Japan’s Second Round of Production Tests from Methane Hydrates is all about Energy Independence

What They Said

Japan’s Agency for Natural Resources and Energy (ANRE) recently announced the country would start its second offshore production test this month to dissolve methane hydrates and extract natural gas in the offshore sea area along Atsumi Peninsula to Shima Peninsula. The tests will be carried out in two wells and will be performed over a five-week period. Japan has an estimated 40 trillion ft3 of methane hydrates with the country aiming to commercialize production from the deposits by 2025.

What We Think

Japan has globally led the development of methane hydrates in recent years as it continues to pursue alternatives to its dependence on nuclear energy. In March 2013, the country produced 120,000 m3 of gas from methane hydrates using depressurization in a six-day offshore production test at the Daini-Atsumi Knoll. However, while a second round of production tests is indeed an indicator of Japan’s renewed interest in the resource, we see the country’s goal of commercializing production from the deposits by 2025 as highly doubtful.

Japan is the largest importer of liquefied natural gas (LNG) in the world, followed closely by its neighbor South Korea. The drop in oil prices has benefitted most LNG importers in Asia, with spot prices in the region falling by nearly 70%. With LNG exports from Australia and the U.S. set to flood the Asian markets by 2021, the costs associated with LNG imports are set to fall even further as supply in the region rises [(see the report “The Future of Natural Gas: What the Rise in Demand Holds for the Global Energy Landscape”) client registration required].

As LNG imports continue to grow more economical, we believe it is unlikely Japan will eventually commercialize its methane hydrate deposits without a strong regulatory backing or government policy. The country already has a well established gas infrastructure, with talks held earlier in the year for improving import relations with the U.S. Furthermore, the country is also investing in small-scale LNG projects to power its islands, with utilities such as Engie identifying Japan as the future hub for small-scale LNG demand. In comparison, outside two production tests in the last four years, the country has not invested in any infrastructure development for methane hydrate production. Despite its publicized interest in the deposits, it appears the country is still banking on LNG imports to meet its energy demands for the near term.

A possible explanation for the country’s interest in the deposits could be a precautionary move for energy independence with an outlook for a high gas price environment in the long term. As LNG turns gas into a global commodity, a scenario could exist where demand outweighs global supply, and gas prices justify production from expensive reserves such as methane hydrates. With that said, a commercialization date by 2025 seems improbable based off the current gas prices. Similar to the U.S. Department of Energy’s investments in hydrate research, readers should be wary that Japan’s interest in methane hydrates is largely for energy independence at this point in time. We don’t see the country producing from these deposits in the near future unless gas prices justify such an undertaking.

By: Harshit Sharma