A New Energy Relationship

Before the Fukushima disaster in 2011, nuclear power accounted for 30 per cent of Japan’s total electricity. Now only two reactors out of 54 are still in operation. Some of these plants will be restarted once it is assured that they can be run safely, but this process may take a long time under new strict regulations.

Considering these circumstances, fossil fuels would appear to be the only alternative to satisfy the huge electricity demand, as Japan’s expanding renewable energy sector is still not big enough to make up the difference. Liquefied natural gas will play the most important role because of its low carbon emissions and the wide availability of supply. Indeed, Japan’s consumption of natural gas has increased from 70 million tons in 2010 to 90 million tons in 2012.

However, increasing natural gas imports have had a very serious economic impact on the country. Because of its import price structure, which is linked to the crude oil import price, the price of liquefied natural gas has nearly doubled since 2011. Japan now faces the challenge of securing a stable energy supply for a reasonable price.

This is where Canada can help.

The shale gas revolution in North America has turned Canada into a new energy giant in the global gas market. The possibility of huge gas reserves in Western Canada and Quebec is attracting energy-hungry Asian countries, including Japan.

And Japan can help Canada too.

In 1994, NAFTA came into force in North America. Since then, Canada’s trade dependence on the United States has increased. Exports to the U.S. now account for more than 70 per cent of total Canadian exports. Specifically, fossil fuels such as gas and oil have become one of Canada’s main exports.

But Canada has to face the fact that the U.S. demand for Canadian gas will fall in the near future as U.S. shale gas reserves are developed. In this context, reaching out to new markets for exports, especially for energy, has become one of the country’s most important national economic concerns.

However, a number of factors need to be considered when it comes to Japan as a solution for Canada’s potential export challenges.

First, the global natural gas market is getting very competitive. Before the shale gas revolution, the global gas market was divided into a number of regional markets. But the rising supply of unconventional and liquefied natural gas is already leading to increased trade. Gas-rich countries such as Qatar, Australia, Russia, and Mozambique are already rushing into new gas projects. Canada is falling behind schedule compared to these countries. Japan cannot wait indefintitely for Canada to pick up speed.

This brings us to a second key factor: Canada’s openness to foreign investment will become only more and more important as competition increases. Canada is an attractive country for international investment because of its stable politics, steady economy, however its regulatory structure could be more efficient. The efforts of the federal and provincial governments towards the latter are highly appreciated, more needs to be done. And some recently announced energy tax increases in some provinces may have a negative impact on investment.

Third, as natural gas becomes a global market commodity, both importing and exporting countries should seek a new price mechanism in order to reflect the real demand and supply situation. For Japan, lowering the cost of natural gas is vital. Canada could do much to encourage a stronger energy relationship with Japan by moving this issue forward.

Finally, today we see more than five big LNG and pipeline projects underway in the western region of Canada. These projects have great potential when it comes to exporting natural gas to Asia, but huge LNG plants and other facilities all within a limited geographic area will require massive amounts of labor. Securing the labor force without creating tensions with local communities and rising labour costs will be a challenge. Furthermore, Canada’s complex relationship with First Nations groups could also undermine the smooth completion of these projects. Japanese firms, who always seek to be part of socially responsible developments, will be watching to make sure that energy projects are granted a social license to operate in these areas by all stakeholders.

Currently, Canada is the 14th largest exporter to Japan and the 16th largest importer from Japan. This is too shallow a level of trade when you consider the close relationship between the two countries. Increased trade in the energy sector could be the key to strengthening that relationship, providing the issues above are addressed, and an extremely valuable part of the possible Economic Partnership Agreement.