Analysis: Japan fails to divert LNG away from Europe

By Daniel Fineren and Edward McAllister

LONDON/NEW YORK (Reuters) – Fears that Japan’s nuclear crisis might quickly cut Europe’s liquefied natural gas supply seem unfounded, with twice as many LNG tankers heading for Europe as for Japan, shipping data has shown.

British gas prices surged last week on the worry that supply of the shipped gas would be immediately diverted to top importer Japan after an earthquake on March 11 knocked out 11 gigawatts of power supply.

But, ample supply in the LNG market has so far dampened the impact, as Asian suppliers quench Japan’s increased import needs. Russia, Australia, Brunei, Malaysia and Indonesia have all said they can raise exports. Some already have.

“There is so much South East Asian supply at the moment that can meet Japan’s needs,” said Steve Johnson, president of Waterborne LNG analysts in Houston, Texas. “We do not expect to see many cargoes drawn from the Atlantic Basin and maybe a few from the Middle East.”

Of 196 LNG tankers whose destinations have been logged by the AIS Live ship tracking system since Tuesday, only 16 were showing their destination as Japan, while 23 vessels have Europe as their next port of call. This is nearly unchanged from tanker flows seen on March 3, before the quake.

After rising nearly 15 percent following the earthquake, UK gas prices for next month have fallen more than 5 percent from a high of around 65.80 pence per therm on March 16.

Shortly before March 11, European imports rose to similar levels to that of top LNG importer Japan for the first time. And Europe still looks set to receive more super-cooled gas over the next few weeks than Japan.

“We believe the market has overstated Libyan unrest and the Japanese disaster in the short to medium term,” analysts at French investment bank Societe Generale said in a note. It expects Japan will need to import just 5 billion cubic meters (bcm) of extra gas this year, equal to about 1 percent of Europe’s annual gas demand.

Britain alone has at least nine LNG tankers due to arrive in the next two weeks (LNG/TKUK: Quote, Profile, Research), while another 10 are either in the Mediterranean or heading from Middle East producing countries — mainly global export leader Qatar — toward as yet undefined markets in Europe.

There are five or six tankers heading for undefined destinations in Asia, global shipping hub Singapore, or somewhere in the Pacific Basin — some of which may ultimately head for Japan.

EYES ON QATAR

Traders and analysts are closely watching what top exporter Qatar will do following the Japan quake. The UK’s main LNG supplier, whose export capacity has increased massively in recent years, said it can offer extra cargoes to Japan if needed.

“What the Qataris do will be very important. Qatar is in a position where it could solve the (Japan) problem single handedly. They have more flexibility than any other supplier,” said Frank Harris, LNG analyst at Wood Mackenzie in Edinburgh.

About five tankers have left Qatar for Japan since March 11, but so far there has been no marked increase in deliveries. Analysts said it could take time as needs are assessed and deals are discussed.

There could be a shift in supplies to Asia in the coming months as demand there increases more than in Europe. A lack of shipping availability will make it difficult for Atlantic Basin producers to make many long voyages east, meaning Middle Eastern and Asian suppliers may do most of the heavy lifting later this year.

LONG TERM ASIA DEMAND

In the short term, plentiful global supply of gas, thanks largely to a boom in unconventional gas production in North America, lasting economic lethargy in parts of Europe and Qatar’s huge increase in production over the last few months, should ensure Europe still gets plenty of LNG in 2011.

BofA Merrill Lynch Global Research estimates the global LNG market could remain oversupplied by about 29 billion cubic meters this year.

But in the longer term, the likelihood Japan’s nuclear power crisis will keep 11 GW of its nuclear capacity shut for years, perhaps forever, may mean less LNG for Europe and a return to overdependence on dearer oil-indexed Russian pipeline gas.

Soc Gen estimates that Japan’s incremental demand for gas will double to 10 bcm in 2012 as the country’s economy recovers from the demand-slashing destruction caused by the quake and tsunami but the affected reactors remain closed.

“With the LNG market tightening further on the back of Japan’s power crisis and continuing unrest in the Middle East, we see spot gas prices pushing higher,” BofA Merrill Lynch said in a research note.

“Some of the additional LNG volumes for Japan will come out of the Atlantic Basin, so Europe’s dependence on Russian gas could rise again.”

(Editing by Alden Bentley)

Analysis: Japan fails to divert LNG away from Europe