Will Japan do to us on gas what we did to it on ore?

There’s a unsettling story in The Australian today about a Japanese push to break the oil-benchmarked LNG contract pricing system:

JAPAN’S drive to sever the oil link in the pricing system for liquefied natural gas could slow development of Australia’s gas industry, oil and gas company Santos has warned, saying the current pricing system was important to funding new developments.

…The Japanese move — revealed in The Australian yesterday — is linked, in part, to an extraordinary boom in shale gas in the US that has driven down gas prices in the domestic markets there.

…In Tokyo this week, Japan’s Trade Minister, Yukio Edano, told LNG suppliers a “paradigm shift” in pricing was needed to contain Japan’s soaring energy bills. He cited the growing gas demand and the linkage to soaring oil prices as the reasons for the rise. But he did not offer a clear alternative.

…But if LNG prices drop dramatically, some oil-linked contracts that underpin projects in Australia could also be renegotiated under price review clauses.

…With US domestic Henry Hub gas prices of about $US3 a gigajoule at less than one-fifth of Japanese LNG import prices, this would probably raise US prices and bring down those in Asia, where all of Australia’s LNG is bought.

Holy cow, Batman. You might recall we did the reverse to China (and Japan) when we held the pricing power in iron ore in 2007, forcing customers off long term contracts into the spot market, sending prices skyrocketing.

This is the reverse of course, with the pricing power all with the customer as new, much cheaper, supply gears up to enter the market. Yet it has the same irresistible logic.

The story also says that many of the current LNG projects are based upon the assumption of $14 per gigajoule. I sincerely hope that that is not the case.


Houses and Holes
Latest posts by Houses and Holes (see all)


  1. My spider sense continues to tingle that all is not well with the project to build the worlds biggest coal-seam gas processing complex here in Gladstone. If they really are as far over budget as I have heard, perhaps they thought they could offset it in the future because they expected to sell squillions of cubic metres of gas at sky-high prices?

    I also have wondered why coal-seam gas prices are tied to oil prices. Coal-seam gas is not (as far as I’m aware) the same thing as liquid petroleum gas, and has no use as automotive fuel, being used instead for electricity generation. Probably should be a price distinction between automotive-usable gas and gas strictly useful for power generation, with the price of the latter being more closely related to the price of thermal coal.

    Which is what has been knocking around in my head for a while – it suddenly appears that the world may in fact, not be severly constrained for coal supply going forward. Nor for LNG.

    Surely LNG has storage issues as well. If I can’t use all the coal I’m contracted to buy from you, I can just use a fleet of D12 bulldozers to scrape flat a huge are and keep piling up the excess. If conditions dictate that I can’t use above a certain quantity of gas, I can’t just stockpile it – that’s physically impossible owing to the nature of the substance. I need to build expensive storage facilities, and once those are at capacity, it’s phsically impossible for me to take any more gas.

      • How about those soaring RE prices and rents in Rocky Lef-tee?

        I see all those ” buy property in Rocky NOW” get rich quick schemes on the plane every week.

        If it goes pear shaped, lots of property to hit the market there I suspect.

        “it suddenly appears that the world may in fact, not be severly constrained for coal supply going forward. Nor for LNG.”

        Peak energy , as we know it, is far off. Crude prices are where they are because delivery and trade in it’s instruments is hostage to cartels of one kind or another.

        • You should see the amount of new housing developments here in Gladstone GSM.

          But you’ll need a six-figure salary – ordinary income earners need not apply.

  2. Makes sense that LPG – usable for automotive fuel – should be priced seperately to coal seam gas, which as far as I’m aware, has no automotive application and is strictly for electricity generation.

    • Coal seam gas aka methane or natural gas powers vehicles all over the place. See Natural gas vehicle at wikipedia. This is not rocket science.

      Tip: a few seconds on Google would save you the embarrassment of looking like a know-nothing.

      • I didn’t bother RTM because a person I know working on the project told me it is unsuitable for automotive fuel. I will tell them on your behalf that they are a know-nothing.

      • Hmm – you’ll have to forgive me for not having heard of it since the leading users of it according to wiki are places like Iran, Pakistan and India. All over the place….heavily in the middle east.

        I’d be careful about using Wikipedia as an unimpeachable source of truth.

        • Well, all due respect mate, but an example exists in Australia. Brisbane City Council runs about half it’s buses on LNG, and is on its way to 100% as it retires old buses.

      • Natural gas as a vehicle fuel is usually used only for large, heavy vehicles because it cannot be compressed as much as LPG without also being chilled. So for smaller vehicles such as passenger cars, the size of tank required for a reasonable range (combined with a shortage of suitable refuelling stations) makes it fairly impractical.

        Best use is for vehicles such as buses which return on a regular basis to a base where they can refuel. Some ACT buses run on natural gas.

          • There are only about 1500 refuelling stations in the US at the moment, about half of which are available to the public. As for Australia … have you tried to get CNG in, say, Wilcannia?

            I agree that this can change quite rapidly. In Brazil, for example, the number of CNG vehicles has expanded fivefold in the last few years to 1.5 million. But that still doesn’t make it practical here and now in Australia.

      • PS, Lef-tee, the person you spoke to may have meant that natural gas cannot be used as a fuel for cars in Australia with their current engine configurations (even if adapted). This is true. By contrast, quite a few cars sold in Australia can be adapted for LPG use.

        • Yep, that’s what I thought Alex.

          In-laws – who do a lot of travelling in a caravan – have their car set up for petrol/LPG. They say it tows the van ok on straight, flat stretches but uphill it isn’t so good. Still worth the dual system for them as long as LPG is cheaper than petrol.

          Revert2Mean, what say you? Is Alex a know-nothing as well?

          • You’re both low wattage posters, IMO. You asked. Compressed natural gas is almost certain to be the fuel powering most Australian vehicles within 20-30 years as conventional oil and LPG runs out.

          • You need to turn your wattage up R2M, your light bulb is looking a bit dim. You’re making projections as to what MIGHT possibly exist in the future, I’m talking about how things are in the here and now.

            If you can show me your patented idea for licking the problems involved with using LNG to power conventional vehicles, I might even buy shares in your future company.

            For now, I think it’s best to admit that everyone ends up looking like a donkey occasioanlly – today it was your turn.

          • There are over 20 million vehicles running happily on CNG today, many of them sedan cars. There are passenger cars running on CNG manufactured by the major car makers.

            What part of this do you not understand?

            All Australia has to do is start selling the vehicles. You can refuel at home. It’s happening all over the world right now, and will be happening here soon too.

          • Actually, Revert2Mean can claim bragging rights here – it is I who am looking like the donkey here, not him.

            The technology is certainly proven and appears pretty much as reliable as petroleum engines overall and CNG vehicles are an expanding industry. I’m just surprised I’ve never heard of it before.

            I think it does have an extremely powerful and long-established competitor though in the oil industry though. Also, while the fuel burns cleaner than petroleum, there are significant environmental questions surrounding the extraction process, chiefly where agricultural lands overly the coal seams. Should we allow productive agricultural land to be damaged in pursuit of a cleaner fuel?

            I can see the possibility of an increased proportion of vehicles in Australia running on CNG but I’m not sure that it’s going to bump off petroleum in the next 20 years.

        • 5 stage compressor??? What makes you say that? To compress natural gas you won’t use an axial compressor. They are used when there is a need for a high flow rate. For natural gas generally a diaphragm or reciprocating compressor would be used. I’m not sure about the legality of doing that at home but yes more likely would be made illegal. How would the Gov get its excise otherwise…. The safety reason will be invoked though.

  3. the word I’m looking for is sobering, and I think it’s likely true that lower prices are here for a bit and Japan will push ahead.

    I don’t have the data, but in the 70/80’s I was told that Japan pushed down prices on copper and other minerals out of MtIsa and other sites. I’m sure it’s nothing more than the market working to get the best price in most cases, but what we’re entering now is uncharted so high energy prices will kill any recovery so maybe that will drive prices down naturally without Japan pushing??

    • The main issue with the natural gas market at present is that it remains largely regional. Unlike crude oil, where around 65% of production is traded internationally, only 30% of natural gas production is traded internationally, with around 20% moving by pipelines and a mere 10% traded as LNG.

      The current price discrepancy (the main US benchmark is sitting at $2.8 per btu against around $17-$18 for Japanese imports now) is the result of the unconventional (shale) revolution that took off earnest in the US 5 years ago, and the Fukushima disaster in Japan. Monthly US shale production has risen from 4 billion cubic feet in Jan 2007 to 25 bcf in July 2012. Thus prices collapsed. On the other side of the ocean, Japan has shut down all its nuclear reactors in response to the Fukushima disaster. Nuclear power accounted for 30% of Japan’s energy generation, a gap it has primarily filled with natural gas imports. Thus import prices rose from $12 before the nuclear disaster to over $17 today.

      What Japan is pushing for is a global natural gas market instead of a regional one, and the abandonment of the outdated long-term contract pricing system linking natural gas prices to the oil price, in a bid to hasten price convergence across regions.

      The question for me is how much the US is prepared to export. The vast majority of gas production in the US is unprofitable below $4, so producers there are understandably keen to cash in on the export market. But I am not sure that much will actually be allowed to leave. The unprofitably low prices seen now are a result of a short-term glut, as the US economy adjusts and high cost producers shut down, prices will rise to a more reasonable level. Crucially, the shale revolution has presented the US with a viable way of weening itself off a dependence on energy imports; oil imports have fallen a good 20% since 2005, and this shows little sign of abating, as Thursday’s crude oil inventories surprise demonstrated.

      That being said, I think the natural gas market will continue evolving into a more liquid, global one, as mobile LNG supply continues to increase as a proportion of production. I haven’t seen the costings on most of the local LNG projects, but I understand that most have long-term contracted buyers. I hope they’re iron-clad.

        • constant gardener

          3d1k, good to see you link TAE. I think your thinking in this forum is amongst the most balanced/realistic ones.

        • Thanks, 3d1k.

          I imagine some gas will allocated for export in the US, but I doubt they will allow the tidal wave of exports that would be required for prices to converge. Diversion of Canadians supplies from the US market to Asia, may be a different story.

          Yes I’m familiar with that shale ponzi meme. I recall a piece from naked capitalism posted here, actually. I’m sure the collapse is nigh, but for now production is at an all time high:

          The main trouble with this thesis is that it’s spot on regarding the irrational exuberance that the sector has succumbed to in recent years, but fails to differentiate between the two types of irrational American exuberance. The first involves some major new technological breakthrough that boosts productivity and whips market participants into a frenzy of investment, borrowing and buying. People rightly recognize that the game has changed, but overestimate the degree to which it has changed. This occurred in the 1990s and the 1920s. Barry Eichengreen has an interesting paper on this topic: http://www.bis.org/publ/work137.pdf

          The second kind involves asset price inflation for no good reason. This is what happened with the subprime mortgage crisis.

          Both involve too much debt and both involve a nasty hangover.

          But in the first instance, when the dust clears, the technology remains. We still have assembly line production innovated in the 1920s, and we obviously still have the internet to show for the dot.com bubble in the 1990s. This is the case with shale gas, which is why it is erroneous to equate the manic behaviour associated with the shale gas bonanza with the subprime mortgage crisis. There is a shakeout underway in the sector, but once prices recover to $4-$5, the US will have a stable industry and decades of cheap energy. Long enough to figure out space-based solar, is my hope.

          • MJV,
            I will have to do more analysis, but don’t you think given the collapse in both new drilling and the well production fall off rates that ,demand remaining constant with NG domestically US, that prices will go a lot higher than 4-5? In 2010 NG was over $7 for example.

          • I doubt it GSM, at least not for the next 10 years or so. As I mentioned, the supply increase is absolutely enormous, if US gas demand doesn’t change, I couldn’t see prices moving much higher than $5 in the medium term. Of course, gas consumption is likely to rise considerably, so perhaps it will be enough to pull prices past that. A lot will depend on the oil price I would say.

            That being said, as I understand it, the long-term supply metrics (‘100 years’ of gas!) are based on prices being around $8.

        • I’ve been reading the same types of shale gas is doomed reports for over 2 years now.

          All of them use the same reasoning which is that the old wells they have looked at are not productive enough to make money at current prices. Well duh of course they aren’t. They were drilled when the expectation was prices would be materially higher than currently exist.

          The problem with their conclusion of imminently higher gas prices though is twofold:

          1) Like for like well productivity continues to improve as lateral lengths increase, frack stages increase and per frac productivity improves. In addition per frac drilling and completion costs are falling. See for instance Encana’s latest corporate presentation where they show the price required to earn a respectable return continues to fall in their Montney play in Canada (pg 26).

          2) Producers continue to discover and bring into production liquids rich plays that also produce substantial natural gas (e.g. the Marcellus).

          See the EIA’s latest weekly report http://www.eia.gov/naturalgas/weekly/.

          • Persons like myself who are in the oil and gas producing business, and have followed the predictions of EIA for the past couple of decades, know not to put much stock in the EIA’s predictions.

            Go back and look at some of EIA’s predictions for world oil production and oil prices during the 1990s and early naughties, and compare that to what actually happened, and you will see why the EIA has almost no credibility.

            Also, one should look at corporate reports as being as much salesmanship as truth-seeking.

        • @3d1k


          It costs $7 or $8 per MCF to produce an MCF of shale gas, and it’s been selling for $2 to $6 per MCF in the US market for the lasat three or four years.


          That’s not much of a business plan.

          One should not underestimate the power of derivatives, though. Almost all the independent oil and gas producers hedged their production back in 2006 to 2009 when prices were much higher. The natural gas producers have therefore not taken the brunt of the rout in gas prices. I suppose one could say that the US government, with its massive subsidies to keep the finance industry afloat (it’s the finance industry which wrote the natural gas hedges), is the party who really took the losses.

          The hedges are now beginning to run out, though.

          The mythology of “free markets” in the energy sector has been kept alive with the use of some pretty creative propaganda. It has about as much basis in reality, however, as the Garden of Eden. “Free markets” in the energy sector have not existed since Texas’s governor Sterling sent in the Texas Rangers to shut down the East Texas Field back in 1931:


          A great read on this is Nicholas George Malavis’s Bless the Pure & Humble.

          Humble Oil Company grew up to become Exxon, and Pure Oil Company was merged into Union Oil Company and finally into Chevron.

          • Thanks a lot for the link energywonk, I saw a similar chart some time ago to the one posted in that piece, only the break-even price for the bulk of the plays displayed was $4. This is the first time I’ve looked at NG in earnest in months, seems my facts were amiss or my memory failed me.

            Long henry hub is looking pretty good. I liked the long when it was under $2 and there was buzz around the US exporting; basically free money if you could manage it moving a little further against you, had to revert to break even eventually. I didn’t have the platform to do it at the time though and watched in dismay as it rallied some 50%. I would have targeted $4, but it seems that may be too conservative.

          • Get back to me in a few years with those Goldman Sachs projections when we see what those Marcellus wells will actually do.

            You have to recall that back in 2007 and 2008, when the Barnett Shale play was in its heyday, those same Wall Street types who are now touting the wonders of Marcellus Shale were touting average reserves for Barnett Shale wells at 4 or 5 BCF.

            Where are all those beautiful reserves now? According to the most recent figures from the Texas Railroad Commission, there are a total of 16,213 wells in the Barnett Shale which have produced a cumulative of 10,494 BCF. That’s only .65 BCFG/per well. In the first four months of 2012, the average production from a Barnett Shale well was a little bit north of 300 MCFGPD.


            So you have wells that cost about $5 million each to drill and complete, that have produced on average a cumulative to date of 650,000 MCFG per well, and are currently producing on average only 300 MCFGPD.

            To assign 2 BCFG of reserves to the average Barnett Shale well is extremely generous, and the average cumulative production is probalby going to be much closer to 1 BCFG per well. At 1 BCFG per well, just drilling and completion cost is $5 per MCFG, which doesn’t include royalties, production costs or any ROI for the gas producer.

            For the Wall Street types, the next new shale play is always better than the last one. The actual history of production from these shale plays, however, has fallen well short of the hype.

  4. The Japanese company Inpex is investing 34 billion dollars into the Australian economy for the Ithycus gas project. At the time of inception the gas price was $14. I was under the impression that the price had dropped dramatically since then.

    Either way there is very little chance of any gas projects being cancelled. Since the Tsunami in Japan closed the majority of the nuclear power plants, the demand for LNG has increased and increased for the long term.

    It would be in the national interest of Japan to be released from the current pricing system. Given their balance of payments (not healthy) they really need to get their energy as cheaply as possible.

    Its not personal, its business.

  5. If the oil-benchmarked LNG contract pricing system does indeed break then an expansion of the domestic LNG market could become an avenue to fill some of the demand gap towards the end of the decade. Domestic energy security.

  6. Bloody oath. Its 283/GJ in US right now!!!

    I don’t buy the stranded US gas argument……. at those prices someone will figure out how to get it out, at very least you get indirect leakage via more competitive manufacturing etc. it makes almost no sense to have a global pricing regime anymore as everyone just got endowed with shedload of gas (unconventional). local pricing makes a lot more sense.

  7. What’s the word limit on the spam filter?

    Mod: more than 500 I think, plus there’s keyword and link filters in place (and the occasional filter on 3d1k’s advertising)

  8. Confusion above between LPG (liquified petroleum gas) and LNG (liquified natural gas). LPG is usually produced in a petroleum refinery as part of the process of fractionating crude oil into various types of products. It is a mix of propane and butane, in different proportions depending on the market and the time of year. It is what is used in most gas powered cars as well as in barbecue gas bottles. Also used for domestic heating and cooking where there is no piped natural gas.

    LNG is processed from natural gas, which comes out of the ground as gas, either from oil fields, underground gas reservoirs, or from shale or coal seams. Natural gas is predominantly methane, mixed with various other hydrocarbons, hydrogen sulphide and other impurities. The impurities are removed before the natural gas is either piped to users or compressed and cooled until it becomes liquid (LNG), then exported using large cryogenic tankers.

  9. Darn, I think I have just blown the word limit with a post explaining the difference between LPG and LNG. Mod, could you please rescue it.

  10. “It is what is used in most gas powered cars”

    That was my understanding as well Alex – LPG is automotive fuel while LNG is used mostly in electricity generation.

    If you’ve ever tried towing a load uphill while running on LPG, you’ll understand why petrol and turbo diesel are more popular.

    How much energy does methane release when burned in an internal combustion engine versus petroleum I wonder?

        • Hard to say. It is worth reading the comments thread on the post I linked to below. LNG certainly has its supporters in the US, some of whom are actually driving LNG cars.

          • An increasing number of vehicles worldwide are being manufactured to run on CNG, eg. the Honda Civic GX.

            As of December 2009, the U.S. had a fleet of 114,270 compressed natural gas (CNG) vehicles, 147,030 vehicles running on liquefied petroleum gas (LPG), and 3,176 vehicles running on liquefied natural gas (LNG).

            In other countries, there are millions of CNG vehicles. Worldwide, there were 14.8 million natural gas vehicles by 2011, led by Iran with 2.86 million, Pakistan (2.85 million), Argentina (2.07 million), Brazil (1.70 million), and India (1.10 million).

          • “As of December 2009, the U.S. had a fleet of 114,270 compressed natural gas (CNG) vehicles”

            The total number of passenger vehicles in the US is around 250 MILLION so it’s currently a drop in the ocean as far as the US is concerned.

            Maybe if petroleum runs critically short in the medium-term future and nothing better than CNG has come along……..

            70% is a lot of power to give away.

        • choice is a fine thing lef-tee.
          Whilst choice exists between liquid fuels and gaseous fuels, liquid fuels win.
          Can we for the sake of argument, remove that choice ?? What then??
          Fuel cells love methane. So the urban shopping trollies are good to go.
          But, Locomotives and roadtrains don’t work as fuel cell targets. ( nevermind bulk ore carriers on the high seas. )
          What to do? Grow bio fuel praps.

          Whatever, the challenges aren’t that immense,if we can master our demand for such fuels. Efficiency is key

      • The issue with methane is not its energy density but the critical point [−82.3 °C (190.9 K) 45.79 atm (4,640 kPa)]. At temperatures higher than -82.3 °C the system will go from a liquid state to a gas no matter how much we increase the pressure. In other words methane is hard to handle. Cryogenic liquids are usually stored at atmospheric pressure in well insulated containers continuously boiling. The rate of boiling keeps the liquid just under critical temperature. The vapors are either used or lost.

      • More great work everyone. I favour flex fuel vehicles and utilizing energy endogenous to countries. In Australia CSG LNG etc seem a logical choice. Gas really is a great transitional fuel. It’s not just doublespeak.

          • Ps read up on Boone Pickens and clean energy fuels corp. no spruiking but worth paying attention to this effort

          • Boone Pickens has been the head cheerleader for the US natural gas industry, so one should view what he says with a good dose of skepticism.

            Boone Pickens and the independent oil and gas producers lack the political power to stabilize natural gas prices. The Pickens-backed ploy in California to sell natural gas with a ballot initiative was a failure:

            Attempt to sell natural gas with a California Ballot Initiative

            In November 2008, California voters rejected a referendum by a 60% to 40% margin regarding natural gas. Pickens owns Clean Energy Fuels Corporation, a natural gas fueling station company[29] that was the primary backer of the November 2008 Proposition 10 on California’s ballot. Much of the measure’s sale of $5 billion in general fund bonds to provide alternative energy rebates and incentives ($9.8 billion after interest) would have benefitted Pickens’ company to the exclusion of almost all other clean-vehicle fuels and technology.[30]

            With the IOCs (Interntional Oil Companies) moving more and more into shale oil and gas production, however, the power relationships will surely change. I think you will find they have the political power to have the US government intervene under some pretense (maybe by exploiting environmentalism, as Pickens attempted to do, or the fear of fracking) so as to eliminate the market chaos. Once the IOCs have consolidated their position, I expect natural gas prices in the US to stabilize above $8 per MMBTU.

          • Your point is that Pickens comes from status quo and is arguing his own agenda,which I understand, my point was merely to illustrate Pickens is putting his money where his mouth is, as always, he has skin in game and clean energy fuels corp is world leader in LNG for vehicles. All energy start ups have always needed govt assistance so what?

          • energywonk said:

            Your point is that Pickens comes from status quo…

            Well actually my point is just the opposite of that, that Pickens does not come from the status quo.

            When I speak of “status quo,” I refer to folks like Dick Cheney. They have the political power, intend to keep it, wield it for their own personal economic gain, and everybody else be damned. Truly, there’s nothing like political power when it comes to getting one’s self out of a tight spot.

            Take Halliburton, for instance. Halliburton, due to some collossaly bad business decisions made by Cheney, was in crisis by the summer of 2002:


            The “status quo” has the political power to make asbestos liability go away, involve the nation in imperial wars (as in Iraq), and to do what Pickens can only dream of doing: having the government intervene on its behalf in order to trump the vagaries of free markets. In the case of Halliburton, its stock price pretty much tells the tale. By the summer of 2002, Halliburton stock had reached lows below $10 per share, well below the $30 to $50 range the stock traded at only a couple of years before. Of course we all know what happened next, and by 2006 Halliburton stock was selling for almost $80 per share.

            When the “status quo”—-that is the transnational energy companies like Exxon, Chevron, Shell, BP, etc.—-consolidate their ownership position in the shale plays, they will then wield their political power so that the government will intervene into natural gas markets. This can take several forms. One is to tinker with the demand side as Pickens attempted to do, with nassuve government subsidies to spur natural gas consumption. Another would be to exploit environmental concerns or fear of fracking to constrict the number of drilling permits being issued. Fewer drilling permits mean fewer producing wells and therefore less supply of natural gas. Then “free markets” can work and natural gas prices will go up.

          • Ok fair enough I agree Pickens career has essentially been as a disruptor and I don’t have issue with your particular scenario. None at all really.

  11. Nobody really knows what kind of geological instability fracking might cause. All it takes is one monumetal disaster, like an anomalously large earthquake somewhere in a fracking region, and govenments around the world will hastily put the production on hold until further notice, which usually means indefinitely.

        • Not really. Fracture and stimulation history etc is easily found and a million videos on YouTube. If cement jobs are good etc and the industry is well regulated there should rarely be issues. Stochastic events are the only issue and this problem is something that standard risk models struggle with anyway.

    • that is ridiculous.

      speak to a geologist with a schmick about what you are suggesting and you will stop suggesting it!

      Cuadrilla caused a tremor in the Bowland shale because they injected directly into a fault.

      The energy required to create an earthquake is some beyond substantial!

      Do some reading on the Richter scale to get a clue on how much energy an anomalously large earth quake is!

  12. HnH . Your a champ., few people realise what you read , let always that is informed. To keep it civil on iron ore consumption , how much is EARC how much is hearth produced?

    All I know of production is :

    1. Korea is gas dependent

    2. Japan is gas dependent

    3.Turkish militatry pensions have been heavilly invested in industrial production