Lot’s of stuff going on, all of them bad. But one thing is for sure, LNG demand will be the big winner from this..
FIRST came the squeeze on liquefied natural gas supplies. Now comes the demand pull after Japan’s massive earthquake and nuclear scare, prompting Slugcatcher to ask whether it can possibly get any better for Australia’s LNG industry?
Probably not is the answer, because LNG is in a sweet spot as demand for uranium stalls and gas power picks up the electricity generation shortfall in Japan.
Coal and oil will also emerge as winners from events in Japan, but the biggest beneficiaries will be companies producing LNG, including Woodside and Santos.
Next in line will be the emerging LNG producers, which will suddenly find themselves inundated with purchase orders and capital to accelerate construction plans.
Japan will be doing all the early buying, but other countries will chime in as they consider the pincer effect of the supply squeeze, which Woodside boss Don Voelte warned about last week, and the demand pull in a post-earthquake world.
Even without other countries rushing to place orders, Japan will single-handedly boost demand given its well-established infrastructure to handle LNG.
Japan already ranks as the world’s biggest importer of the fuel, accounting for 35% of global trade. In 2009 alone the country bought an estimated 86 billion cubic metres of the stuff.
With 11 nuclear power stations knocked out of action and Japanese Prime Minister Naoto Kan tipping power shortages for years to come, the slack will be picked up rapidly by gas-powered electricity.
If the crisis continues, and rolls into a global slowdown of nuclear power plant construction, then LNG demand will rise rapidly for years.
It is probably just the Slug’s imagination over-heating, but it seems that events in Japan will spark a dramatic rethink about how many LNG projects can be built around the Australian coast.
At last count there were more than a dozen proposed, fed by conventional and unconventional gas deposits, leading to a widespread assumption that not all would survive the tests of demand, capital availability, construction capacity and skill shortages.
Today, all bets are off because LNG is being seen as the fuel which will help restart Japan’s industry, and it is LNG which will be preferred over coal, when planned nuclear expansion plans get bogged down before a myriad of government committees around the world.
While the issue of demand is crystal clear, the question of future supply was not even on the radar screen of LNG watchers until just before the super-quake rocked Japan, reportedly shifting the entire country by 2.4 metres, according to global positioning readings.
On Thursday last week, PetroleumNews.net reported the latest musings of Voelte, a man who once worried about there being too many LNG projects on drawing boards in the Asia-Pacific region.
His latest thoughts were quite different; rather than talking about “windows of opportunity” in the hunt for customers, Voelte questioned whether enough new LNG projects were being built.
Perhaps he was merely talking up his plans to expand the fast-emerging Pluto project to four more stages.
But even if he was, his comments about there being no new LNG projects in Russia since Shell’s investment in Sakhalin, Iran shutting down, Yemen and Oman running out of gas and Qatar imposing a moratorium on LNG expansion could not have been better timed.
“It’s all about Australia,” Voelte said. “The key fact is nobody is building LNG plants around the world for various reasons; everything from political tensions to just not having enough gas left.”
Those comments underline the supply squeeze hitting the LNG industry and the possible shortage confronting gas customers.
Demand pull is what’s coming now as Japan scrambles to source every available shipment of LNG and rushes to place orders with projects yet to be built.
Managing the sudden surge of interest in LNG will be a major challenge for Australia, where shortages of construction capacity and manpower are already driving a severe outbreak of cost inflation – with much more pressure to come.
Then this from Jim Cramer:
I see a wave of rebuilding with natural gas being the preferred fuel. It’s the fastest to build and cheapest. I think if a country is tabula rasa, as Japan is now, it will opt for natural gas entirely because it is much cleaner than coal.
That means huge construction jobs with massive shipping requirements to Japan. It means materials and machinery will be in short supply and the Chinese government-mandated slowdown will be countered.
To build plants you need steel and concrete but, most importantly, aluminum and aluminum turbines. I suspect all of those commodities jump in price, along with the iron ore and copper needed to create the steel and rebuild the electronic infrastructure.
This money will all be provided by Japan so it will serve as a giant and quick stimulus to the world’s infrastructure and infrastructure-related businesses. The most obvious players include Alcoa(AA), U.S. Steel(X), ArcelorMittal(MT), Vale(VALE), BHP Billiton(BHP), and Freeport-McMoRan(FCX).
That should be the case immediately tomorrow, although overall fears, a la Chernobyl, might initially put a damper on the market. That would cause these stocks to go down slightly with the rest of the market.
They are, however, the go-to names if the smoke clears and people believe the worst is over. If not, then I think they would be more late-in-the day or second-day plays.
And Japan will not be the only one increasing LNG demand. From Bloomberg:
Japan’s worst nuclear accident in at least 33 years has compelled China and India to review plans for atomic energy that were set to provide a boon for suppliers including Areva SA (CEI) and General Electric Co. (GE)
The potential meltdown at a nuclear plant struck by Japan’s record temblor may be “a big dampener” on India’s program, Shreyans Kumar Jain, chairman of the Nuclear Power Corp. of India, said in Mumbai. The accident may become a factor in the drafting of China’s energy plans, Xie Zhenhua, vice chairman of the National Development and Reform Commission, said in Beijing.
India plans to spend $175 billion by 2030 on nuclear generation while China is adding 27 reactors in five years as the two most-populous nations seek cleaner energy sources to propel economic growth. Japan’s accident, a month shy of the 25th anniversary of the Chernobyl disaster, may reignite debate about the safety of atomic energy, Nuclear Power’s Jain said.
“The Japan accident has created a very, very tough situation for India, actual implementation of nuclear power projects will now certainly take a backseat,” said Debasish Mishra, Mumbai-based senior director at Deloitte Touche Tohmatsu. “It will be very difficult to sell the idea of nuclear power to people for any political party after the Japan disaster.”
The earthquake on March 11 knocked out generators at the plant in Fukushima needed to keep the reactors cool, raising the prospect of a meltdown at the facility. Authorities evacuated tens of thousands of people living within a 20 kilometer (12 mile) radius after an explosion destroyed walls surrounding one of the reactors and radioactive material leaked into the atmosphere.
“This event may be a big dampener for our program,” Jain, chairman of India’s state-run monopoly producer, said in a telephone interview yesterday. “We and the Department of Atomic Energy will definitely revisit the entire thing, including our new reactor plans, after we receive more information from Japan.”
State-owned Nuclear Power has sought more information on the accident from the World Association of Nuclear Operators, the International Atomic Energy Agency and its own official stationed at Tokyo, Jain said.
In China, the government won’t change its plans to develop nuclear power, Zhang Lijun, vice minister of environmental protection, said a day after the 8.9-magnitude temblor struck off the eastern coast of Japan. Local media said the death toll from the quake and ensuing tsunami may exceed 10,000.
China has pledged to cut carbon emissions by switching to clean energy such as nuclear and wind power. It wants at least 15 percent of its energy mix to come from non-fossil fuels by 2020 and is building more atomic plants to help meet that goal.
The nation’s energy planners say they aim to have 40 reactors by 2015 and, by 2030, enough additional reactors to generate more power than all 104 reactors in the U.S., the leader in nuclear energy. China National Nuclear Corp., the country’s largest reactor builder, and rival China Guangdong Nuclear Power Group Co. are looking to foreign companies such as Toshiba’s Westinghouse Electric Co. and Areva for their reactor technology, components supply as well as help with construction.
The nation’s nuclear power capacity may reach 40 gigawatts by 2015 and exceed 70 gigawatts by 2020, Han Wenke, head of energy research at the NDRC, said last June. China had 10.82 gigawatts of nuclear power capacity as of the end of 2010, the state-owned China Electricity Council said in February.
No Longer Sacrifice
Premier Wen Jiabao, who will today hold his annual press conference at the end of the National People’s Congress, said last month that China can no longer sacrifice the environment to achieve economic growth.
“The accident in Japan may trigger increased public concerns over building atomic plants,” said Dave Dai, a Hong Kong-based analyst at Daiwa Securities Capital Markets Co. “China will become more cautious while developing nuclear-power plants but is unlikely to alter its long-term nuclear development plans.”
The Chinese economy, which more than doubled in the past five years, surpassed Japan’s in 2010 to become the world’s second biggest. It is also the world’s biggest energy consumer and its largest polluter.
Most of the 155 reactors planned worldwide are in Asia, according to the World Nuclear Association. There are 442 reactors worldwide that supply about 15 percent of electricity and a further 65 are under construction, the association said on its website.
Global expansion of nuclear power may draw more scrutiny and skepticism as the world watches Japan struggle to prevent the meltdown, said Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission.
General Electric Chief Executive Officer Jeff Immelt declined to comment about Japan in New Delhi yesterday. Immelt is scheduled to brief reporters at an unrelated event in India’s capital today.
“In general, our business is going very well, but the situation in Japan is troubling,” said Vaughn Gilbert, a spokesman for Toshiba Corp. (6502)’s Westinghouse nuclear unit.
Patricia Marie, spokeswoman for Areva, declined to comment.
China has also been the site of some of the world’s most devastating earthquakes. A 7.5-magnitude temblor in northeastern China’s Tangshan killed 250,000 people in 1976, according to the U.S. Geological Survey. At least 87,000 people died in 2008 in a 7.9-magnitude quake in the southwestern province of Sichuan. A 5.8-magnitude temblor in southern China’s Yunnan province last week killed at least 25 people.
Indian reactors at Kakrapar in western Gujarat state and Kudankulam in the southern state of Tamil Nadu have survived an earthquake in 2001 and a tsunami in 2004, without any safety scares, Nuclear Power’s Jain said.
“But that doesn’t mean we can be happy,” Jain said. “Our new launches will have to keep in mind public sentiment and naturally this process won’t happen overnight.”