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In yet another reminder that we live in a global economy, events in Japan are setting up to boost liquefied natural gas (LNG) stocks in 2014 and beyond.
Japan's appetite for LNG has ramped up dramatically over the past several years thanks to the 2010 Fukushima nuclear disaster that prompted the closing of virtually all of that country's nuclear reactors.
As a result, we've seen a massive shift in how Japan generates its electricity. While in 2010 nuclear plants provided about a third of Japan's electricity, now they provide almost none.
Natural gas has been the fuel of choice to fill the gap. Power generation via natural gas has risen from 32% in 2010 to nearly half today, which is excellent news for LNG stocks in 2014.
In December, Japanese utilities set an all-time monthly record by burning nearly 5.3 million tons of LNG. And this trend is still just getting started.
What's more, the Japanese have increasingly been turning to natural gas to heat their homes.
But Japan has a problem - one that will ultimately benefit LNG stocks in 2014.
How Japan's Needs Will Drive LNG Stocks in 2014
Japan is already the world's biggest importer of LNG, accounting for nearly 40% of global demand.
But that LNG has gotten more expensive over the past year, thanks to the aggressive money printing by the Bank of Japan.
While the monetary stimulus is intended to stimulate Japan's long-moribund economy, it also has caused the yen to plummet against the dollar over the past year. That raises the price of imported products like LNG.
Combine that with dollar-denominated and oil price-tied LNG contracts (currently between $16 and $18 per million BTU) and you can see Japan's dilemma, especially when the price is closer to $4 per million BTU for natural gas in the United States.
Since Fukushima, LNG import prices are up 75%, according to The Wall Street Journal.
That means Japan has become desperate to find ways to reduce the costs of importing LNG. And several of the solutions it has come up with will support LNG stocks in 2014...
Utilities Unite for Better Prices: Since Fukushima, the Japanese utilities have seen an increase of 3 trillion yen in their fuel-purchasing costs.
So one plan to cut down on these costs is for the Japanese utilities to band together to get somewhat better prices.
Utilities joining forces to purchase at least 40 million tons of LNG annually include Tokyo Gas, Kansai Electric Power, and Tokyo Electric Power, the owner of Fukushima.
When U.S. exports really start to accelerate, it's very likely that the Japanese utilities will turn more and more to U.S. suppliers. And more agreements with Japanese utilities will boost the prices of LNG stocks in 2014.
Creating an LNG Futures Market: The Japanese are moving toward the establishment of their first futures contract for liquefied natural gas. The government's goal is to have such contracts trading by March 2015.
In May of this year, the country will attempt to establish a spot price for LNG.
In addition, the Tokyo Commodity Exchange formed a joint venture with Singapore energy broker Ginga Petroleum to set up an over-the-counter market for LNG derivatives. Trading there is expected to begin in May.
Oil and natural gas director at the Ministry of Economy, Trade and Industry, Ryo Minami, told The Wall Street Journal, "What we are seeking is reliable market influence on LNG prices."
Translation: We want the kind of lower natural gas prices that the United States enjoys here in Japan.
Buying in the United States: One of the most obvious ways for the Japanese to obtain cheaper prices for LNG is simply to buy it in the United States. This is already happening, though it poses a different sort of problem - the LNG still needs to be exported to Japan.
That, however, is not stopping the Japanese utilities from signing contracts with U.S. LNG suppliers.
Tokyo Gas has already signed a contract to buy 1.4 million tons a year of LNG from the Cove Point LNG project in Maryland starting in 2017. This project, controlled by Dominion Resources Inc. (NYSE: D), received Department of Energy approval in September for LNG exports.
The soon-to-be-approved Cameron LNG project in Louisiana, controlled by Sempra Energy (NYSE: SRE), counts Tokyo Electric (Tepco) as a future customer. The utility signed a contract to buy 800,000 tons a year of LNG beginning in 2017.
This is just part of Tepco's plan to purchase 2 million tons of U.S. LNG.
The second approved LNG project, Freeport LNG, also has several Japanese utilities signed up. These include Chubu Electric, Osaka Gas, and other Japanese firms like Toshiba. Freeport is 50% owned by ConocoPhillips (NYSE: COP).
These signed contracts - as well as the ones bound to come in the months and years ahead - represent a major tailwind for U.S. LNG stocks in 2014.
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- Money Morning:
LNG Stock Analysis for 2014
Tepco's Plan for LNG Buyers' Group, with 40 MT/YR Target
- Tokyo Gas:
Press Release: Progress Toward Achieving "Challenge 2020 Vision"
Euro Wins, Yen Loses Against Dollar in 2013
- The Wall Street Journal:
Japan Approches LNG Futures Goal with a Pair of Moves in May