Analysis: Japan boosts reliance on allies Australia, US for long-term LNG supplies

Japan Petroleum Exploration Co

10/03/2024 22:00

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      Contracts from Russia, other countries expiring over time
    

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      Prospect of Russian gas disruption has Japan turning to
allies
    

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      Deals being struck in Australia, US despite political
issues
    

  
    By Katya Golubkova and Yuka Obayashi
       TOKYO, March 11 (Reuters) - Resource-scarce Japan is
shoring up long-term supplies of liquefied natural gas from
close allies Australia and the United States as key contracts
from providers including Russia are set to expire by the early
2030s.
    Japan's biggest power generator JERA last month agreed to
buy a 15.1% stake in Woodside Energy's  WDS.AX  Scarborough
project in Australia. It was the latest in a string of deals as
the fallout from Russia's invasion of Ukraine threatens to
disrupt access to gas from its northern neighbour, making it
more imperative to find reliable long-term supply sources. 
    LNG accounts for about a third of Japan's power generation
and it is the world's second-largest importer behind China.
        It remains a key part of Japan's energy mix even though
imports fell by 8% last year to the lowest since 2009 as it has
increased the use of renewable energy and restarted some nuclear
reactors following a complete shutdown after the Fukushima
disaster in 2011.
    Since 2022, Japanese LNG buyers have struck equity deals in
five projects in Australia and the U.S. including an exploration
block. They have secured 10- to 20-year offtake contracts from
those countries for more than 5 million metric tons annually, or
8% of Japan's 2023 consumption, according to a Reuters
calculation, eclipsing transactions elsewhere in the world.  
    Political issues including new carbon emissions rules in the
Australia introduced in mid-2023 and President Joe Biden's
freeze in January on new U.S. LNG export licence approvals have
not dented Japan's appetite for long-term supplies from those
countries.
        Kyushu Electric Power  9508.T , among the top five
Japanese utilities, has said it is considering buying a stake in
Energy Transfer's  ET.N  Lake Charles LNG project in the United
States, even though it is now subject to the U.S. licence
freeze. 
    That would be its second direct equity stake in gas
production after Australia.
    "North America and Australia still have supply stability
compared to other projects," Kyushu Electric Executive Officer
Takashi Mitsuyoshi said. 
    "There are some concerns about North America due to the
recent (LNG) move by Biden, but they, along with Australia, are
allies and that means a lot."
    Japan and the United States are members of the Group of
Seven (G7) alliance of developed nations and are partners with
Australia in another regional security body, the Quadrilateral
Security Dialogue, also known as "the Quad".    
    Kyushu Electric has long-term supply contracts with
Australia, Indonesia and Russia, some of which are due to expire
between 2027 and 2032.
    Mitsuyoshi said Indonesia may have limited export capacity
in the future due to strong domestic demand thanks to a growing
economy.
    Qatar, another Japan supplier, is ramping up production but
some buyers chafe at its contracts that limit flexibility to
trade cargoes, with Japan's industry minister last year calling
for the elimination of the destination clause. 
    Since 2022, Japanese LNG buyers have increased their
involvement with Oman, but on a smaller scale compared to
Australia and the U.S., while Inpex  1605.T  acquired new
exploration licences in Malaysia.
 
   
    REPLACING RUSSIA
    LNG flows to Japan have changed over the last decade,
including large declines from Indonesia, Malaysia, Qatar and
Russia as well as the U.S. and Papua New Guinea becoming major
new suppliers, according to Japan customs data. 
        Throughout that period, Australia has been its top
supplier, though other new sources are emerging.
        Canada, a G7 member, is preparing to start its first
major export facility, from which Mitsubishi Corp  8058.T , a
shareholder, will receive over 2 million tons of LNG annually. 
    Yoko Nobuoka, senior analyst for Japan power research at
LSEG, said the importance of cooperation with allies for Japan's
energy security, including LNG, had increased on the back of the
energy crisis triggered by Russia's invasion of Ukraine. 
    Russia was Japan's third-biggest LNG supplier last year,
after Australia and Malaysia, but imports fell 10.7% from 2022. 
        Much of Japan's Russian LNG comes from the Sakhalin-2
project, but many of its long-term contracts are set to lapse
around 2030, giving added incentive to lock in deals elsewhere.
    The vast new Arctic LNG 2 project, in which Mitsui & Co
 8031.T  and state-owned Japan Organization for Metals and
Energy Security (JOGMEC) together own 10%, underscores the
perils of Tokyo's reliance on Russian gas.
    Washington in November imposed sanctions on the project,
prompting its operator, Novatek, to declare force majeure and
leading Mitsui to record an additional provision of 13.6 billion
yen ($91.94 million). 
    "But G7 members can't cut that reliance (on Russian LNG)
overnight, so that's why they need boosted LNG supplies from
allies," said David Boling, a director at consulting firm
Eurasia Group who was deputy assistant U.S. trade representative
for Japan from 2015 to 2022.   
($1 = 147.9300 yen)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Japan LNG imports over the past decade    https://reut.rs/3v2Bhnq
Expiration of Japan LNG contracts    https://reut.rs/4c5DnmW
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Yuka Obayashi and Katya Golubkova in Tokyo;
Additional reporting by Emily Chow in Singapore; Editing by Tony
Munroe and Jamie Freed)
 ((jekaterina.golubkova@thomsonreuters.com;))