Gas Explodes. Business Booms. Japan and LNG
by Willhemina Wahlin
"There's a joke from the early days of the oil business," write Daniel Yergin and Michael Stoppard, in "The Next Prize," an article in Foreign Affairs in 2003. "A geologist reporting back on drilling a wildcat exploratory well says, 'the bad news is that we didn't find oil. The good news is that we didn't find gas'." Little did the early oil tycoons know that natural gas would have the last laugh, thanks largely and ironically to the emergence of its liquefied form, Liquefied Natural Gas (LNG) -- and no country on earth is currently laughing louder than Japan, the largest importer of LNG in the world.
The Japanese government views LNG as vital to its strategy to reduce the nation's oil dependence, as well as a key ingredient in its post-Kyoto Protocol recipe for alternative fuels, and is actively promoting LNG through subsidies. Japanese corporations have been securing their lead position in every link of the global LNG supply chain, through the formation of large consortiums that provide everything from shipbuilding to financial consulting. These subsidies and consequent investments have brought Japan to the forefront of the LNG industry. Not only has Japan essentially secured its own supply, it is also playing a pivotal role in the supply to other nations. But if there are hopes that LNG will be a rival to oil in the future, there are pressing needs now facing the industry, including the expansion of delivery capacity and the reduction of set-up costs for new projects. So, where to next for LNG?
What a gas...
LNG, PNG, CNG, LPG...many initials can equal much confusion. LNG, PNG and CNG are all forms of natural gas: Liquefied, Pipeline or Compressed, and LPG, Liquid Petroleum Gas, is, as the name suggests, an oil derivative. Natural gas reserves are commonly found on their own or with oil.
Natural gas can be converted to a liquid by cryogenically boiling it to - 162Ž. If it is kept at a constant pressure, the liquid will act as an auto refrigerant, keeping its boiling temperature, and its liquidity, making it transportable. Although this process was discovered almost a century ago, developing the technology to liquefy, store and transport LNG while making it economically competitive with PNG and LPG was a bigger challenge. Since 2000, technological advancements in the liquefaction and re-gasification process have made the processing of LNG more fuel efficient, and so more economical. Re-gasification plants are made up of individual processing trains, and because each of them operates independently, it reduces the risk of total shutdown or operation failure of the whole plant. Adding a new train is much cheaper than building a whole new plant, and so this makes the addition of capacity to a plant more cost effective. According to Hong Kong-based Azfar Shaukat, Director of the Oil & Gas Division at Mott MacDonald, an engineering firm specializing in feasibility studies and the design of large-scale projects, trains are also increasing in processing capacity. "The train sizes of 10-15 years ago were about 1.5 million tonnes a year," he said in a telephone interview. "Now we're getting to the stage where a single train can produce 7 million tonnes a year."
Shaukat also explained that recent developments in LNG shipping are of importance to the deliverable capacity of LNG. "The reason why people weren't looking at the capacity before was that they really didn't know how big this market was going to be...but then there was this huge interest in LNG worldwide. The weak link in the chain then became the ships...so now from 135,000 or 140,000 tonnes capacity, people are looking at maybe a quarter of a million capacity."
New designs of LNG carriers are also working on diesel-fired electric motors, which will need less space on the carrier, creating more capacity, and will not require any LNG 'boil off' to power the ship, meaning that the 'boil off' gas can be returned to the cargo, increasing deliverable capacity.
Gas explodes. Business Booms. Japan and LNG
Japan, almost by nature, is methodical in its investments. It believes in the benefits of government -business and government -government relationships, and cultivates these on a long-term basis. Such relationships are crucial in the LNG industry, with project set-up costs estimated to be between USD 200-300 million, demanding suppliers have a firm commitment from buyers. But for Japan, the investment has been critical. After the oil shocks of the early 1970s, Japan was jolted out of its complacency, realizing that it could no longer rely on oil as its main source of energy. While the reduction in the nation's consumption of oil has been impressive, Japan still relies on oil for 52.9 percent of its primary energy production, which it aims to further reduce to 47.7 percent by 2010. Japan imports around 97 percent of all oil consumed, about 88 percent of which is from the Middle East. LNG is the world's most viable near-term alternative to oil today. That Japan has been able to secure supplies from places as geographically dispersed as Australia and Russia, as well as the Middle East, adds to its energy security.
Japan's strategy to reduce greenhouse gas emissions by 6 percent is based on fuel diversification, with natural gas set to increase from the current 12.7 percent of Japan's domestic and industry energy needs to 20 percent by 2010. "Japan believes that the burning of coal, oil, natural gas and other fossil fuels accounts for 90 percent of greenhouse emissions and they should be the focus of countermeasures against global warming," said METI (Ministry of Economy, Trade and Industry) in an email interview with J@pan Inc. "Natural gas is a clean energy source that places a small burden on the environment in comparison with other fossil fuels... for this reason, Japan is accelerating the shift to natural gas while moving toward a balance of energy sources -- oil, coal, nuclear power, etc." The environmentalist's jury is still out, however, particularly among those that view heavy investment in LNG as diverting funds from research into renewable energies. Shaukat agrees this is partly true, but adds, "Converting a power station to run on gas is going to have a much more dramatic effect and is much more immediate than replacing that particular power station with lots of wind turbines. It would be very difficult to beat the economics of the CCGT plant [Combined Cycle Gas Turbine plant, which is borrowed from jet design]. It's going to be much more efficient, and doesn't require all of the post-combustion treatment facilities that liquid or solid fuels would require." Yergin and Stoppard also suggest that CCGT power plants offer the most immediate alternative. "CCGT plants are easier to finance, quicker to build, and more efficient in their consumption of energy than existing coal plants...of all the fossil fuels, it is the best suited to the post-Kyoto world: electricity generated from it emits only 40 percent of the carbon dioxide produced by electricity generated from coal."
Since 1969, when the first LNG terminal began receiving gas from Alaska, Japan has steadily become the world's largest natural gas importer -- all in the form of LNG. This has largely been made possible by the way in which Japan invests in an industry. "The Japanese have a supply chain mentality," said Dr Euan Low, Mott MacDonald's International Business Development Consultant in Tokyo. "The way that they're actually investing in the LNG market is from source to re-gasification, so it's right the way through the supply chain." Dr Low also thinks that Japan is very good at mobilizing its resources. "You've got these great big trading companies which have huge development capability. They have such a large financial resource behind them, they can spend a lot of time and effort evaluating the market, trying to work out which technology to put in, and then start taking trading companies to look at the supply chain." These investments, in turn, help the government to realize its policy goals. METI believes it is important to promote LNG's development and use. Through the Japan Oil, Gas and Metals National Corporation the ministry subsidises companies' LNG field exploration and asset purchases and even guarantees liabilities incurred in borrowing development funds.
In the 2004 fiscal year, METI awarded two project contracts worth USD 1 billion. The first of those went to Chiyoda Corporation, one of a handful of companies worldwide that are licensed to build project terminals from start to finish. With the help of METI's project contract, Chiyoda went on to sign a deal with RasGas in Qatar worth USD4 billion. Chiyoda, with French Company Technip, will build two LNG processing trains with a capacity to process 7.8 millions tonnes of LNG per annum, making the project one of the largest in the world.
Chiyoda holds 30 percent of the world's LNG plant projects, according to the company's web site. Indeed, Chiyoda is involved in LNG projects as far reaching as Indonesia and the United Arab Emirates, as well as Qatar. "They have their own process," explains Shaukat. " If you're talking about a new production facility anywhere in the world, then Chiyoda is going to be on that list." The company attributes its success to its "Natural Gas Value Chain," the integration of the full range of engineering functions in the processing and production of natural gas, from the gas fields through to the end users. This "Natural Gas Value Chain" was the main reason for its selection by Shell to build the first LNG terminal in Russia. This project will give Chiyoda a firm position in the country with the largest gas reserves in the world. Only recently, Russian President Vladimir Putin was talking of building pipelines for the supply of Russian gas to Japan. Perhaps, with Chiyoda's engineering experience, Putin may have an alternative.
The second of METI's 2004 LNG project contracts went to LNG Japan Corporation, which enabled it to increase its equity in the Tangguh Project in the Indonesian province of West Papua, raising its total share from 1.07 percent to 7.35 percent, according to a statement by the company. The project has just signed a 25-year contract to supply LNG to China via the new LNG terminal in Guangdong, starting in 2006. LNG Japan supplies approximately 30% the market share in LNG to Japanese power and town gas companies.
LNG Japan Corporation is a 50-50 joint venture between Sumitomo and Nisho-Iwai (now Sojitz Corporation) that began in October 2001. This venture is rapidly increasing its interest in LNG projects all over the world, including a 3 percent share of Ras Laffan Liquefied Natural Gas Company, part of RasGas in Qatar. Probably not so coincidentally, Sumitomo Mitsui Bank became a financial consultant to the Qatar Gas Transport Co., a government-affiliated company, for a USD14.5 billion project to build 57 LNG carriers by 2009. "Sumitomo aims to expand such operations by leveraging its experience in raising capital," the Nikkei Financial Daily reported. In addition, Sumitomo Mitsui Bank will also act as financial adviser for LNG projects in Thailand and Indonesia.
Other Japanese corporations are receiving subsidies from METI too, particularly in R&D. However, the LNG industry appears to be slated for far less in subsidies than you might expect for an emerging global industry. This is more than likely due to the collective organization of the corporations themselves; rather than merely competing with each other, it is common to find a number of Japanese corporations working on the same project, such as in Qatar (Chiyoda, LNG Japan, Sumitomo Mitsui Banking Corporation) or the Tanngah Project in Indonesia (Nippon Oil Corporation, Mitsubishi Corporation, LNG Japan Corporation, JGC Corporation and Kanematsu). Nonetheless, the subsidies go some way in demon-strating the unique way in which Japan establishes itself within an industry, serving its own resource supply needs while simultaneously boosting its economic power.
A shift in the 'LNG Paradigm'
Traditionally, the LNG industry has operated according to what Yergin and Stoppard call "the LNG Paradigm." They explain that, "all the elements of the projects -- which last for 20 years or more -- are laboriously worked out and settled before any serious dollars are spent." In other words, it is a highly inflexible industry, owing to the sheer economic commitment it takes to undertake an LNG project. In recent years there has been an increase in spot buying -- the purchase of natural gas without the need for a 25-year contract at a fixed amount -- but it is still has a minimal place within the industry.
There are serious ramifications for the continuation of such a paradigm. For one thing, countries with less investment scope have difficulty securing a supply of LNG, putting them at a serious disadvantage should they wish convert older, dirtier coal-fired power stations to natural gas and CCGT technology. One solution is to establish distribution hubs within regions. "That's where I think CNG also has a role," says Shaukat. "The way that people have been thinking about this is LNG as a specific product, but it's not...it just happens to be gas, and if you think about it in those terms, then you start to look at other possible ways of getting it to market." Dr. Low adds that Japanese investors are considering investment in a distribution hub in East Asia, which would give a boost to the development of the industry. In addition, the shipping of CNG could be much more economical across shorter distances. "There are studies that show that over relatively short distances...up to maybe even 1500 miles, CNG is quite attractive," said Shaukat. The fact that LNG terminals are so expensive to set up, coupled with the fact that only specifically designed terminals can accommodate the leviathan carriers, means that CNG distribution hubs could be an economically viable way of getting gas to smaller markets. This, in turn, could also increase the industry's capacity to enable spot buying. The benefits of this are self-evident, particularly to smaller and less economically powerful nations.
Is gas set to become the next oil?
The current importance of LNG upon the international stage cannot be underestimated. For instance, up until around 2001, the gas industry in the United States was a mainly national concern. Since that time, however, certain factors have come into play that have created an intriguing situation. For one, the government has locked down all federally owned land that could possibly be explored for further reserves. On the other hand, they have set the wheels in motion that will see natural gas powered energy increase from the current rate of 20 percent up to what they hope will be around 52 percent by 2025. Many people in the gas industry in the US are confounded by this, and are calling on the government to urgently address the yawning gap between supply and demand. Yergin and Stoppard foresee a more serious consequence. They suggest that it has a hauntingly close resemblance to the late 1960s when the United States became integrated with the world oil market. "In a few short years, the United States went from being a minor petroleum importer to a major one. The surge in demand from the world markets, pulled by the engine of the American economy, helped set the scene for the oil crisis of the 1970s and created dependencies with which the world still wrestles." At the rate of increased gas consumption projected for the US, many are suggesting it will not be long before it overtakes Japan as the largest consumer, and even importer, of LNG and other forms of natural gas. At the same time, LNG imports are also rapidly increasing in China, India, Korea and the EU, with many new receiving terminals slated for construction. If, in addition to this, distribution hubs begin to appear, natural gas will very likely be the fuel for the 21st century.
But there is a while before that will happen. For now the industry needs to consider some very important supply shortfalls. The largest of the world's gas reserves are in the Middle East and Russia, and while both of these regions have oil as their export priority, the market for LNG will be slow to develop. Additionally, the stockpiling of LNG is virtually non-existent, as is spot buying. So, unless you want to pay through the nose, a 25-year contract will still be the norm. The other element, of course, is the fact that the fleet of tankers required to deliver gas is below critical mass. "It's going to take another 20-30 years before it gets to the level where maybe you can have a gas exchange in the same way you have an oil exchange," says Shaukat. "If you have a fluid market, then maybe you can start to consider that LNG will effectively be competing with crude oil, but I think it has some way to go before that." JI