February 13, 2014 6:23 am JST

Japan to get hands on cheap US shale gas starting in 2017

TOKYO -- The U.S. has approved all four shale gas projects in which Japanese companies are involved, paving the way for Japan to receive large supplies of low-priced natural gas starting in 2017.

     The U.S. Department of Energy greenlighted the Cameron project in Louisiana on Tuesday. Its expected output of 8 million tons a year makes it the largest of the four projects, which are spread over three sites.

     Japan intends to import a total of 25 million tons of gas a year from the four U.S. operations and a Canadian project, equivalent to about 30% of its annual domestic gas consumption. If all the shale gas were used to fuel power plants, the electricity produced would equal the output of more than 20 nuclear reactors, according to one estimate.

     Japanese companies are preparing to get underway. Sumitomo Corp. and Tokyo Gas said they have established a U.S. joint venture, ST Cove Point, which will buy the shale gas, outsource it for liquefaction and handle sales. Tokyo Gas plans to buy 1.4 million tons a year from ST Cove Point for its own use, while Sumitomo intends to take 800,000 tons annually for sale to Kansai Electric Power.

     Tepco, which needs to cut costs quickly, aims to procure 2 million tons of shale gas by 2020, a move that is expected to slash its fuel costs by around 50 billion yen ($483 million). The latest rehabilitation plan sets a goal of receiving 10 million tons by the first half of the 2030s.

     The average import price for LNG in Japan is $16 to $18 per million British thermal units. With most bought through long-term contracts, in which gas and crude oil prices are linked, Japanese companies are paying well above market price, which has come down due to the shale gas boom.

     Prices will probably still come in 20-30% lower even if liquefaction and shipping costs are included, says a Tokyo Gas official, adding that the large procurement volume will likely help stabilize prices. And once imports of shale gas begin, Japanese firms will be in a stronger position to negotiate prices with Middle Eastern suppliers.

     With Japan's nuclear reactors idled in the wake of the 2011 earthquake and tsunami, Japan imported 7 trillion yen of LNG in 2013, double pre-disaster levels. This figure is equivalent to about 60% of Japan's record trade deficit. And increased power rates have hurt household spending and prompted some manufacturers to move production abroad. An influx of cheap shale gas could boost consumer spending and stimulate the Japanese economy.

     However, some companies have been burned by shale gas. Osaka Gas will book an extraordinary loss of about 29 billion yen this fiscal year due to failed shale gas development in Texas. It was unable to reach production targets using existing technologies.