The massive increase in U.S. shale-gas production and reserves in recent years has turned the U.S. gas market on its head, prompting traditional liquefied natural gas (LNG) importers to launch plans to export domestic gas overseas.

Japan, in particular, could use the relief, and the country is intent on diversifying its sources of LNG.

In November 2011, Japan’s crude oil imports dropped 8.9%, while LNG enjoyed a 21% rise during the same month, according to the latest data from the Japan Ministry of Finance. For the year, the world’s largest LNG importer was on track to import a total of 78 million metric tons of LNG in 2011, government data showed.

Japan’s demand for gas is expected to increase even further as uncertainty continues over the future of its nuclear capacity -- following the Fukushima Daiichi nuclear disaster in March 2011.

The prospects of increased LNG exports from the U.S. and elsewhere will arguably be music to the ears of East Asian utilities that are still tied, for the most part, to oil-linked contracts.

The price difference between the U.S. and Asian markets is indeed striking.

On Jan. 6 at the New York Mercantile Exchange, the February 2012 natural gas contract settled at $3.06 per million British thermal unit (/MMBtu). Meanwhile, the February East Asia LNG pool (Japanese crude cocktail) price -- closed at $20.56/MMBtu for the same date, according to ICIS Heren data.

Crude Oil Losing Ground To LNG

The Ministry of Finance figures appear to illustrate that crude oil is losing out to LNG in taking the country’s rising thermal-power demand amid continued nuclear-power outages.

Many analysts say this trend is likely to continue throughout the winter unless utilities restart idled reactors.

“LNG will keep its importance” as a fuel to replace nuclear power given its relatively smaller carbon-dioxide emissions and stable supply, Ken Koyama, analyst at think-tank Institute of Energy Economics, Japan, wrote in a recent report.

Since the Fukushima-Daiichi nuclear power plant accident, only seven of Japan’s 54 reactors are in service. Lingering public fear over the safety of nuclear-power technology has forced utilities to boost thermal-power generation to make up the electricity shortfall.

Spare U.S. Natural Gas Capacity

Current daily consumption of natural gas in the U.S. is around 62.4 billion cubic feet per day, and “technically recoverable” gas resources is estimated at 1,836 trillion cubic feet (Tcf) from which 616 Tcf is attributed to shale gas. (Unproved shale-gas volume is 827 Tcf per U.S. Energy Information Administration’s Annual Energy Outlook 2011.)

Combined with the U.S. Department of Energy’s latest determination of proved gas reserves, the U.S. has enough natural gas for at least the next century, according to D.K. Das with Houston-based UniversalPegasus International.

“It should be noted that spare capacity in a capitalistic system does not necessarily mean domestic production minus domestic consumption,” Das told Hart Energy. “In an open market, a commodity will chase the highest price quoted for it globally.”

Das released a preliminary study -- published initially in the Scandinavian Oil-Gas Journal -- showing that conditions are opportune for the U.S. to export LNG to Japan as well as to Korea and China. Titled, Prospects of LNG Exports from the United States to Japan, the analysis considered several factors that would govern the feasibility of exporting U.S. LNG to Japan and other Far-East countries.

Since all the large U.S. shale-gas basins are located far from the U.S. West Coast, there is currently no facility on the West Coast for gas liquefaction and the Kenai LNG terminal in Alaska is being closed. Geographically detached from the U.S. shale-gas basins, the U.S. Gulf of Mexico is the best bet logistically, Das said.

More specifically, the Eagle Ford, Barnett, Woodford, Haynesville and Fayetteville shale plays are the most accessible to liquefaction facilities proposed on the Gulf Coast.

“A rapidly rising production trend is evident from forecast [shale-gas basin production] data, which indicates that sufficient quantities of LNG could be exported if a reasonable net margin is assured to the producers,” Das wrote.

Other LNG Supply Competition

The main contenders to supply LNG to Japan are Qatar, Australia, Malaysia and Russia, Das said.

Of those, Russia’s contribution would definitely increase from 4.3% to a higher percentage when the Sakhalin-II LNG plant reaches peak production and if the proposed Vladivostok LNG terminal becomes operational by 2017 -- although the reliability of Russian supply will always remain a big question, Das wrote in his paper.

“Malaysia could be an eager exporter but it already supplies almost 20% of Japan’s requirement, therefore Japan may think of exploring other markets. Australia’s case is similar to that of Malaysia. In the case of Qatar, all the parameters appear to be satisfied except for the concern regarding long-term political stability in the Persian Gulf region,” according to the study.

“It makes sense, therefore, for Japan to review the possibility of importing U.S. natural gas,” Das told Hart Energy. “But permitting delays and any postponement in constructing the liquefaction facilities on the Gulf Coast could lead to U.S. losing out the LNG race to Australia, Qatar and Malaysia.

LNG Export Facilities Of Note

Two potential liquefaction facilities on the U.S. Gulf Coast that could export LNG are the Freeport LNG and Sabine Pass terminals. Both plants are targeting start-up in 2015.

Freeport LNG and Macquarie Energy plan to develop four liquefaction trains -- each with a capacity of 330 million cubic feet per day (MMcf/d) -- at Freeport LNG’s existing LNG import terminal on Quintana Island, 70 miles south of Houston.

Cheniere Energy’s Sabine Pass liquefaction project is being designed to permit up to four modular LNG trains -- each with an average processing capacity of 466 MMcf/d.

“These proposed export terminals will be located in one of the largest gas-producing regions in the world, near two large natural gas-trading hubs -- the Houston Ship Channel and Katy -- with access to the extensive U.S. pipeline network,” Das emphasized. “Moreover, with the opening of the Panama Canal to LNG ships in 2014, cargoes being exported out of Freeport/Cheniere will have a much shorter and quicker access to the Far East, a prime area for LNG demand.”

Japan Seeks U.S. Regulatory Approval

Currently, only countries with free-trade agreements with the U.S. are approved to import U.S. LNG. A Japanese trade ministry official has said the country was seeking approval for imports by Japanese firms.

In a meeting with U.S. Energy Secretary Steven Chu last September, Seishu Makino, a Japanese senior vice trade minister, requested approval for imports by Japanese companies.

According to the Nikkei report citing an unnamed trade ministry official, “Japan conveyed the expectation that exports of LNG from the U.S. to Japan can contribute to a stable supply, to which the U.S. expressed a certain understanding.”

Initially, Japanese power and gas utilities would import 2.0 to 3.0 million metric tons of LNG each year, and the Japan Ministry of Trade estimates U.S. shipments could eventually make up 10% of Japan’s LNG imports.

Osaka Gas Co., Japan’s No. 2 natural gas distributor, also sees the U.S. as a promising shale-gas exporter. “Japan can be a destination when an expansion of the Panama Canal in 2014 allows large LNG carriers to get through the canal,” Kenji Kawamoto, an executive officer in charge of overseas business development was quoted as saying in July 2011.

Japan’s third-largest trading firm, Sumitomo Corp., has said it is eyeing more upstream investment opportunities in U.S. shale gas and looking to pick up shale-oil assets there, as it sees those markets growing.

Contact the author, Kristie Sotolongo, at ksotolongo@hartenergy.com.