Kiran Stacey Further further thoughts on Japan’s effect on gas prices

The debate about what might happen to spot natural gas prices as a result of the Japanese nuclear crisis rumbles on. The latest view comes from IHS Cera, and differentiates between what might happen in 2011 and in 2012-2014.

As others have, IHS Cera begins its calculations (which aren’t available online) with the effects of the smaller 2007 quake, which knocked out 8.2GW of nuclear power and sent gas prices up to $20/mBtu. But its analysts point out that world LNG capacity is expected to have increased by half between 2007 and 2012, which should provide enough slack to keep a lid on prices.

But the fact is, LNG is already being diverted from the UK and elsewhere in Europe, and so we already know Japan’s needs cannot solely be accounted for by additional capacity. Instead, Europe will have to rely more on pipeline gas.

Luckily for consumers, says the report, there is enough pipeline gas around for Europeans to increase their imports significantly, which should keep gas prices beneath contractual levels throughout this summer.

However, the longer-term picture is different. Here is what the report says:

The outages and ensuing issues surrounding the Japanese nuclear fleet are not short term, and pulling LNG from Europe to meet additional demand further accelerates the appearance of a tight global market in 2012-14 – the same effect as from the abnormal weather in 2010.

It also covers a less-remarked on effect from the loss of Japan’s nuclear power: that on coal. While 12GW of nuclear power have been knocked out, 8.3GW of coal power have also been lost. This will be a significant blow to producers, especially Australia, which relies on Japan as the biggest importer of its steam coal.

The news is even worse given the slowdown in Chinese coal purchasing in the last quarter. But it may be that a drop in prices encourages China to start buying again, and put a floor under prices.

Further reading:
How much extra gas will Japan need?
More views on Japan’s effect on gas prices