Japan is caught in a trade deficit trap. Exports to Europe fell by 28% from a year earlier in August, according to data from the Ministry of Finance.
Exports to Germany were down 18% and exports to the UK were down 42%. Exports to China – and this was before all the Toyota bashing – fell 12%.
Exports fell more than imports. The result was Japan’s 18th consecutive monthly trade deficit since the March 2011 earthquake and tsunami. But the big driver of the trade deficit isn’t falling exports. It’s rising energy imports.
This is a structural shift in Japan that has a direct impact on the Aussie LNG industry. Japan needs energy. It has to import almost all of its oil and gas. It used to meet the electricity demands of industry with nuclear power.
But only two of its fifty nuclear power plants are currently online. And there’s a great deal of debate about a plan to phase out nuclear power entirely by 2030.
The Impact on Australia
Japan will face much higher trade deficits for years to come if it’s forced to meet its energy needs with imported LNG. That’s why the trade deficit data was shortly followed by Japanese calls to decouple LNG pricing from the oil price.
Japan pays about four times as much for LNG as it costs in America. A revamp of the LNG pricing system would likely result in lower prices, and a lower trade deficit.
Japan is just one customer for Aussie LNG. But it’s a major one. And doubts about how the product will be priced in the future cast a lot of uncertainty over the industry. How can you decide to proceed with a major project if you’re not sure how much your product is going to cost in the next five years?
The broadside from Japan may have been blunted by a bullish presentation on shale gas by Martyn Eames, the vice president of Asia Pacific for Santos.
Eames told a conference in Darwin that, ‘The Northern Territory government estimates the Territory to have more than 200 trillion cubic feet (tcf) of shale gas resources.’
Eames also included a very handy graphic which I’ve taken the liberty of reproducing below. It shows exactly why Australia is expected to pass Qatar as the world’s largest exporter of LNG, at about 80 million tonnes per year by 2020.
However it also shows how much capital investment is committed to an industry where the price of the product could be in flux.
The off-shore projects in the Northwest Shelf are likely to go ahead. Most of them have already reached final investment decision and have long-term off-take partners lined up. The same is true for the Darwin-based projects.
It’s the coal-bed methane projects in Queensland that you have to wonder about, although they appear to be going full steam ahead at the moment.
My own view is that the gas market is being internationalised in a way it never has been. It’s always been a regional market, owing to the infrastructure and cost issues of exporting gas across the ocean.
But at least within Asia-Pacific, I expect gas to be traded a lot more, and a pricing system to emerge that encourages more consumption. That will solve the problem of excessive production. Lower prices encourage consumption.
I don’t have any doubt that between the domestic needs and export markets in Asia, Australia’s shale gas industry will have plenty of takers for its product.
Of course you can’t have customers until you have product. But that’s where we’re at right now with the shale industry. Drilling continues. Resources are being proved up. And in the long term, it’s the one industry I think you could make hundreds or even thousands of percent returns on the exploration stocks available.
Dan Denning
Editor, The Denning Report
