Summer 2007 earthquake in Japan threatens the viability of an LNG operation in Louisiana

One aspect of the energy industry that fascinates me is the interdependent nature of the business and the way that one can trace how certain major events have consequences half a world away. Last July, the Kashiwazaki-Kariwa nuclear complex in Japan was shaken by a large earthquake. So far, all visual inspections of the internals of the 7 units located there have not revealed any significant damage that would affect the ability of the plants to operate. However, the inspection process is continuing and there is not yet a schedule published that indicates when the reactors will return to service. (See TEPCO home page.)

The loss of those generators has caused TEPCO, the utility that owns the plants, to step up its purchases of Liquified Natural Gas (LNG) to burn to produce the electricity that the fission reactors would have supplied to TEPCO customers. Since the total capacity of the plants that are not operating is about 8200 MWe, the effect on the LNG market has been substantial.

The fuel required to replace their production by reasonably efficient natural gas fired generation plants is about 1.3 Billion cubic feet per day, assuming that they operate at an 85% capacity factor. That represents about a 15% step increase in LNG demand from Japan, which already was responsible for about 40% of the world LNG demand. (Note: These numbers are computed based on the LNG import and export figures available for 2006 on the EIA web site.)

Since the nuclear plant shutdown has persisted for 8 months and counting, the total amount of natural gas that has gone to Japan rather than other places in the world has had a major effect on the world price of LNG.

According to an April 18, 2008 article in the Wall Street Journal titled Surge in Natural-Gas Price Stoked by New Global Trade the change in LNG shipping patterns and prices has put the viability of a major new LNG terminal located on the border of Texas and Louisiana at risk. Since LNG in the US has to compete in price with domestically produced gas, there is a limit to the price that an LNG terminal owner can bid in a competitive world market. If LNG is too expensive, the owner would not be able to sell the product.

If this situation continues, the owner gets placed into the no win situation of having a large, expensive new capital investment that he cannot operate. Without operating the plant, there is no revenue. Bottom line – even though the commissioning of a new LNG terminal could have been the cause for healthy shareholder returns for Cheniere Energy, the company’s stock has fallen from a plateau above $40 per share in the fall of 2007 to less than $12 per share now. I am pretty sure that most of the shareholders do not recognize that a portion of the blame for their pain rests on the shoulders of an excessively “conservative” reaction to an earthquake in Japan.

Of course, the LNG suppliers are experiencing a wonderful business environment as they get to pick and choose among competing bids for their cargoes. So are those domestic natural gas companies that are selling their product for a price that is partially supported by the competitive purchases of LNG on the world market.