Can Japan Freeze American LNG Exports?

The United States cannot approve or build liquefied natural gas, or LNG, export terminals fast enough to appease countries looking for cheaper energy. While there are many destinations from Europe to Asia that will be on the customer list, perhaps the most obvious finish line is Japan. The island nation is at the world's mercy for much of its energy; it's the world's largest importer of LNG, second-largest importer of coal, and third-largest net importer of oil.  

Japan is acutely aware of its dependency on foreign sources of energy and is feverishly seeking cheaper power supplies. But even the pursuit of American gas, which is about one-sixth the price of Asian market prices, has not stopped the country from looking for longer-term solutions. Japan's latest idea, if successful, could fundamentally change the global market and have major implications for domestic natural gas.

The future is cold
Anytime a country is 28th in total energy production and 5th in consumption, it has to entertain some crazy ideas for bridging the gap. Topping that list is methane hydrate, a frozen form of methane which covers most of the planet's surface. Global estimates state that there is more energy in the world's reserves of methane hydrate than all other forms of fossil fuels combined. Why haven't you ever seen or heard of this energy-packed ice? It is located in the world's methane sinks – ocean floors and arctic permafrost – which are not very people friendly.

A massive bed of methane hydrate is located just off of Japan's eastern coast about 400 kilometers southwest of Tokyo. Current estimates say the deposit holds enough gas to keep the country's lights on for the next century. In fact, upon being brought to the surface one cubic meter of methane hydrate expands to 164 cubic meters of natural gas. Ice never seemed so valuable.

Source: U.S. Department of Energy

The Japan Oil, Gas, and Metals National Corporation is leading the first large-scale field test later this month to gauge the efficiency and safety of such a project. If all goes well commercial production could begin as early as 2018. There are many more questions than answers facing development, though. Disturbing large areas of the ocean's seabed could cause massive underwater landslides, which could trigger tsunamis. The same disruptions could cause a multitude of environmental problems too, such as a large-scale methane releases or water acidification.

If we've learned anything from the development of shale oil and gas, it's that environmental concerns often take a backseat. So no matter how you feel about the balance between risk and reward, if Japan can figure out a way to develop its large off-shore gas reserves it will.

Why does it matter?
Japan bought 85 million metric tons of LNG (116.5 billion cubic meters of natural gas) in 2011, which represented 34% of the total world market. The United States is widely believed to restrict exports – and keep a major manufacturing advantage from leaving its shores – to between 15 million and 52 million metric tons by 2020.     

It's important to note that no American company has permission to export LNG to Japan due to its non-free trade status. However, this requirement will likely be waived on a case-by-case basis since only one Free Trade Agreement country – South Korea – is a major importer of LNG. So if we look into the future, what companies would be affected by a more independent Japan? 

Are American exports in the balance?
Cheniere Energy (NYSEMKT: LNG  ) and Total (NYSE: TOT  ) are currently the only companies sporting an LNG export terminal approved by Uncle Sam. Their Sabine Pass facility will be capable of shipping 15 million metric tons of LNG per year, with the option to add two liquefaction trains to increase capacity by 50%. Sempra Energy (NYSE: SRE  ) appears to be next in line for constructing a terminal, but must now get approval from the Federal Energy Regulatory Commission, or FERC. The company believes that its Cameron LNG terminal could be approved later this year and that construction could even begin as early as the fourth quarter.

The flurry of application submissions is the industry's attempt to take advantage of perhaps the quickest profit in the energy industry. How cheap is American gas? Take a look for yourself:   

Source: Waterborne Energy. Note: $/MMBtu

Opportunities will remain if we exclude Japanese imports, but the competition will be much fiercer. Australia and Qatar, which sold 31.6 million metric tons of LNG to Japan in 2012, would need to look elsewhere if our scenario takes root. That could put a big damper on the number of domestic export terminals ultimately approved. 

Manufacturing an alternative
BP (NYSE: BP  ) recently signed a 20-year contract with Freeport LNG for 4.4 million metric tons of LNG per year. However, the company is actively diversifying its portfolio away from LNG -- and it's not alone. Multinational energy companies such as Total and Royal Dutch Shell haven't been shy about their intent to export American gas, but they also support restrictions to take advantage of cheap natural gas for their domestic chemical businesses. Using natural gas as a feedstock to manufacture value-added chemicals – as each of the above plan to do – is an even more profitable business than selling natural gas in liquid form. 

Others, such as Clean Energy Fuels  (NASDAQ: CLNE  ) , want to use cheap natural gas to replace diesel fuels in the trucking industry. The company maintains that compressed natural gas fuel can be up to $1.50 cheaper than diesel fuel and is building an impressive coast-to-coast distribution network to seize what it sees as a golden opportunity. The takeaway: LNG exports add to the natural gas industry, but don't make or break it. 

Foolish bottom line
Can Japan find a way to commercialize its vast methane hydrate deposits? Methane hydrates may sound like a pipe dream, but don't forget that few predicted the shale gas boom just a decade ago. Perhaps Japan will bring the next disruptive energy revolution to the market. Optimism aside I think the technology warrants some attention (it's not included in LNG growth models), but investors may not want to consider it as a high-level threat just yet.

It appears that restrictions to support domestic chemical industry growth and jobs are a bigger threat to American LNG exports than an experiment 1,300 meters under the sea. So what's the best investment strategy in natural gas? Don't rely too heavily on LNG export forecasts – diversify into investments that will create value from gas domestically as well. 

One potential investing opportunity to capitalize on LNG export restrictions – or a more independent Japan – is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand-new report. Just click here to get started.


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