By Tony D'Altorio
Under the threat of nuclear meltdown in Japan, global energy markets are roiling. Globally, prices for natural gas and coal – the two main alternative commodities for power generation – have risen sharply in recent weeks. They soared after Japan ordered the fossil fuels to help replace its lost nuclear output.
Ricardo Leiman, CEO of Noble Group (OTCPK:NOBGF) – one of the world’s largest commodities traders – sees Japan’s dilemma boosting demand for other energy sources.
“We think it is going to impact positively on thermal coal and [natural] gas,” he says. “The world is going to be reluctant to expand nuclear in a big way.”
So far, he’s right. Uranium prices are down 25% since March 11, while thermal coal prices have risen over 10%.
But really, liquefied natural gas (LNG) serves as a much better replacement.
Japan’s Love Affair With LNG
Along with South Korea, Japan uses the most LNG among its global peers. Even now, multiple projects are underway close to the country. That includes Australia’s massive Gorgon venture, where much of the output is bound for China. But those gas fields have more than enough to go around to meet Japan’s needs as well. And ever since the earthquake, Japanese utility companies have been actively locking in additional LNG multi-year contract agreements.
Fortunately for them, the country began expanding existing LNG terminals and adding new ones well before the earthquake. Obviously, those facilities won’t be ready overnight. But Japan’s nuclear problems won’t go away so quickly, either.
PFC Energy has a realistic estimate regarding Japan’s LNG needs. It bases the prediction on the country’s smaller earthquake in 2007, which took out 8.2 gigawatts of nuclear capacity. In the aftermath, Japan’s LNG purchases on the spot market jumped from 100 million tons to 500 million tons.
The recent quake took out 9.7 gigawatts of nuclear capacity; PFC calculates this could result in increased LNG demand of 500-600 million tons per month.
Invest in LNG and Profit From Nuclear’s Downward Trend
Investors can profit from nuclear’s downward trend in a couple of different ways, including investing in companies involved with major LNG projects such as Chevron (NYSE:CVX) and Royal Dutch Shell ADR (NYSE:RDS.A). Shell, in fact, already began diverting global LNG shipments to Japan.
But because Japan’s major ports and LNG terminals remain largely intact, there is a backdoor option: Shipping companies that transport natural gas should do quite well too.
Erik Stavseth, an analyst at Oslo-based Artic Securities, expects owners of the relatively few ships not chartered on long-term contracts to gas producers to do especially well. He says: “Given the tightness in LNG markets, where there are virtually no vessels available at present, LNG will be the shipping sector that is boosted the most.”
Many such companies trade on European exchanges, but U.S. investors can easily acquire Golar LNG Limited (NASDAQ:GLNG) and Teekay LNG Partners L.P. (NYSE:TGP), a limited partnership with a current yield of about 6.5%.
The current situation in Japan promises to have lasting affects. And that means liquefied natural gas likely has a strong future ahead of it.