U.S. Expected to Approve Expanded LNG Exports to Japan

The US policy of LNG exports to Japan is expected to see a significant change in near future as more export approvals are considered.

A report published by Baker & McKenzie has said that last year the US government approved exports from a second terminal, and decisions on eight other applications for export approval are expected later this year.

Implications for Japanese LNG buyers and investors

The report stressed that expanded U.S. LNG exports represents an opportunity not only for Japanese LNG buyers to diversify their supply sources with shale gas but also at more competitive pricing linked to Henry Hub prices rather than oil prices.  Japanese companies also could establish value chains in the U.S. by investing in projects to build export facilities and by acquiring interests in shale gas fields.

Since 1967 the Kenai LNG Plant in Alaska, which produced all eight of the LNG cargoes shipped from the U.S. to Japan in 2011, had been the only LNG plant with export approval.  This changed last year when the Sabine Pass facility in Louisiana obtained export approval.  Eight other applications for export approval are now pending.

Export approval process and outlook

Under the Natural Gas Act gas exports require permission from the federal government.  Such permission is only granted if the Department of Energy (DOE) determines that the proposed exports are consistent with the public interest.  Exports to 17 countries which have free trade agreements (FTAs) with the U.S. are deemed consistent with the public interest and the DOE must approve exports to these countries “without modification or delay”.  In contrast, approvals for exports to non-FTA countries, including Japan, are subject to a lengthy public interest finding process which allows for comments, protests, and motions to intervene from interested parties.

The applicable legislation does not require the DOE to take action on applications within a certain timeframe.  After Sabine Pass received approval for exports to non-FTA countries in May last year, the DOE suspended consideration of all applications pending the results of a study on the impact of exports on the domestic energy market.  This followed complaints from some U.S. lawmakers who were concerned that exports might increase domestic prices.  The domestic market impact study was initially scheduled to be completed by the first quarter of this year, but it is still pending and is now expected to be completed later this summer.  Accordingly, none of the pending applications are likely to be approved until the fourth quarter of this year at the earliest.

There are, however, some reasons to believe there is political support for expanding LNG exports to non-FTA countries such as Japan.  For example, on July 2, 2012, a bipartisan group of 21 members of Congress from states with shale gas deposits sent a letter to Energy Secretary Steven Chu urging the DOE to expedite the pending LNG export applications.  In February, Secretary Chu said he supports LNG exports, and Prime Minister Yoshihiko Noda also said he discussed expanding LNG exports when he met with President Barack Obama on April 30, 2012.

Actions to consider 

• Conduct preliminary due diligence on LNG projects with pending non-FTA export approval applications, as these projects are likely to be now seeking LNG buyers and equity investors.

• Monitor the DOE’s non-FTA export approval process. 

• Investigate the compatibility of LNG produced from U.S. shale gas with regasification facilities and pipeline networks in Japan

Conclusion

Given the currently wide differential between the Henry Hub spot price used for trading on the New York Mercantile Exchange (NYMEX) and JCC pricing, expanded LNG exports produced from U.S. shale gas fields is a potential game changer for the gas market in Northeast Asia, and Japan in particular.  From the Japanese buyer’s perspective, it is clear that approvals for further export terminals is an important development to monitor in order to position themselves as potential buyers and equity investors.  For more information, please contact Colin Cook or Hiromitsu Kato.  

Source: Baker & McKenzie