A Japanese Twist in the Natural Gas Saga

Japan has just announced that it has been the world’s first nation to extract natural gas from frozen methane hydrate off their coast. Methane hydrate is sometimes called clathrates or fire ice and is a frozen ‘cage’ of methane and water molecules. This announcement suggests that Japan may soon have their own shale gas revolution to rival the USA. The announcement is also likely to worry international oil companies who are targeting Japan as a key market for their products in the next few years. Although other countries are examining methods to exploit methane hydrate deposits, they have been less invested in their efforts due to an abundance of easier energy sources, in particular the large shale deposits in the USA and China and the oil sands in Canada. What has incentivised the Japanese to push for their own “clathrates gas revolution” is the higher cost of LNG prices contributing to a rising trade deficit that the new government under Shinzo Abe is trying to arrest as well as exposing its major power utilities companies, such as Tokyo Electric Power Company and Kansai Electric Power, to massive financial losses.

Powering Japan's future?

Currently, Japan is heavily reliant on imports for its energy needs, especially after the Fukushima Nuclear disaster of 2011. They are the largest importer of LNG in the world and currently pay about US19/mmBtu for their imports. This is about five times the US Henry Hub natural gas price of around US$3.70/mmBtu. Several IOCs with large shale gas production in the USA have applied for export licences and are building LNG terminals in order to meet demand in North Asia. Therefore, this recent development could be particularly worrying to them, as they will have the infrastructure to export natural gas to Japan by 2015. It has been estimated that there are around 1.2 trillion cubic metres of methane hydrate off the shore of Japan, equivalent to 11.5 years of Japan’s natural gas consumption. Yet, it could take until 2016 or 2017 until Japan have built economies of scale and improved offshore drilling technology to the level to make extraction of natural gas from methane hydrates economically profitable.

However there are environmental concerns with extracting methane hydrate. Drilling for undersea methane hydrates could have an impact on earthquake-prone areas, a particular concern for Japan.

If Japan is able to produce economically profitable methane hydrates in the next few years they will have a large reserve of natural gas to reduce their dependency on imports. This could bode ill for the natural gas market by decreasing prices worldwide and in particular force international oil companies to accept lower revenues despite a huge outlay on initial natural gas infrastructure. It will be interesting to see how Japan’s “clathrates gas revolution” compares to the US’ “shale gas revolution”.