australia’s Woodside, which owns 90%, and Japan’s Kansai Electric and Tokyo Gas with 5% each and 15-year sales agreements for the gas. The project is being financed by the Japan Bank for International Cooperation (JBIC) and the Bank of Tokyo-Mitsubishi, which headed up a syndicate of eight other financial institutions.
Japan also has significant investments in the Chevron-operated Gorgon project which is about 130kms off Western Australia’s coast. The project is a joint venture between six parties, three of which are Japanese. At the end of February 2011, JBIC signed loan agreements worth US$102mn for Tokyo Gas Gorgon to increase its interest in Gorgon by 1%. In return, Tokyo Gas will take 1.1 million tonnes of LNG a year from the project.
“Australia, a country endowed with abundant gas reserves and boasting political and economic stability, has come to play an increasingly significant role as an LNG supply source,” JBIC states.
However, Australia’s ambition to take a starring role in the global LNG industry is dependent on a number of factors including the threat of a change in carbon tax laws which would place heavier levees on LNG producers and a maintained high price of oil which keeps LNG as an attractive option.
The most important element, which is crucial for Australia to fulfil its plans of becoming the world’s second largest LNG producer after Qatar, is for offtakers to be found for all of the scheduled projects.
Without the offtakers, the projects will be delayed. There has been a global oversupply in the last five years so it remains a buyer’s market and offtakers are waiting for cheaper gas opportunities brought about by the excess.
“While there’s competition, it’s not like anyone’s missing out; if you want to sign a contract you can. But the power in the market could switch from being a buyer’s market to a seller’s market; this could happen quite quickly if some of the projects start being delayed a little bit,” says Drew Edwards, associate director of natural resources at ANZ.
Further black swan events such as the Fukushima nuclear crisis are the sort of incident that could swing the balance from buyers to sellers. Australia would not be able to produce enough gas to fill the gap and ANZ’s Edwards estimates that the country would not be able to meet demand until at least 2016.
However, once the country does reach full production of all proposed and current LNG plants, it is estimated to be capable of producing up to 100 million tonnes of LNG a year. This would potentially dwarf Qatar’s projected output of 77 million tonnes by the end of 2011.
But Australia’s LNG fields “won’t all get built and won’t all get built this decade”, says John Turnbull, ANZ’s head of oil and gas, project and structured finance. “The emerging numbers is that Australia will be behind Qatar in world production.”
Funding gas’ golden age
Regardless of how many projects come online in the next decade, Australian firms are going to be looking to three main sources of financing to get the projects built. The established pillars of LNG project funding are export credit agencies, such as Japan’s JBIC, commercial banks and capital markets.
An LNG project that is showing the components of this is Japanese firm Inpex’s US$20bn Ichthys offshore development. While all the funding for the development has yet to be allocated, the company has indicated that it will use project finance; a route which will invariably draw in export credit agencies.
The firm will also raise US$6.7bn through corporate funding via a global share offering, diluting the value of existing shares by more than 50%. The announcement sent the firm’s shares plummeting by 13% on the Nikkei bourse when it was announced in July 2009 and reached an all time low in August of the same year. The shares have since recovered but this demonstrates why sourcing funds through project financing is so popular for LNG developments as investors generally react better to debt being taken on than to shares being diluted.
Another reason that project financing is so popular with Japanese LNG deals is, as Société Générale’s Baker notes, because commercial banks are very comfortable lending to projects that sell to Japan because of the country’s immaculate track record in honouring contracts. Furthermore, as Japan is the world’s largest LNG importer, the country sets the standard for the industry in terms of how deals should be done.
“Japan has proven itself over a long period of time and through several cycles to be a very, very reliable buyer,” Baker says. “That’s established a pattern in the LNG industry and you tend to see other buyers coming to the market and behaving similarly.”
Baker notes: “LNG is a very popular industry for the commercial banks; it’s had a good credit track record and banks feel it is something they can understand.”
Regardless of how the nuclear situation plays out, LNG looks set to form an integral part of powering Asia. Commercial banks’ and export credit agencies’ willingness to support LNG development projects, alongside the sharp increase in demand from Japan and other emerging economies such as China and India, could herald the beginning of a golden age for LNG. GTR