Shizuoka Gas Company has successfully met the challenge of developing a natural gas market based on a stand-alone LNG terminal and smaller-scale LNG imports, with plans to supply a market doubling in size to some 1 million tonnes per year.
 

From the current sale of 46 mmcfd, or less than half a million tonnes per annum, to one million tonnes per annum of LNG within 10 years from today is a good target for the city gas distributor, Shizuoka Gas Company, of Japan. The company is operating about a hundred miles (160 km) west of Tokyo along the Pacific coast of the country and is headquartered in Shizuoka City, the capital of Shizuoka Prefecture. There are 229 gas distributors in Japan, and Shizuoka Gas is No. 6 in terms of the volume of sales.

Its licensed distribution area covers six municipalities and seven townships that include 300 thousand customers. Shizuoka Prefecture is nothing like the most densely populated areas such as Tokyo, Osaka and Nagoya, but has a fairly large concentration of industries in the east and west of the Prefecture. Shizuoka Gas' territory includes the eastern end, Fuji City at the southern foot of Mt. Fuji, where 13% of the country's paper is produced, thanks to the abundant water, spacious land, and good access by road and sea. There are other energy consuming industries also such as chemicals and pharmaceuticals in that area.

Like in the EU, Japan has a phased deregulation programme for power and gas utilities, and, in the case of gas, sales to customers who consume more than 17 mmcf/y have been deregulated. Because of a large industrial market in Fuji, the percentage of Shizuoka Gas' sale to deregulated industrial customers is 65% and much higher than the country's average of 40%. In other words, Shizuoka Gas has more industrial and less residential customers. This makes the business strategy and future of Shizuoka Gas Company different from many other gas distributors in Japan.

Before Natural Gas

Just like many other gas utilities in the western hemisphere, Shizuoka Gas Company originally manufactured gas from coal. Its business started in 1910, a quarter of a century after the imperial regime opened the country for modernization, with only 190 customers within the city of Shizuoka. The service continued to expand beyond the city limit, except when it was interrupted by the last war. The company lost 73% of its customers. Restoration of the war-torn industry and economy took a while but was followed by a very fast growth of the economy thereafter. The company's business grew in parallel. Coal plants were demolished and replaced by oil in 1962. It was technically better and cleaner, but it was not a great success especially after the first oil crisis in 1973 when the price of oil soared. The company suffered heavy deficits and took many years until it returned to a normal track of business.

When LNG was brought in to Japan by top power and gas companies in the late 1960's, only a very large quantity of imports appeared feasible because of the high cost of new technology. Shizuoka Gas had to wait until 1988, after the first generation of LNG from Alaska, Brunei, Abu Dhabi, Indonesia and Malaysia had supplied all the major power and gas companies in Japan. In those days, one million tonnes a year was considered to be the minimum feasible quantity. Shizuoka Gas' requirement was much smaller.

Preparation for LNG

The customers' demands were expected to exceed the capacity of the two existing naphtha-based plants in 1995. The alternative would be either to expand the facilities or to change to natural gas. The former would obviously be a less costly choice, but Shizuoka Gas decided to change their supply to natural gas.

Hurdles to Overcome: Nothing came easy for a smaller company, when Shizuoka Gas started to implement the plan.

1. A Stand-alone Terminal: The major buyers could enjoy economies of scale, because they were big in the first place and in addition a power company and a gas company could jointly build a receiving terminal and the power company could site its power plant next to the terminal. Moreover, they could work together to smooth out peak and off-peak demand. Shizuoka Gas had no such partner. Moreover, switching feedstock from naphtha to natural gas would take a number of years. In addition, hourly, daily and seasonal demand fluctuations were quite large. The facilities had to be designed to meet the maximum peak but also had to be controllable at the minimum level of operation.

Shizuoka Gas' LNG terminal came into operation in 1996. Despite having had to start with a very small quantity of LNG, Shizuoka Gas believed in its future and designed their terminal to accept a standard-size LNG ship. The unusual discharge of part cargoes was arranged with the help of the seller and the co-buyer, Tokyo Gas, for the first five years until the demand grew large enough and the second LNG storage tank was ready in 2001.

2. Slow Turn-over: A small demand and a large ship results in LNG stored in the tank for a longer period of time. LNG boils off and is enriched over time, whereas all Japanese gas utilities were committed to a very narrow band of heating value (1,235 Btu/std. ft3).. This required a condenser to reliquefy the boil-off gas and return it to storage - a very unusual arrangement in Japan..

3. Fear of Earthquakes: In Japan, Shizuoka is a synonym for tea because nearly 50% of Japan's tea is produced in the Prefecture but it is equally well known for the possibility of major earthquakes. Plate tectonics explains that Shizuoka sits close to where three plates meet, which has caused a major earthquake once in some tens of years. Facilities like an LNG receiving terminal are designed to withstand earthquakes of Magnitude 7, the largest on record in the area. The soil was improved and adequate numbers of piles were driven to prevent soil fluidization. The level of the terminal site was elevated to protect against a possible high tide that might occur at the time of a large earthquake.

LNG Imports

A 20-year agreement was executed between Shizuoka Gas Company and Malaysia LNG Sdn Bhd for sale and purchase of LNG from 1996 with an annual quantity gradual increase from less than 0.1 million tonnes initially up to nearly half a million tonnes in 2015. Shizuoka Gas has tried hard to find customers for the natural gas. As a result, the average annual growth of industrial sales in Fuji has been 27% per annum during the period of 1995-2003. This contributed significantly to the growth of the total volume of the company's sales, an average of 13% per annum, which compares with only 4 % per annum of the total city gas sales in Japan. This market development and the strategy for the future has been well recognized in the stock market, and Shizuoka Gas' share price has been close to the highest of all the gas companies, ever since it was listed in the Tokyo Stock Exchange in December 2001.

The general trend of the Japanese economy has been stagnant, but the local industries' awareness of the greenhouse effect and their interest in shifting to an environmentally friendly source of energy increased during the period. Such potential demand often becomes reality when old facilities are replaced. The company's sale of gas may well be doubled within 10 years if Shizuoka Gas could stay in competition with other sources of energy such as electricity, fuel oil and LPG. The price, after all, is of dominating importantance. The growth of sales will go higher than the contracted increase in supply of LNG from Malaysia. Shizuoka Gas Company has added a small quantity of LNG from the North West Shelf, Australia, on a 25-year agreement to start from 2005. The agreement was signed early in 2003.

Distribution Facilities

The growth of Shizuoka Gas' business is supported by its distribution facilities.

The LNG Receiving Terminal: Shimizu LNG Company owns and operates a receiving terminal in the natural deepwater port of Shimizu (a part of Shizuoka City). It is 65% held by Shizuoka Gas Company and 35% by Tonen General Sekiyu K.K., an operating arm of ExxonMobil Corporation. The terminal has two inground LNG tanks of total capacity 180,000 m3, and five Open Rack Vaporizers of total capacity 110 tonne/hour . Shimizu LNG receives, stores and regasifies LNG for Shizuoka Gas Company.

Shizuoka Gas Company had no terminal site of its own but was fortunate because it could collaborate with Tonen General who had a shoreline site where they used to have a small refinery. The oil tanker berth was converted to accept a full-size LNG ship. In a country where ideal industrial sites are so scarce, it is only a few -Tokyo Gas, Osaka Gas, and Toho Gas (Nagoya-based) - among many gas companies who have such luxury. Tonen General has plenty more space, and the two companies are currently discussing expansion of the LNG receiving facilities.

Major ports in Japan are already over-congested to the extent that regular visits of more ships carrying flammable cargoes are not always welcomed. This terminal conveniently sits between Tokyo and Nagoya and has a potential of supplying gas to both if and when pipeline connections are made.

Trunklines: The capacity of the 12-inch trunkline of 20 miles (32 km) which connects the LNG receiving terminal and the industrial market in Fuji will soon be saturated. The second 24-inch line is being laid, passing through mountains and across rivers, for completion in June 2004. Everything is costly in Japan because of limited land availability, local opposition, earthquakes and stringent safety regulations. This short 16-mile (26 km) trunkline costs Shizuoka Gas as much as US$150 million.

Shizuoka Gas will be connected to a domestic natural gas supplier in late 2006. Teikoku Oil Company, who produces some oil and gas onshore in Niigata, an area along the Japan Sea coast, owns and operates a 192-mile (310 km) natural gas pipeline to Tokyo and supplies their gas to distributors and industrial customers on the way before reaching Tokyo Gas. Teikoku Oil would be able to extend and expand their business if they pick up more gas at the midpoint of their pipeline route. Selling more gas always benefits Shizuoka Gas, as a higher load factor of its distribution system improves its economics. The first leg of the connection is a joint venture of Teikoku Oil, Shizuoka Gas and Tokyo Gas. Tokyo Gas has agreed to be a part of this scheme. They will be an indirect buyer of Shizuoka Gas once Shizuoka Gas starts to sell its gas to Teikoku Oil, but Shizuoka Gas and Tokyo Gas foresees the future when both territories are directly connected.

Mr. Akira Tsuji graduated from the University of Shizuoka Prefecture, Japan, in 1994 with a major study on international relations for which the school is very reputable. He then joined Shizuoka Gas Company and started his career with the department for design, construction and maintenance of the company's distribution network. In 1999, he was seconded to the Japan Institute of Energy Economics, the top research organization specializing in energy issues, whose main clients are the government offices such as the Ministry of Economy, Trade and Industry. He was involved in the research of natural gas de-regulation and LNG receiving terminals in Europe. He returned to Shizuoka Gas Company in 2001 and has since then been attached to the Corporate Planning Department, which is a core of the company engaged in all aspects of policy decision and strategy.