LNG supplies for EU could be diverted to Japan

European LNG supplies could be under threat as they become vulnerable to diversion into Japan

LNG supplies for EU could be under threat

The devastation in Japan could have strong ramifications for the EU, as 5-12bcm of LNG will now be vulnerable to diversion to Japan for the foreseeable future, according to a report by Deutsche Bank released on Tuesday.

"Nuclear energy out losses in Japan should be replaced by 47% from gas, 39% from coal and 14% from oil," says Thierry Bros, senior European gas and LNG analyst at Société Générale in Paris. "It will need an extra 5bcm of LNG imports for this year alone, and this is going to make a big change."

The 5bcm of LNG will be arbitraged against the European market, explains Bros. "The spare capacity of LNG had reached 29bcm in 2010, which equates to nearly 6%, however this is going to be reduced after the Libyan crisis and Japanese disaster to 23bcm (4.5%)," he says.

The Fukushima-Daiichi plant, with its six reactors, is likely to be closed forever, he says. "This means 2bcm of extra LNG will be going into Japan each year going forward."

Various countries close by are already talking about diverting some of their LNG supplies to Japan. "The Koreans are talking about diverting some of their LNG, and there may be a few cargoes that can be found in Australia," says Andy Flower, senior research fellow at the Oxford institute for energy studies in Oxford. He notes that there is also extra LNG capacity available in the Pacific Basin, Indonesia and Russia.

"The diversion of LNG from Qatar, which would otherwise have come to Europe and the UK, doesn't necessarily mean it is going to reduce the volume of LNG coming to the UK. I don't think it means you are going to see levels decline," says Flower.

"A lot of people are over-estimating the extra LNG that people will import. There are assumptions that everything that is lost is going to be replaced with LNG, however there are coal and oil imports that [can be] readily used," he says.

The significant loss of nuclear power in Japan as a result of extensive damage to the Fukushima-Daiichi facility could have an impact on energy strategies. "Many countries worldwide are likely to rethink their energy mix," says Eugen Weinberg, head of commodity research at Commerzbank in Frankfurt. "It may not be obvious at the moment, but Japan will increase its proportion of coal, LNG, gas and oil. The fear and risk aversion are bringing down the price of commodities in general, it is not just oil, even gold fell by 2% yesterday," he says.

As of Friday March 11, 14 nuclear reactors were being built in OECD countries. "What we will do with these now is the question," Bros says. This could well be the end of the nuclear energy era in the OECD, where people might decide against nuclear. The Chernobyl disaster happened in the USSR, where nuclear energy safety was not a priority. Japan is a developed country, and they were prepared for things like this and it hasn't worked, so people will probably not want it going forward," says Bros.

Production of gas is seasonal, with producers reducing their output in the summer because people need less gas than in winter. "The Libyan crisis and the Japanese disasters are happening when we are ending winter, making it easier to balance the market," Bros says.

"The supply of oil has been highly debated over recent weeks, but the focus on the Middle East and North Africa seems to be gone at the moment, although matters there are not likely to calm down," says Weinberg. "I do not think it makes sense to explain the current price volatility with any fundamental reasons."

"At the moment it is difficult to make an accurate assessment. In a couple of days it could all get better but at the moment it is devastating," says Weinberg.

However, LNG prices are unlikely to increase as much as people are predicting, says Flower. "I think a lot of the LNG will go into the market at contract prices. A lot of suppliers are not going to want to rip off Japan or charge a lot extra given the situation."