The shale gas revolution: What does it mean for Japan?

November 25, 2012

TAKESHI YAMAWAKI/ Senior Economic Correspondent

For the United States, the “shale gas revolution” has fueled a spark of hope in stagnated economy. The revolution is already shaking up the global energy picture and could end up impacting the lives of the Japanese, too.

Though both fossil fuels, crude oil and natural gas are different in many ways.

For a start, gas is kinder to the environment than other fossil fuels; when burned, it emits around 25 percent less carbon dioxide (CO2) than crude oil and 40 percent less than coal.

Atomic energy has an even better record on CO2 emissions, but Japan’s confidence in nuclear power was heavily shaken by the accident at the Fukushima No. 1 nuclear power plant in March 2011. Nuclear energy’s share of Japan’s electricity generation subsequently dropped to 2 percent. Natural gas stepped into this gap and now accounts for nearly half of Japan’s electricity output, up from less than 30 percent before the earthquake.

The usage of renewable energies also needs to increase, yet renewables will not be able to meet Japan’s huge energy demand any time soon. As a result, the country will remain heavily dependent on gas for the foreseeable future.

This makes the shale gas boom especially good news for Japan.

There is another big difference between gas and oil; whereas gas can be found all over the world, oil production is concentrated on the Middle East.

The keyword here is “diversification.”

Daniel Yergin is an economic analyst whose recent work, “The Quest: Energy, Security and the Remaking of the Modern World,” recounts the drastic changes sweeping the global energy scene. He claims the United States will start to “export moderate amounts of liquefied natural gas (LNG)” to Japan in the future and adds that it is “really important for Japan to diversify its sources of LNG.”

Akira Ishii, senior visiting researcher of the government-affiliated Japan Oil, Gas and Metals National Corp., agrees, with one caveat.

“While it’s important to increase the number of suppliers, diversification also demands that Japanese firms engage directly in resource exploitation in other countries,” says Ishii. “In this sense, it's good that these companies acquired stakes in shale gas developments in the U.S. and Canada.”

It would indeed enhance Japan’s security if it could obtain energy from a variety of countries in a number of ways.

There are several problems with shale gas extraction, though. For example, the process currently involves the use of chemical agents. There are environmental concerns with these chemicals contaminating underground water sources, and so on.

Furthermore, unlike crude oil, natural gases such as shale must overcome some problems to transport. Whether shipped in liquid form as LNG or delivered through pipelines, the cost of gas only increases the farther it has to be transported. This is why natural gas prices differ from region to region, unlike crude oil costs.

Japan currently buys gas from places such as Qatar of Middle East for $17 (1,350 yen) per thermal unit (1 million BTU). By contrast, in the United States, where gas is produced domestically, it costs just $3 per unit. This high cost has caused Japan’s trade deficit to balloon.


Let’s assume global gas development can proceed in a way that takes green issues and the concerns of local communities into account. Let’s also assume that the global trade in gas expands briskly from hereon. Under this scenario, what would happen to gas prices?

The International Energy Agency states that if such a “Golden Rules Case” came to pass, in 2020, gas prices would be $5.40 in the United States, $10.50 in Europe and $12.40 in Japan.

Let’s now assume that Japan can acquire all its gas at this price by 2020. As gas rates are partly determined by the cost of raw materials, the average Japanese household would shave around 5,000 yen off its annual gas bill. With costs having risen to such high levels, this would certainly provide a boost to family finances. It could also help rein in rising electricity bills to some extent.

Shigeru Muraki, executive vice president at Tokyo Gas Co., believes this could be possible.

“In Asia the cost of natural gas is linked to crude oil prices, but we need to cap price fluctuations as much as possible," he says. "If the public and private sectors in gas-consuming countries can work together, it should be possible to lower gas prices.”

Importing gas from the United States is not that simple, however.

Countries who have signed free trade agreements (FTAs) with the United States can freely buy gas, but non-signatories such as Japan need to apply to the U.S. government for special permission. As a result, gas exports to Japan are currently barred. This even applies to those plants in Texas that have already signed deals with Osaka Gas Co., and so on.

At the same time, some lawmakers from the U.S. Democratic Party have voiced their opposition to any further exports, citing environmental concerns or fears that such a move would raise the cost of shale gas within the United States.

This, however, is not the opinion of Frank Verrastro, senior vice president at the Center for Strategic and International Studies. Verrastro, who previously held several senior positions in the U.S. government, says that in light of the special relationship between the two countries, the United States should treat Japan the same as it treats South Korea or other countries who have signed FTAs.

The topic of U.S. gas exports to Japan has also been raised privately during top-level talks between the two countries. Now that the Nov. 6 presidential election has been concluded, the U.S. government will probably sit down and examine the issue in more detail.


The other key to Japanese energy diversification is Russia.

In the wake of the shale gas revolution, Middle Eastern gas previously earmarked for the United States is now being shipped in large volumes to Europe. This has helped push down gas prices on the Continent.

This, in turn, has caused a lot of consternation in Russia, a country used to selling a lot of gas to Europe.

“Russia will face unexpected competition in gas markets, and we’ve already seen Russian officials trying to downplay the impact of shale gas,” says Paul Sanders, executive director of the Center for the National Interest, a U.S. think tank. Sanders also points to allegations that the government-affiliated gas company, Gazprom, is supporting environmental groups in Europe who are trying to block shale gas projects.

With its back to the wall, Russia has turned its gaze to Asian markets and is pursuing development in its far east. Last September, during an Asia-Pacific Economic Cooperation summit in Vladivostok, Japan and Russia signed a memorandum on building an LNG plant on the outskirts of Vladivostok. Under this memorandum, Gazprom and several Japanese companies will work together to start exporting LNG by as early as 2018.

Some voices in the Japanese government and private sector, meanwhile, are calling for a revival of aborted plans to build a pipeline between Japan and Russia’s Sakhalin Island. They say such a pipeline would be more advantageous from a national security perspective than a sole reliance on LNG imports.

So should we expect radical changes to foreign policy and so on in the wake of this global “shale gale” revolution? It will take a few more years before we can answer that question fully. Yet booming shale gas production in the United States is already having a subtle impact on the policies of many countries.

Since the accident at the Fukushima No. 1 nuclear plant, Japan has been hemorrhaging money for imports as energy costs soar. Energy saving is, of course, important, but Japan will still need to secure resources from elsewhere. To do so, it will need to keep a close watch on global changes, try to see a few steps ahead and act accordingly. Otherwise, there may indeed be a high price to pay.

TAKESHI YAMAWAKI/ Senior Economic Correspondent
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A shale gas mine in Oklahoma (Photo: Naoatsu Aoyama)

A shale gas mine in Oklahoma (Photo: Naoatsu Aoyama)

  • A shale gas mine in Oklahoma (Photo: Naoatsu Aoyama)

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