Chris Bomshin Kim
Chris Kim attends Hangyang University, South Korea. His study focuses on international energy development strategies. Chris’ also a big fan of movies, and cat lover.
South Koreans are avid soccer lovers. There is a soccer term called derby match, where two rivals go head to head against one another. For the Korean’s this would be the haniljeon(韓日戰), where the Korean national team plays against the Japanese counterpart. Various historical, economic, and political issues have made Koreans collectively consider Japan as an almost subconscious rival, and football is where the nationwide sense of competition is displayed.
Beside soccer, another battle is arising in a new field: shale gas. But unlike in the sports, where the Koreans have had a vantage point over the recent years, the balance is not so much the same, as Japan took the lead.
Just what is shale gas? When refined, shale gas can be used like any other conventional gas. But because the shale formations containing the gas were difficult to reach from the ground, it was not until the technological leaps of “hydraulic fracturing” and “horizontal drilling” were found the shale gas saw commercial value.
With shale’s introduction as a future energy source, the U.S. became a new key player in the gas industry. The domestic consumption of shale gas has brought down gas prices; the U.S. gas prices are down from around $10 to $2.75/million Btu ( MMBTU being 0.019 ton). In fact, the gas is so cheap that the Americans operate gas-run power plants, and the industry watchers fear significant revenue loss due to overproduction. As for the government, they see commercialization of their massive shale gas reserves a “game changer” through which they seek to become a net energy exporter instead of staying as a net importer.
For other countries, especially those in East Asia, U.S. shale gas poses two important advantages: One is that it is in general cheaper than gas from the Middle East, the conventional energy source for Asia. The other is that the supply of American gas is unlikely to be disrupted than the Russian gas, which is often weaponized for political purposesㅡas seen now in Europeㅡ rather than remaining as a pure commercial commodity.
This is where the Japanese saw their opportunity.
On Friday, May 17, 2013, the Obama administration announced to allow Freeport LNG site in Texas export LNG (Liquified Natural Gas). This was one of those events that mark the American ambition to become a net energy exporter. Amid the decision, Japan, despite yet to strike a FTA deal with the U.S., became the first beneficiary to import US shale gas. Japan’s Chubu Electric Power and Osaka Gas are to import 2.2 million tons per year of US shale gas in the form of LNG, shipped to the Japanese archipelago for the next 20 years.
Following the Fukushima crisis in 2011, Japan has desperately sought to increase LNG imports to substitute nuclear energy on which the country has been dependent for so long. The new American gas was a jackpot.
The biggest consumers of LNG are concentrated in Asia, with Japan being the largest importer of the product, followed by South Korea. Gas suppliers have took advantage of this fact and have been selling gas to Asia at a higher price than other regionsㅡa practice often referred to as Asian Premium. Trading in LNG itself raised the production cost and Japan was again at a disadvantage. Then, depreciation of Japanese Yen added itself on the agenda as a result of prime minister Abe’s so called “Abenomics.”
This happened at a time when Japan’s gas prices are already five times that of the US’s. A cheaper, dependable gas from the country’s biggest ally was therefore a lifesaver.
Other than benefiting from cheaper gas, another advantage amounting to Japan’s interest is the one involving nuclear energy. Shale gas will be crucial in maintaining Japan’s less-nuclear-dependent energy outlook. In 2012, around 90% of electricity in Japan was generated by fossil fuel, either via imported LNG or petroleum. In the same year, hydropower only contributed 8%, while nuclear energy only did 2%.
To many, nuclear energy is deemed as the most effective option for the naturally energy-dry nationsㅡ which both Japan and South Korea clearly are. But such dependency does not alleviate its dire safety issue which lies at the center of the discussions. In that regard, it would be wise to incrementally lower the portion of nuclear generated-energy in the total generation capacity, even if the Japanese government is to reboot a few of its nuclear reactors. Filling in this gap with the American shale gas is therefore a positive step forward towards Japan’s new goal: running the world’s 3rd largest economy with safer and cleaner energy.
one of the world’s biggest buyers of gas was paying some of the highest prices for it. To make matters worse, electricity consumption in the country is expected to nearly double by 2035
Where the Japanese were successful, Koreans may want to press on harder. In 2012 alone, South Korea’s LNG accounts for 25% of total electricity generation, while coal and nuclear power does 40% and 30% respectively. On top of this daunting reality that a quarter of nationwide electricity consumption was entirely covered by imported energy, Korea had to pay $14.7/MMBTU for it, while wholesale gas price in the U.S. was just $2.8/MMBTU; and European Piped Natural Gas being $9.3/MMBTU. Simply put, one of the world’s biggest buyers of gas was paying some of the highest prices for it.
To make matters worse, electricity consumption is expected to nearly double to 70.2 million MTOE (Million Tonnes of Oil Equivalent) by 2035, from 39.1 million mtoe in 2011. Without plans for expanding nuclear energy usage, the country needs to find cheaper gas.
Furthermore, Korea does not wield the upper hand as a big buyer as it would have in other areas of commerce. Most of the gas comes from the Middle East, small portions from South East Asia and Australia. A limited number of gas producers combined with a near 100% dependence on imported gas gives the sellers an instant upper hand, thus enabling the whole “Asian Premium”. Striking a big time deal with the U.S. would not only mean cheaper gas, but a better position for South Korea when negotiating energy deals with other supplying countries, for instance, Russia.
Considering South Korea is as energy-deficient, heavily import-dependent, and nuclear-dependent as Japan, the Koreans may want to benchmark one more time in their strategies to replicate Japan’s success in adopting the U.S. shale for its own geopolitical and economic benefits. Indeed, this is something they should take more seriously than a soccer match.