Russian and Japanese interests are nearing terms in a deal that would supply Japan’s ever-increasing demand for liquefied natural gas (LNG).
Both sides are eager to secure trade: Russia with its excess natural gas production and an increased threat to its dominance from future U.S. exports, and Japan with its growing consumption and high natural gas prices.
Talks took place in Tokyo last Wednesday. Russia’s Gazprom (OTC:OGZPY) Chairman Alexei Miller and Japan’s Trade Minister Toshimitsu Motegi, amongst other officials, discussed interest in solidifying a supply agreement that focused on Gazprom’s Vladivostok LNG terminal in the eastern Siberian port of Vladivostok.
The meeting marks the first time the $38 billion project has been presented to Japan in Gazprom’s effort to infiltrate Asian markets. Included in the discussion was the construction of the Chiyoda Corp. and JGC Corp. projects—two LNG plants that would help redraw the East Asia energy map.
Gazprom, the second largest gas producer, and Japan, the biggest LNG importer in the world, could solidify the deal when Japanese Prime Minister Shinzo Abe visits President Vladamir Putin in Moscow on April 29.
From MSN Money:
“The talks have picked up steam dramatically,” said a senior government official. “I think the rules of the game are about to change big time. Gazprom, which until now has had the monopoly and has been elusive, is getting a move on.”
Mutually Beneficial
The Japanese are downplaying the whole thing, MSN Money reports, saying these kinds of talks have happened in the past, only to dissolve when a dispute over islands in the North Pacific rose to the surface. Nobody likes to have their islands taken from them, right? But that’s what Russia did at the end of WWll.
And it’s left an impression on some of Japan’s leaders. But this could be an opportune time to settle disputes from the past, especially as both sides can benefit from one another.
“If we think about the islands and energy as a package, as a broader deal it’s a completely different calculation,” a senior government official told MSN Money. It will surely be a topic of discussion come the 29th.
While history shows Japan’s reluctance to forget, it just may be Russia who faces a greater need to make this deal happen; the threat of outside competition from the U.S. and other gas producers is stiffening around the globe. It’s vital that Russia secure its exports before the U.S. decides to open the flood gates.
Japanese natural gas needs are soaring, especially after the Fukushima Daiichi meltdown of 2011—the largest nuclear disaster since Chernobyl in 1986. Since that time, Japan has shut the doors on many of its nuclear power plants and has turned to importing for much of its energy needs.
Japan set a record, UPI.com reports, for LNG use in 2012. The nation consumed 9 billion cubic feet per day last year, 2 billion cubic feet more than in 2011.
Japan receives its gas now from only one LNG Russian terminal: Sakhalin-2, where Mitsubishi Corp. and Mitsui & Co. are junior partners with Gazprom and Royal Dutch Shell (NYSE:RDS.A)
LNG Terminal Expansion
But Japan wants to expand at that terminal.
Expansion there would also be the most viable option for Russia, who sees more business with Asia as a key component in its future plans. It is also trying to run gas to China through its East Siberian pipeline. The two sides are currently having pricing issues, but if they are ironed out, China could eventually become Russia’s biggest customer.
The Vladivostok project would supply East Siberian gas to China and ship LNG to Japan, and this would give Gazprom an advantage in positioning for other LNG markets.
China and Japan are currently in the middle of a tug-of-war over natural gas, and both nations are willing to pay top dollar to secure supplies. China uses more, but Japan is constantly setting all-time highs in LNG and is on its heels in overall consumption.
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U.S. Opens Up
With so much demand for natural gas, the U.S. is perfectly positioned to begin exporting, but there doesn’t seem to be much urgency presently. But with all the dollar signs in the air, it’s assumed it is going to happen eventually—sooner rather than later.
Assuming so, there are three players who will lead the way in LNG exports: Exxon (NYSE:XOM), Cheniere (NYSE:LNG), and Shell.
Cheniere Energy has the Sabine Pass LNG terminal, the only U.S. terminal approved for exports by the FERC. The terminal has a total export capacity of 4 billion cubic feet per day and will be set for exports by 2015.
A 20-year deal with Total (NYSE: TOT) has much of these exports already heading to Europe, not quite reaching the Asian markets, where prices are upwards of $18.
Two pipelines are directly tied to LNG projects. TransCanada (NYSE:TRP) is teaming up with Exxon, ConocoPhillips (NYSE:COP), and BP (NYSE:BP) in Alaska. And Kinder Morgan Energy Partners (NYSE:KMP) has signed on with Shell to export LNG in Georgia.
And American-based companies such as Chevron (NYSE:CVX) are making deals outside of the U.S. Last month, a long-term deal was struck with Japanese utility Chubu Electric Power Co. for LNG from the Wheatstone project in Australia, according to UPI.com, and gas is expected there in 2016.
Exxon has also inked a deal with Russia’s other energy juggernaut, Rosneft (MCX:ROSN), to build a $15 billion LNG plant at Sakhalin-1, north of Japan. As of now, Rosneft has not secured the right to export natural gas.
Japan and Russia haven’t had a meeting like the one at the end of the month in ten years. If it goes well, the industry as a whole will have to take notice. Things are going to change. And even the U.S. is perked up for this one.
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