Japan’s Future Energy Policy

~the possibility of the Methane Hydrate~*

Tomoyuki Iriyama†

ETH Zürich

20.04.2011

Abstract

The energy resource is essential for us in order to keep a sustainable growth. Until last year, the

nuclear energy was the main stream, because it emits no CO2 and needs no fossil fuel(oil or coal,

natural gas). But in this March everything has changed. It happened that the nuclear power plant in

Japan was blown and released a huge amount of radioactive materials outside. The energy policy all

over the world stands at a crossroad. Japanese government also has to consider the future policy.

This paper reviews Japan’s energy history and current situation, then finds the problem. At the

same time I focus on the new resource, Methane Hydrate and think about the possibility of this

resource using by cost-benefit analysis and game theory approach.

Finally I suggest my ideas of Japan’s future energy policy.

*This paper is the writing assignment of “Energy economics and policy”.

† Tomoyuki Iriyama is the exchange student of the department of Environmental Science(D-UWIS),

at ETH Zürich. Also the graduate student of the department of Social Engineering at Tokyo Institute

of Technology.

E-mail: iriyamat@student.ethz.ch

II

1. Introduction

On 11th March, the historical gigantic earthquake has struck the north-east coast of Japan,

triggering a more than 10-metre tsunami that swept away everybody and everything in its path, with

consequent damage to the Fukushima nuclear power plant resulting in a partial nuclear meltdown.

One month later, more than 28,000 either confirmed dead or missing and some big aftershocks

(around magnitude 7) have been following. As for the nuclear plant, the situation became worse and

worse. Far beyond the expectations, the vast amounts of radioactive materials were released to the

atmosphere and sea, and still are being. Japan is faced with the world’s worst nuclear crisis, on par

with the 1986 Chernobyl disaster, according to the International Atomic Energy Agency (IAEA)

scale. This harrowing scenes have economical and political impacts, are provoking a change of the

energy policy all over the world. As you can see in figure1a, now in the world there exist a lot of

nuclear plants in operation, under construction and propositions. The nuclear energy generates

13.5% of total electricity generation in 2008.

But the situation surrounding the

nuclear has completely changed.

The re-examination of nuclear

safety is required, it means, at the

very least, lead to significant

delays in new investments, an

inevitable rise in cost and

probably more rapid closures of

existing plants. Even China, the

world’s biggest builder of nuclear

reactors, froze applications for

new plants pending a review of

safety. Also public opinion against

the nuclear energy is increasing.

The energy policy is at a turning

point.

Japan, which relies on the nuclear

energy for 24% of its electricity supply, is also standing at the bifurcation point and has to think

over the future energy policy. In this paper, along with reviewing briefly the past and current

Japanese energy policy, I, one of Japanese citizens, consider about the future direction and discuss

about the possibility of the new valuable resource, Methane Hydrate. Why is Methane Hydrate, not

solar or other green energy? I have three reasons for that. First, this resource exists in the near sea

around Japan and the vast amounts of it are already confirmed. Second, Methane Hydrate could

make Japan resource-rich country. Seeing the recent rapid rise in commodity price, it is important to

have the resource for countries, in particular Japan, which has no resource and relies on imports.

Third, I think it is not interesting to pick the theme related to green energy. Because a lot of

Figure 1 The nuclear world a

III

Year 60 70 80 90 00 05 07Self-sufficiency (%) 58.1% 14.9% 6.3% 5.1% 4.2% 4.0% 4.2%

researchers already discussed about it and there is nothing new. Naturally I think green and clean

energy is the best way for future world, but this is not a unique way. Rather at the same time, we

have to continue to look for new resources. Therefore I focus on the unpractical resource, Methane

Hydrate and discuss about the possibility of it.

In what follows, I firstly mention Japan’s energy policy. Next I introduce what the Methane

Hydrate is and analyze the economic sufficiency and the entry game. Finally I conclude this paper

with suggestions to Japan’s future policy.

2. Japan’s past and present of energy policy

Back to 60s and 70s, it was oil that Figure 2 Change of Japan’s primary energy b

had supported Japan’s high

economic growth period. We

imported a vast of oil from Middle

East and depended on it for 75.5%

of the primary energy supply.

But the impact of the first oil crisis,

triggered by the Yom Kippur War,

changed the energy policy.

To stabilize the energy supply, it

shifted to nuclear, natural gas, coal

energy. The second oil crisis,

caused by the Iranian Revolution in

1979, accelerated more

introduction and development of

these energies. As a result, the

percentage of oil in primary energy

supply in 2008 became 41.9%,

alternatively the percentage of coal (22.8%), natural gas (18.6%), nuclear (10.4%) increased.

Japan did an effort to make the energy policy more variety. But considering the dependency on the

fossil energy (83%), it is still high and the effort is not enough.

Figure 3 Japan’s energy self-sufficiency ratioc

From the point of view of the energy self-sufficiency, the rate of it is only 4% in 2007. Because not

only oil and coal, but also natural gas (LNG) and uranium are almost all imported. But it is also true

that Japan has strongly promoted energy efficiency and now become a world leader of such fields.

IV

What makes this vulnerability more dangerous is recent rapid rise of oil price.

Until 2003 the price was steady Figure 4 the price of oil d

and below $40/barrel. Then it

went higher and higher, in 2008

was beyond $140/barrel. After

this fever calmed down,

nowadays the oil price is up

again and over $100/barrel.

For Japan, which imports oil

almost 100%, this is very serious

situation.

Considering all the above, the

problem is clear. The best way is

to find the resource by oneself. In

the next chapter, I pick up one

resource that could solve problems.

3. New resource: Methane Hydrate

3.1. What is it?

Methane Hydrate (MH) is one of an unconventional natural gas Figure 5 Methane Hydrate e resources. It is ice-like compound in which methane is held in

crystalline cages formed by water molecules, and generally forms in

two types of geologic environments: permafrost regions(dominated

cold temperatures) and beneath the sea in sediments off the outer

continental margins(dominated by high pressures). There exists

naturally in huge quantities in a number of places around the world

(See figure 6). Scientists have estimated that there might be somewhere

in excess of 1 trillion tons of MH. In fact, in Japan when the

METI(Ministry of Economy, Trade and Industry) researched the

eastern Nankai Trough area in 2007, they figured out the total volume

of methane initially considered to exist. According to the result, the

amount is about 1.14 trillion m3, equals to 14years consumption of the natural gas

f. Even in small

area, the number is extremely big. Who cannot expect the good future of this resource? In particular,

Japan has been moving actively. In 2008 the some technical approaches to extract succeeded.

Therefore the government made a policy that by 2018 the practical technologies of MH would be

accomplished and from 2019 the commercial product would start.

But there are some problems about MH.

V

Figure 6 Distribution of known MH accumulations g Figure 7 MH Distribution

h

3.2. The impacts on Environment

Because of the specific characteristics of MH (only exists in the conditions of low temperature and

high pressure), this resource might have played an important role in past climates and could have a

significant effect in future human-induced climate change. Methane is a potent greenhouse gas

which can be released during extraction and use of MH. 55 million years ago, a gradually warming

climate caused icy methane hydrate to melt and let the gas bubble up to the ocean’s surface, which

may have caused temperatures to spike dramatically, some paleoclimate researchers hypothesize. In

the Nature paperi, some scientists explicitly called a release of MH “a doomsday scenario for the

climate”. Other scientistsj predicted that if the temperature were up by three degrees due to the

global warming, this would eventually get rid of all the methane in the ocean. But they also

mentioned that this scenario did not have a serious effect for alarm in the near future and it was not

a doomsday thing. The MH is highly controversial.

It is obvious that in future we have to shift to non-CO2 emission and ultimate clean energy. But it is

not very likely that we will be able to do that by the middle of the century. If we want to limit

global temperature rise to about two degrees by the end of the century, global emissions would have

to peak within the next two decades and fall toward zero in the second half of the century. This

means that there is a large gap between the reality and ideal. However at the same time, this is a

chance for MH. It might have some risks. But it is also true that methane is the least carbon-

intensive of all hydrocarbons. The CO2 emission of MH is about half as of coal or oil.

From this point of view, in this paper I do not deeply refer to the environmental risk of MH and

focus on the economic possibility for the new resource. In the next chapter, I do the economic

analysis.

VI

4. Economic Analysis

4.1 The Estimate of Economic Potential

The development technology of Methane Hydrate is still in the research phase, not commercial.

But some researchers already have estimated the economic potential of MH. Firstly I explain about

processes and results of three papers.

In the report (MH21, 2008k), the brief flows of estimation are as follows:

1. The model of field: Methane Hydrate α-1 concentrated zone*

2. predict the geological environment in the α-1 concentrated zone and

the storage condition of MH from existing data

3. evaluate the production method by MH21-HYDRES(original program made by Japan)

4. simulate a variety of scenarios by MH-ECONOMICS BM(original program made by Japan)

Figure 8 is the result that is the most economical evaluation of all possibilities.

Figure 8 chart of deliberating economic potential and evaluation results l

VII

The R&D program is configured as follows:

business operation to commence: 2016, production to commence: 2021,

a production period: 15 years, a production lead-time of each: 8 years,

the price of gas in 2004: 23.8 JPY/m3, the rate of inflation as annual rate: 2.56%,

the rate of increase in gas prices as annual rate: 3.88%

As a result, the average production cost has three patterns.

1. in the case based on current construction cost (3 times as in 2004): 92 JPY/m3

2. in the case that all assumptions are satisfied: 46 JPY/m3 (2004 base)

3. in the case that the production is below the expectation (1/4): 174 JPY/m3

In another paper(Kawata, Fujita, 2003m

), the production method(depressurization) is evaluated

economically and environmentally. According to the calculation, the gas production cost is

evaluated to be 53 JPY/m3. In regard to CO2 emission, 58.43 g-C/Mcal (CO2 emission amounts/

energy amounts). This value is lower than the reported value for LNG (69.77 g-C/Mcal).

Moreover the paper(Nojiri, Satou, 2008n) analyzes the effectiveness of MH development

considering risk of crude-oil supply shock. They assume that the total production is much bigger

(1 trillion m3) and estimate the production cost is 52 JPY/m

3. The risk, which is crude-oil supply

short such as oil shock and military events in oil-producing countries, is also calculated. Comparing

this risk with the cost of MH development and the benefit of CO2 emission trade, they suggest that

there is a merit (2.6 trillion JPY) and it is

worth to develop the MH.

Seeing the LPG price between 2008 – 2010

(imported to Japan)o, the range of price

fluctuates between 40 JPY/m3 and 105

JPY/m3. Comparing real price with price

expected by model (Red and Green line), I

cannot say that the Methane Hydrate does

not have any competitiveness. It is also true

that we have to collect more exact data and

pay attention to the exogenous factor, for

example exchange rate and inflation rate and

so on.

Figure 9 LPG import priceo

46 JPY

52 JPY

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4.2 Game Theoretical Analysis

The energy market is relatively monopolistic and the wall of entry is very high. Assume that the

industry dealt with the Methane hydrate enters into the energy market (in particular natural gas

fields), this event will be able to be described by one of the game theory ways, entry game.

Figure 10 the tree of entry game (MH vs. GS)

Now, there are two players, the Methane Hydrate industry (MH) and the Natural gas industry (NG).

Each player has two strategies, enter or give up for MH, fight or accept for NG. If MH gives up

entry to a market, nothing can change. MH gets nothing and NG gets 10. Otherwise, NG has to

choose a strategy. If NG fights against MH, NG makes a profit and MH makes a loss because MH

already invested for searching or extracting. If NG accepts the entry of MH, they share the profit.

MH gets 2 and NG gets 8. Because the increase of supply could cause the gas price decrease.

We can solve this game using backward induction. For NG, the strategy of fight is better than

accept (9 > 8). Because MH is rational, MH chooses the strategy of give-up (0 > -3). Therefore the

sub-game perfect equilibrium of this game is (give-up, fight).

In case that the government intends to improve the energy independency (ex. development of new

resources), it needs to change something. One simple idea is that if NG cooperates with NH, the

government gives NG preferential treatment, for example tax reduction or subsidies.

In this case, the game tree will change as follows. This time, NG accepts the entry of MH and MH

also chooses to enter. The sub-game perfect equilibrium is (enter, accept). This result is favorable

for the government.

MH industry

Natural gas

industry

enter

give-up

Accept

Fight

( -3 , 9 )

( 2 , 8 )

( 0 , 10 )

IX

Figure 11 after tax reduction

There are some problems regarding to this analysis, the setting of profit or strategy. The important

thing I emphasize here is that we need to give some incentives to existing, big industry as well as

new industry, and the way to change the situation is so simple.

5. Conclusion

Above I explained the characteristic and economical aspects of the Methane Hydrate. It is clear that

there are a lot of benefits and possibilities, also problems which we have to resolve. In order to

make MH more useful and practical, I have four suggestions.

1. speed up progress

2. expand the research fields

3. more government support

4. attract people’s interest

I take it granted that we have to improve technology and efficiency. This is a just necessary

condition, but not sufficient condition. Seeing the present world, the speed of changing the situation

is dramatically fast. Not only developed countries but also emerging countries are moving actively

to target securing of resources. In 1990s, Japan already knew that there was a vast of resources

surrounding offshore area around Japan. But until now we did not get any practical success.

Japan, which has no resources, should speed up. Therefore the government is a key player. It should

MH industry

Natural gas

industry

enter

give-up

Accept

Fight

( -3 , 9 )

( 2 , 9.5 )

( 0 , 10 )

X

allocate more budgets to development and the existing industry. As I mentioned before, to promote

the new resource into the market, it is effective to give the existing industry some incentives, for

instance tax reduction or subsidies. As for suggestion 4, most of Japanese people do not know the

possibility of MH, much less the existence. I think it is important to make MH more popular.

Finally, I mention one thing. For the first part of introduction, I wrote about the nuclear energy and

said that now it is a turning point of nuclear energy. But the nuclear is also necessary in the future

and cannot be replacement, I think. Leveraging our nation’s strength, technology that leads the

world, we have to comprehensively deal with our energy policy.

I hope the Methane Hydrate could play a important role of Japanese future.

XI

Appendix

* Detail of Methane Hydrate Concentrated Zone

XII

References

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11e0-9705-00144feab49a.html#axzz1JLUxKc4Z

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R&D program, p-24-26

l Research Consortium for Methane Hydrate Resources in Japan, 2008,

“Flow chart of deliberating economic potential and evaluation results”, Japan’s Methane Hydrate

R&D program, p-26 Figure5-5

XIII

m

Y. Kawata et al, 2003, “Evaluation of Economics and CO2 Emission for Developing Offshore

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06.05.2010,

http://www.greeningofoil.com/post/Methane-hydrate-a-future-clean-energy- source.aspx

- E. Dendy Sloan Jr, 2003, “Fundamental principles and applications of natural gas hydrates”,

Nature, Vol-426, 20.11.2003