Committee: JNOC should take charge of Japan's pipeline network project

A subcommittee of Japan's Ministry of International Trade and Industry has recommended that state-owned exploration company Japan National Oil Co. take charge of the project to build a natural gas pipeline network in Japan. The recommendation is significant in that it not only seeks to find a new role for JNOC, which has consumed huge amounts of public money in largely unsuccessful E&D projects, but also signals MITI is now actively supporting the notion of a national gas pipeline grid.`


TOKYO�A subcommittee of Japan's Ministry of International Trade and Industry (MITI) has recommended that state-owned exploration company Japan National Oil Co. (JNOC) take charge of the project to build a natural gas pipeline network in Japan. The recommendation is significant in that it not only seeks to find a new role for JNOC, which has consumed huge amounts of public money in largely unsuccessful exploration and development projects, but also signals that MITI is now actively supporting the notion of a national gas pipeline grid.

As one industry consultant pointed out, "MITI's policy regarding the project has traditionally been one of benign neglect."

The subcommittee is expected to release a more detailed report on the project next month and will present firm proposals to the government next year.

The basic outline of the project is composed of three distinct components:

� A 2,500-km Pacific coastal marketing-distribution trunk line linking Japan's largest urban areas.

� A 2,500-km import trunk line, extending from a subsea intake site for Sakhalin gas at the northern tip of Hokkaido along the Sea of Japan coast to the intake point of a proposed trans-Asian pipeline near the strait that separates Honshu and Kyushu Islands.

� Several 200-300 km lateral lines crossing Hokkaido, Honshu, and Kyushu to link the two trunk lines and supply inland markets.

The development of a national pipeline system is seen by many as crucial not only to Japan's attempts to wean itself off publicly unpopular nuclear power and environmentally unfriendly fossil fuels but also to a fundamental restructuring of its economy. Japan is already the world's seventh largest consumer of natural gas, but the sector is notoriously inefficient in spite of moves by the government to deregulate the industry.

Current system
Only about 5% of Japan's total urban area is served by a piped gas distribution system. Even the three biggest city gas utilities�Tokyo Gas Co., Osaka Gas Co. Ltd., and Nagoya Gas�have distribution mains limited to 50 km from the nearest LNG terminal or synthetic gas plant.

The outlying service areas and the 200-plus much smaller city gas companies depend on truckload shipments of LNG or, even more commonly, LPG in bottles.

This inefficient and monopolistic distribution system means that LNG prices for Japanese consumers are estimated to be as much as five times higher than those in the US. It also leads a huge price gap: the average price charged by the country's largest gas utility, Tokyo Gas, is less than half that charged by the smallest utilities.

Only the country's electric utilities are not harmed by this setup. They are largely able to bypass it: Their gas-fired power plants are often adjacent to marine terminals and the companies are able to buy LNG in long-term, bulk contracts on the world market rather than from a local gas company.

Inefficiency biggest hurdle
Hikaru Yamada, a spokesman for Sprint Capital Corp. and a driving force behind efforts to establish a gas pipeline network in the country, told OGJ Online that the lack of such a system "is a serious burden to the competitiveness of Japanese industry, and if Japan is to maintain its status as an economic superpower, this is a problem that has to resolved.

"Without its development, the market will remain inefficient," said Yamada.

He also points out that the full benefits of the government's moves to deregulate the electric power sector and open it up to outside players will never be fully realized without the development of an efficient raw material distribution system.

A piped gas network would also greatly boost the use of natural gas in the manufacturing, commercial, and residential sectors of the economy, which is very low in comparison with other high-income countries, both on a per-capita basis and as a share of total energy. More than 50% of the country's natural gas supplies are consumed by the electric utilities. LNG fuels more than 25% of Japan's electric power generation.

Obstacles
Yamada concedes that there are some major obstacles to be overcome before any such project can come to fruition.

"The government will have to fight strong opposition from vested interests who benefit [from] the current way of doing business and a slow bureaucratic system that, too, has shown in the past that it is far from actively in support of a gas pipeline network. But perhaps most importantly, there is the question of who is going to pay for it."

There had been hopes as recently as a couple of years ago that at least part of the project might be funded by private capital. However, Yamada admits that the seeming inability of the Japanese economy to pull itself out of the quagmire means that the public will almost certainly have to foot the bill.

"Moreover, given that the true beneficiary of the system is the Japanese economy, it stands to reason that it is the state and not the private sector that should pay for it," Yamada said.

He maintains that the system, which would operate as a nondiscriminatory, open-access carrier, is very economically viable, but only if its development and operation meet rigorous economic criteria.

His sentiment is one that many analysts agree with. As one pointed out, "Japan has seen too many projects that on paper looked to make financial sense and yet ended up gobbling up huge amounts of public money because they were adjusted�with little or no regard to basic economics�to curry political favor."

More in Exploration & Development