Japan's push for gas exchange hampered by lack of pipeline network

By CHOU HUI HONG, TSUYOSHI INAJIMA and HEESU LEE
Bloomberg

Japan’s effort to set up a natural gas exchange may be hampered by the lack of a pipeline network across the country, according to a government subcommittee.

Japan is considering setting up the exchange as part of measures to deregulate the country’s retail gas market amid surging fossil fuel import costs and nuclear reactor shutdowns.

A subcommittee of Japan’s Ministry of Economy, Trade and Industry will start discussions in coming months about the feasibility of a wholesale exchange.

“In theory, it’s possible to establish a wholesale market,” said Hirotaka Yamauchi, head of the METI subcommittee. “But there would be the problem of how to transport traded gas without a comprehensive pipeline network.”

Gas-fired power replaced nuclear energy as Japan’s main source of electricity after an earthquake and tsunami struck the Fukushima Dai-Ichi atomic plant in March 2011. Japan, the world’s largest buyer of liquefied natural gas (LNG), spent 7.06 trillion yen ($68.8 billion) to import a record 87.5 million metric tons of LNG in 2013, compared with 3.47 trillion yen in 2010, the year before the disaster in the country’s northeast prompted it to shut all its nuclear reactors.

Construction Costs

Construction costs for new pipelines to connect networks between Japan’s major cities and associated storage facilities are estimated at as much as 1.96 trillion yen ($19.2 billion), an advisory panel of the trade and industry ministry said in a June 2012 report.

“The question is who should bear the costs to build such a network,” Yamauchi said. “Given Japan’s financial condition, it would be difficult to use public money.”

Mountainous terrain in the Honshu region and the country’s susceptibility to earthquakes make it difficult to connect its gas pipelines, said Gavin Thompson, the Tokyo-based head of Wood Mackenzie’s Asia gas and power research. About 42% of Japan’s 127 million people live in cities such as Tokyo, Osaka and Nagoya on Honshu, the biggest Japanese island, according to the US Central Intelligence Agency website.

METI is seeking a way to price traded gas and its derivatives, Thompson said. The country’s long-term LNG purchase contracts, usually running for more than 10 years, are typically linked to the cost of Brent oil or a basket of prices known as the Japan Crude Cocktail.

The country is considering three gas exchanges to serve Tokyo, Chubu and Kansai, the Nikkei newspaper said March 11.

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