Those searching the skies for storm-driven relief for falling natural gas prices should lower their sights and take into account the extensive earthquake damage to a major Japanese nuclear power plant recently. That’s just what FBR Research is doing in predicting Japan’s increased demand for LNG to fill its 8,200 MW power gap could cut into supplies for the U.S. market, leading to tightening the domestic natural gas market.
While it’s a little early to calculate, “the evidence is beginning to show Japanese nuclear woes could impact [second half 2007] natural gas,” according to an Energy & Natural Resources report from the Friedman, Billings, Ramsey & Co. Inc. research division.
FBR notes the Tokyo Electric Power Co. (TEPCO) said last Tuesday its major power plant, the largest nuclear facility in the world, would likely be closed through March 2008 to repair damage from a July 16 earthquake, and “Japanese traders announced yesterday that TEPCO would likely increase its LNG imports by about 2.3 cargoes a month, or about 0.2 Bcf/d.
The increased Japanese demand, coupled with more supplies going to Europe, which has its own natural gas problems, would mean less LNG for the United States. This coupled with declining Canadian supplies, as well as the stripping out of liquids from Lower 48 domestic gas, also should whittle away at the current surplus.
FBR research advises that U.S. imports “are beginning to slow down materially. Imports have declined to 2.1 Bcf/d in the second half of July, down from 3 Bcf/d in June and 2.54 Bcf/d in the first six months of 2007.
“We reiterate our opinion that current weather-driven natural gas supply/demand looseness should continue to tighten up throughout the end of the year.” And furthermore, it is possible Japan’s nuclear outage could extend through next year given the safety issues involved; the plant is built on a fault and was only five miles away from the epicenter of the 6.8 magnitude earthquake last month.
While the utility company has not said how it will fill its power gap, FBR advises that LNG is “the most cost-effective and easily scalable alternative,” beating oil on cost at about $8/MMBtu for a spot LNG cargo compared to $10/MMBtu for 0.2-0.3% resid. The island nation lacks any natural gas of its own.
On another front, FBR is not getting the same bearish vibes that others are from the startup of the 1 Bcf/d Independence Hub (see Daily GPI, July 23). For one thing, it will be gradually ramping up to full production through the rest of the year, and subsequently is expected to average an 85% production rate, which translates to 850 MMcf/d. FBR analysts expect to see an average 0.2 Bcf/d production from the hub through the end of the year, with much of it coming once colder weather arrives.
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