Japan Seeks Free Trade Agreement and Easier Access to American LNG

(Bloomberg) — Japan’s bid to join negotiations for the Trans-Pacific Partnership trade agreement may make it easier for the nation to import U.S. liquefied natural gas, a prospect that is raising the hackles of environmental groups.

Japan, the world’s largest LNG importer, said March 15 that it wants to be included in the accord, which now encompasses 11 nations in Asia and the Americas. Bringing Japan into a free- trade agreement may boost companies trying to export natural gas from the U.S., according to Randy Bhatia, an analyst with Capital One Southcoast in Houston.

The Energy Department is reviewing 16 applications to build export terminals to ship supplies to countries that don’t have free-trade agreements with the U.S. Among the companies seeking to export gas are Sempra Energy of San Diego and Dominion Resources Inc. of Richmond, Virginia. Cheniere Energy Inc. has won approval for a facility that would begin exporting in 2015.

“Japan has been very clear that automatic access to LNG is one of the things they want,” Ilana Solomon, trade representative for the Sierra Club in Washington, an environmental group fighting those exports, said in an interview. Success for Japan would mean “we’ll be paying the price here, with more fracking in our backyards, near our schools, and next to our hospitals — only to help a handful of big gas companies profit by shipping natural gas overseas.”

2011 Tsunami

Incorporating Japan in the trade agreement would unite one country seeking new markets for booming supply with another nation desperate for imports to help it replace nuclear plants.

Japan is increasingly reliant on imported gas for electricity, following the March 2011 tsunami that damaged several nuclear reactors, and it’s relying on supplies from countries such as Malaysia, Russia, Qatar, Australia and Indonesia, according to the U.S. Energy Information Administration. The U.S. is not one of its top suppliers now.

Tokyo Electric Power Co., Japan’s largest utility, Chubu Electric Power Co. and trading company Sumitomo Corp. all have agreements to buy LNG, gas cooled to a liquid for shipment by tankers, from proposed export plants that have yet to win government approval.

In the U.S., booming shale-gas output has driven prices below those in much of Asia and Europe, creating an incentive for producers such as Exxon Mobil Corp., for more exports.

Price Differential

In Japan, imported LNG prices averaged almost $16.70 per million British thermal units, a measure of energy output, last year compared with about $2.83 per million Btu in U.S. natural- gas futures trading in New York.

“The history of world trade since the dawn of civilization is that commodities, labor and finished goods move from where it is cheap to where it is expensive,” Walter Zimmerman, chief technical strategist at United-ICAP, a brokerage in Jersey City, New Jersey, said in an interview. Given the current gap between U.S. and overseas prices, “it’s going to take quite a bit of movement to equalize this.”

Gas exports to most nations with U.S. free-trade agreements are largely exempt from Energy Department clearance. Shipping supplies to all other nations requires a government review, and a finding that those overseas sales are in the public interest.

So far two nations with free-trade accords with the U.S. — Costa Rica and Israel — aren’t covered by the natural-gas exemption, according to Bill Cooper executive director of the Center for Liquefied Natural Gas in Washington. For other free- trade partners “that authorization to export the commodity is automatic,” he said.

Sierra Club

However, outside groups such as the Sierra Club are fighting those facilities, as are members of Congress such as Representative Ed Markey, a Massachusetts Democrat. Some U.S. manufacturers, led by Dow Chemical Co., are seeking to limit gas exports, saying increases could raise their costs and damage their competitiveness by making gas more costly in the U.S.

“In principle Dow supports free trade and would support any nation concluding a free trade agreement (FTA) with the U.S.,” George Biltz, Dow’s vice president for energy and climate change, said in an e-mail. “In practice, we are still in year four or five of a 100 year energy advantage, and our view is that the US needs to continue to exercise prudence and balance as we apply the law.”

Export Goal

The Trans-Pacific agreement among 11 nations, including Brunei and Peru, is being drafted as a model for future accords as President Barack Obama’s administration seeks to double the value of all American exports by the end of 2014. Negotiators held the 16th round of talks in Singapore this week and are on track for reaching an accord by the end of the year, according to the U.S. Trade Representative’s office.

An agreement would be the biggest free-trade deal for the U.S., and the first new accord under Obama. The region represents more than half of global output and more than 40 percent of world trade, according to the agency.

After Japanese Prime Minister Shinzo Abe said his nation wanted to join the accord, a statement from the U.S. Trade agency welcomed the announcement, while adding that “important work remains to be done” on prior consultations.

The nations in the negotiations with the U.S. are Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Japan, the world’s third-largest economy, has hinted for years that it would join the talks.

Congressional Approval

If Japan were to become a free-trade agreement country — with natural gas act treatment — “it would give Japan access to U.S. exports from the United States,” Octavio Simoes, president of LNG operations at Sempra Energy, said in an interview.

Joining the talks doesn’t mean access to Japan will automatically open for exporters because an accord would have to include natural gas and requires congressional approval, he said. By itself, Japan entering the talks “doesn’t really do anything,” he said. The Sierra Club’s Solomon said U.S. negotiators have shown no inclination to exclude gas from any agreement.

The focus should be on having the Energy Department issue licenses to export to non-free-trade countries, Simoes said, citing benefits shown in past studies.

– Mark Drajem and Edward Klump, Copyright 2013 Bloomberg.