not all countries reacted the same way. Fukushima did not change the position of France, which produces over 75 % of its own energy needs from nuclear power. And it did not change the position of China either, which maintained its plans to build up to 70 new nuclear plants by 2020.
The nuclear world was polarized, but I was optimistic that common sense would prevail and that short-term knee-jerk reactions would give way to long-term constructive solutions and even safer power generation across the world.
There is, however, no doubt in my mind that Fukushima was a critical milestone towards the end of OPEC's dominance. Let me tell you why.
The sustained spike in natural gas prices
The close down of all nuclear capacity in Japan left a large gap in power generation that had to be filled by coal, natural gas, and crude oil.
The seaborne coal market was able to absorb the increase in Japanese demand with relative ease, but the much smaller market of seaborne liquefied natural gas (LNG) suffered a severe shock that sent prices skyrocketing.
Prices of natural gas in Asia more than doubled reaching over $20/MMBtu, equivalent to over US$110 per barrel of oil equivalent (USD/boe).2
Fukushima impacted other large Asian consumers, such as Korea, Taiwan, and China, who also rely on natural gas for their current and future power generation mix, reinforcing the perception that Asia would buy “unlimited amounts of gas, at unlimited prices”.
The imbalances could not be resolved easily, and the price of LNG for delivery to Japan stayed at an extremely high level for several years in order to direct any available LNG towards North East Asia.
In March 2014, three years after the Fukushima accident, and after extensive political debate in Japan, Japanese Prime Minister Abe announced his pledge to gradually restart nuclear reactors towards the end of the year, which will most likely ease the demand and domestic tightness of natural gas in the region.
However, the sustained high prices and optimistic demand expectations have been a major incentive to the development of new production and liquefaction capacity around the world. The list of producing countries and investments is long.
Look at Australia, for example, investing over half a trillion dollars in new LNG infrastructure to unlock large stranded reserves.
Or Mozambique, where local engineers in the mid-1990s were telling me how desperate they were to prove the large potential of the country, but where the perception among politicians was that it was not worth exploring. Ten years later, with the incentives of high prices and cooperation with international investors and companies, the country made some of the most important gas discoveries and infrastructure development in the region.
Or, even Cyprus and Israel, where large discoveries are putting them on the energy map …as producers!
Fracking and the collapse in US natural gas prices
While Fukushima created a demand shock and sharply higher global LNG prices, a quiet revolution had been taking place in North America for over a decade that had transformed the supply and drastically reduced prices of domestic US natural gas.
For decades, engineers knew about the vast amounts of natural gas resources that were trapped inside shale formations, but had not found a way to extract them commercially on a large scale. But the supply revolution which had started quietly in the Barnett Shale, Texas, in the early 2000s changed that.
“Not sure I told you before”, a senior member of one the largest sovereign wealth funds in the world told me, “I have a degree in nuclear engineering. My first job during the 1970s was to research the application of nuclear technology to extract natural gas from shale formations. It has taken a few decades, and a different technology, but I guess my fellow engineers have finally won”.
Indeed, production engineers had found a solution to unlock the gas trapped inside shale rock formations thanks to the combination of horizontal drilling and hydraulic fracturing. And the potential was massive.
The United States, once thought to be in critical shortage of natural gas, was now enjoying an abundance with enough supply to cover over 100 years of demand.
I remember the first time I heard “US energy independence is real”. It was in 2006, and I was meeting large oil and gas producers in Houston. I had endless debates about decline rates, lack of commerciality, environmental risks, the impossibility to replicate the success of the Marcellus Shale elsewhere in the United States, and other considerations. At that time the view was that shale gas would not be economical below$8/MMBtu and that decline rates would make the “fad” disappear soon.
But the reality turned out to be quite different.
By April 2012, following the unusually warm winter in North America, the price of US natural gas had fallen to $2/MMBtu,3 levels not seen for over a decade. The words of a good friend resonate in my head: “never bet against human ingenuity”.
The divergence in prices between North America and Asia had indeed been extraordinary. Exactly the same molecules of natural gas were trading at a 1000 % premium across the world. The implications are deep, and go beyond energy markets.
Access to abundant, cheap, and cleaner energy has been an important contributor to the recovery and enhanced competitiveness of the United States relative to the rest of the world. On the other hand, expensive energy has had a negative impact on the Japanese economy and competitiveness.
Looking forward, the combination of political and logistical constraints may keep these extraordinary differentials for several more years, but this will not last forever. The markets are sending strong signals, and the response is simply a matter of time.
US tight oil
The shale gas revolution is not just about natural gas. It is also about crude oil.
The engineering feats of horizontal drilling and fracking have been applied with great success in the extraction of crude oil from shale-like formations.
The impact of this “tight oil” is very significant, and has contributed to the growth towards record domestic production in North America.
I was in Moscow in 2006 when a senior executive of a large national oil multinational told me “shale oil is a bluff”. I started talking about the rapid development in technology and reduction in the cost curve, and how the trend would make tight oil economical within three years at above $70/bbl. I could see he was getting agitated. “I will not see shale oil reach a meaningful level of production, and neither will my children nor my grandchildren”. And four years later, during a debate in Spain with some peak oil defenders who had never seen an oil field in their lives, I was told again “shale oil is a bluff”. Yet, during that time, the production in North Dakota had increased threefold,4 twice as much as what doomsayers said would be “the peak”, contributing to the record US production, now as high as Saudi Arabia. Yet, still today I hear the occasional “shale oil is a bluff”.
Geopolitics and high crude oil prices
The oil embargo in 1973 had taken everyone by surprise, changed the energy world forever, and shaped international politics and economics.
Energy security became a top strategic priority for governments around the world, who were using any tool at their disposal
Conversion factor from 1 million British thermal units (MMBtu) to crude oil barrel (bbl) is 5.8 MMBtu/bbl.
Bloomberg and NARECO Advisors.
US Energy Information Administration.
