Can LNG solve Japan’s (or at least Tepco’s) energy troubles?

What are the implications of Japan’s infrastructure on the future? Let’s start with LNG. Can Tepco use LNG to replace its nuclear fleet?

Tepco certainly can build CCGT. It is true that CCGT plants can be built in 27 months. It is also true that CCGT plants are not expensive. (My students estimated a capital cost of $1.25 billion per GW.) And it is true that they do not need that much fuel: a gigawatt CCGT plant requires only 46 BCF of fuel per year — the additional 782 BCF needed to replace Tepco’s nuclear plants is well within the capacity of its existing import terminals.

The rub is that Japan has little ability to move natural gas within the country, so the new plants would have to be built near the terminals. The region is not exactly unpopulated. (See map.) Siting and building plants on the requisite scale is likely to take a lot longer than 27 months unless the country builds more remote terminals or a better high-pressure distribution network ... which will take a lot longer than 27 months. Catch-22.

The second problem is that LNG is an expensive fuel. In February, LNG in Japan went for about $16.66 per MMBTU. One of the reasons LNG is so expensive it that sellers prefer contracts linked to the price of oil. Japanese consumers, of course, would prefer contracts linked to the American wholesale price. The problem, of course, is that high transport costs segment the world market. An exporter in Qatar or Australia has little reason to accept a contract linked to the North American price.

But how much cheaper is North American gas? Cheniere Energy contracts price LNG (at the liquification plant) at Henry Hub × 1.15 + $3.00, or $7.19 at a Henry Hub price of $3.64. It costs maybe another $3 to ship it to Asia. (This report is invaluable.) Call it $10.20. Now, this blog has argued that natural gas prices are going to rise. Not immediately, but in the next few years. If they go back up to $5.50, then the price to Japan will be about $12.33. (The Development Bank of Japan believes prices in this range are possible if import prices are linked to Henry Hub.) That is less than $16.66, but hardly the millenium.

According to my students, CCGT in Japan is only marginally competitive when LNG goes for of $17 per MMBTU: 7.5¢ per kWh, against a nuclear cost in the 6¢-7¢ range. Rates therefore would have to rise. If the cost goes under $13, however, then CCGT electricity would go below 7¢. In short, replacing nuclear power with gas without price hikes depends on access to North American gas.

Thus, on February 22, 2013, Shinzo Abe asked Barack Obama to approve LNG exports to Japan. Tepco has already signed an agreement to purchase gas from the Cameron project, but it still needs U.S. export approval and might not happen. (If the Europeans are smart, they will make free trade in natural gas a plank of the U.S.-E.U. FTA.) A less controversal project is going ahead in Kitimat, British Columbia (this would be better for America, since the B.C. deposits are new and hard to move south and thus have no effect on U.S. prices) but Chevron is now a partner and Chevron insists that prices be linked to oil prices.

But ... you knew there was one ... even if gas exports happen, Cameron won’t be ready until 2018. Kitimat was supposed to open in 2017, but now will be later. In short, Japan will be at the mercy of oil-price-linked contracts for some time ... and even after that will face a substantial import bill.

Which is why there is so much interest in the methane hydrates. Japan has been the first to demonstrate that it is possible to extract natural gas from undersea hydrates. Game changer, they say.

Or not. In a future post, I will say why I do not think that methane hydrates will be developed soon. Or at least why I hope not, since they pose a catastrophic risk to the climate.