Can Japan Freeze American LNG Exports? – Sempra Energy (SRE), TOTAL S.A. (ADR) (TOT), Cheniere Energy, Inc. (LNG)

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The United States cannot approve or build liquefied natural gas, or LNG, export terminals fast enough to appease countries looking for cheaper energy. While there are many destinations from Europe to Asia that will be on the customer list, perhaps the most obvious finish line is Japan. The island nation is at the world’s mercy for much of its energy; it’s the world’s largest importer of LNG, second-largest importer of coal, and third-largest net importer of oil.

Sempra Energy (NYSE:SRE)Japan is acutely aware of its dependency on foreign sources of energy and is feverishly seeking cheaper power supplies. But even the pursuit of American gas, which is about one-sixth the price of Asian market prices, has not stopped the country from looking for longer-term solutions. Japan’s latest idea, if successful, could fundamentally change the global market and have major implications for domestic natural gas.

The future is cold
Anytime a country is 28th in TOTAL S.A. (ADR) (NYSE:TOT) production and 5th in consumption, it has to entertain some crazy ideas for bridging the gap. Topping that list is methane hydrate, a frozen form of methane which covers most of the planet’s surface. Global estimates state that there is more energy in the world’s reserves of methane hydrate than all other forms of fossil fuels combined. Why haven’t you ever seen or heard of this energy-packed ice? It is located in the world’s methane sinks – ocean floors and arctic permafrost – which are not very people friendly.

A massive bed of methane hydrate is located just off of Japan’s eastern coast about 400 kilometers southwest of Tokyo. Current estimates say the deposit holds enough gas to keep the country’s lights on for the next century. In fact, upon being brought to the surface one cubic meter of methane hydrate expands to 164 cubic meters of natural gas. Ice never seemed so valuable.

Source: U.S. Department of Energy

The Japan Oil, Gas, and Metals National Corporation is leading the first large-scale field test later this month to gauge the efficiency and safety of such a project. If all goes well commercial production could begin as early as 2018. There are many more questions than answers facing development, though. Disturbing large areas of the ocean’s seabed could cause massive underwater landslides, which could trigger tsunamis. The same disruptions could cause a multitude of environmental problems too, such as a large-scale methane releases or water acidification.

If we’ve learned anything from the development of shale oil and gas, it’s that environmental concerns often take a backseat. So no matter how you feel about the balance between risk and reward, if Japan can figure out a way to develop its large off-shore gas reserves it will.

Why does it matter?
Japan bought 85 million metric tons of LNG (116.5 billion cubic meters of natural gas) in 2011, which represented 34% of the total world market. The United States is widely believed to restrict exports – and keep a major manufacturing advantage from leaving its shores – to between 15 million and 52 million metric tons by 2020.

It’s important to note that no American company has permission to export LNG to Japan due to its non-free trade status. However, this requirement will likely be waived on a case-by-case basis since only one Free Trade Agreement country – South Korea – is a major importer of LNG. So if we look into the future, what companies would be affected by a more independent Japan?

Are American exports in the balance?
Cheniere Energy, Inc. (NYSEAMEX:LNG) and TOTAL S.A. (ADR) (NYSE:TOT) are currently the only companies sporting an LNG export terminal approved by Uncle Sam. Their Sabine Pass facility will be capable of shipping 15 million metric tons of LNG per year, with the option to add two liquefaction trains to increase capacity by 50%. Sempra Energy (NYSE:SRE) appears to be next in line for constructing a terminal, but must now get approval from the Federal Energy Regulatory Commission, or FERC. The company believes that its Cameron LNG terminal could be approved later this year and that construction could even begin as early as the fourth quarter.

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