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Commodities

US LNG a boon for Japan

More import options a boost but not a panacea

An LNG carrier moored at Chubu Electric Power's Joetsu Thermal Power Station in Joetsu, Niigata Prefecture

TOKYO -- U.S. efforts to boost liquefied natural gas and crude oil exports provide a good opportunity for Japan to break free from its dependence on the Middle East. However, it is still unclear what direction the energy policy of U.S. President Donald Trump will take.

At a meeting with Japanese Prime Minister Shinzo Abe on Monday, King Salman of Saudi Arabia emphasized that he would welcome investment from Japan.

As Japan imports 30% of its crude oil from Saudi Arabia, the kingdom has needed to make little effort to sell oil to an important customer.

But with its oil-dependent economy becoming difficult to maintain, Saudi Arabia now needs to build new industries, prompting King Salman to call for more investment on his visit to Tokyo -- the first by a sitting Saudi king in 46 years.

Meanwhile, on the other side of the world, in Freeport, Texas, to be precise, construction is underway on a natural gas liquefaction plant. The facility is expected to start operating in 2018 and will produce 13.2 million tons of LNG a year, 5% of the gas traded globally.

The region has historically been a receiving terminal for LNG imported from South America and the Middle East. But with production of crude oil and natural gas increasing as a result of the shale revolution in the U.S., Freeport will gradually become an exporting hub.

U.S. Energy Secretary Rick Perry has reiterated the Trump administration's determination to boost exports of domestically produced energy. 

Destination clause

An increase in U.S. LNG may well be good news for Japan. The country's LNG contracts with Australia -- currently its largest LNG provider -- have destination clauses, which restrict buyers from reselling the gas to third countries, making it impossible to resell unused LNG to third countries.

In January, Japan imported LNG from the U.S. for the first time. Unlike Australian gas, LNG from U.S. can be resold. If Japan can import more American LNG, the country will no longer be bound by destination clauses.

However, it would be unwise for Tokyo to see U.S. LNG as a panacea.

In 2013, Toshiba struck a deal with Freeport LNG Development to liquefy an annual 2.2 million tons of gas for 20 years, starting in 2019. The troubled electronics maker had hoped to bundle thermal power generation equipment and LNG, but rising gas prices have cast doubt on that plan.

As LNG is mostly traded on long-term contracts linked to crude oil prices, U.S. LNG is relatively expensive. Amid a global supply glut, it is unknown whether Toshiba can sell LNG as expected. If it remains unsold, losses could swell to up to 1 trillion yen ($8.82 billion).

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