The story of Tokyo winning the Olympic bid caught everyone's attention this week, but everyone was focusing on the wrong get together involving Japan.
The big event was actually the 2nd LNG Producer-Consumer conference. We know that doesn't sound quite as exciting. But Australia's stake in this bout is a lot higher than who'll be able to swim fastest in 2020. We're talking billions and billions of dollars up for grabs here.
Before we get into the energy politics of Asia, we'll take a quick look at the energy politics of the Middle East. They dominated the Daily Reckoning this week. Everyone knows about the war premium currently residing in the oil price. But it's not the only energy market to watch.
'It's about the politics of natural gas,' speculated your regular Daily Reckoning editor Greg Canavan on Wednesday as he reckoned on the likely motives for a US attack on Syria. 'And it starts in the largest natural gas reservoir in the world - the South Pars/North Dome field in the Persian Gulf, a resource shared by Qatar and Iran.'
Yes dear reader, any tale of war and intrigue almost always leads back to the money if you follow the trail. Greg followed his line of thought to this conclusion. 'A few years ago there was talk of a new gas pipeline running through Iran and Iraq to Damascus...and then possibly onto Europe via LNG ports off the Syrian coast. Coincidentally enough, this was around the time when the Syrian civil war started.'
Is this why gas exporter Qatar is allegedly funding the Syrian rebels? We don't know. Suffice to say, the shifting and murky alliances between the players of this Middle East conflict don't make much sense under the current 'chemical weapons' inspired rhetoric we're led to believe.
Of course, our market didn't seem to mind, with the Aussie bourse booking a five year high and even the Aussie dollar getting a nudge higher. The gains are mostly credited to the strong signals out of China. But even Japan reported a revised annualised growth figure from 2.6% to 3.8% for the April-June quarter. That's a big improvement for the perennially underperforming Japanese economy.
What is not improving is the crippling price Japan pays to import LNG. That's why it's hustling to shake up LNG pricing. Japan is trying to redesign the energy market away from the current system of long term, oil-linked contracts. That's because the US shale revolution promises to bring down the global cost of gas if the US starts exporting the stuff in a big way. There's new supply brewing elsewhere too.
Enter a whole lot of friction between suppliers and consumers.
The chart below shows clearly why Japan is hell bent on renegotiating its long term gas contracts. It's paying (as are countries like China, South Korea and India) at least a 30% premium over US manufacturers. That's not helping the trade balance or local businesses.
click to enlarge
That's their side of the story, anyway. For Australian and other LNG exporters, it's a different one. Spending billions of dollars building plant and infrastructure is a far riskier proposition without the comfort of long term, oil-linked price contracts. That's why Martin Hoffman, the deputy secretary for the Department of Resources, Energy and Tourism went into bat for Australia, as reported by the Australian:
'That pricing in North America -- Henry Hub -- is a very volatile price. We have seen it within the last 10 years (reach) three or four times what it is now...It is a spot price for marginal volume. It is not a price for 10 or 15 years of guaranteed and reliable supply. So I guess when you think about the impact -- sometimes, be careful what you wish for.'
Unfortunately for him, his wishes took another blow on Friday when the US government announced approval for a fourth LNG plant to export to Asia out of Maryland (on the East Coast). The level of US exports approved now totals 50 million tonnes a year. Any more approvals after this - there are 13 waiting already - will start to make existing Asian suppliers nervous.
Of course, the answer nobody knows is how long the US gas price can remain at such low levels, especially if the US starts to export it in a big way. US manufacturers obviously want to keep the gas in the country to lock in their major competitive advantage - access to cheap gas.
Michael Smith, whose Freeport terminal in Texas will be the first US operation to export to Japan, says there's so much drilling and gas in America there's no chance of a price spike. There's no Middle East-style 'war' premium to contend with either. Energy major Chevron says the world needs more supply. Conoco-Phillips is taking the opposite side and warning of a supply glut. Of course, they're all talking their own book.
The take away is that Australia was supposed to have bright prospects of billions of dollars in LNG export earnings to look forward to. But the road ahead is now starting to look a bit murkier. Stay tuned.
for The Daily Reckoning Australia