Analysis: Rival LNG supplies, Sakhalin's depleting fields give Japan an exit from Russian gas
11/12/2024 03:24
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Japan relies on Russia for 9% of LNG supply, mostly from
long-term Sakhalin-2 contracts
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Japan's contracts with Sakhalin-2 expire in 2026-2033
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Renewable energy, LNG surplus curb Japan's need for new
Russian
supply
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LNG developers in Canada, US, Australia look to fill gap
By Katya Golubkova and Yuka Obayashi
TOKYO, Dec 11 (Reuters) - As Japan's long-term contracts
to secure liquefied natural gas (LNG) from Russia's Sakhalin-2
project near expiration, rival producers see opportunity to fill
the supply gap, even as Tokyo looks to switch to cleaner energy,
industry insiders say.
The country's declining demand for gas plus geopolitical
pressure on Tokyo to curb its reliance on fuels from Russia mean
Japanese buyers may not want to renew all of their contracts
with a supplier long favoured for its proximity and reliability.
Japan, the world's second biggest liquefied natural gas
(LNG) buyer, depends on Russia for 9% of its LNG, or 6 million
metric tons per year, 5 million of which come from the long-term
contracts at Sakhalin-2 run by the Kremlin-controlled Gazprom
GAZP.MM .
The project also has strong ties with Japanese industry,
with trading giants Mitsui 8031.T and Mitsubishi 8058.T
owning a combined 22.5% in the project.
Sakhalin-2's big advantage over rivals is that it is located
just a few days away from Japan by sea. By comparison, shipments
from Australia, Canada and the U.S. are more than a week away.
But with Japan's western allies seeking to isolate Moscow
over its war on Ukraine, Sakhalin-2 is out of favour, though the
project is exempt from U.S. sanctions.
"Maintaining the same level of supply from Russia may prove
challenging due to the agreement among G7 members to reduce
reliance on Russian energy," an official at Japan's industry
ministry said, adding that final decisions rest with buyers,
which include several Japanese utilities. The source could not
be named due to the sensitivity of the issue.
At the same time, with Japan's sluggish power demand and its
push towards cleaner energy, the need for LNG is set to fall.
Tokyo wants gas to make up 20% of the country's power generation
by 2030, down from 33% last year, and renewables to grow to 38%
from 26% over the same period.
"There is a lot of renewable energy produced in our region,
so the question of whether to renew the contract or not will
depend on future renewable energy capacity," an executive at one
of the Sakhalin-2 buyers from Japan told Reuters.
Japan's long-term pacts for Sakhalin-2 will expire between
2026 and 2033, starting with top power generator JERA's 0.5
million ton annual supply agreement.
RIVAL SUPPLY
Since Russia's 2022 invasion of Ukraine triggered fresh
sanctions, Japanese buyers have increased reliance on allies
such as the United States and Australia, as well as Malaysia and
Oman, securing equity in LNG projects and long-term supply.
Rivals to Russian LNG are looking to build on that. Supplies
from new projects in Alaska and western Canada are
well-positioned, only a few days further away than Sakhalin and
with less geopolitical risk.
U.S. Senator Dan Sullivan of Alaska has visited Japan and
South Korea four times in the last two years to pitch the
yet-to-be-developed Alaska LNG project to Asian buyers, meeting
in August with Japanese government officials including
then-Prime Minister Fumio Kishida.
"This remarkable resource is a strategic asset, not just for
the U.S. and Alaska, but for our allies in Asia. It will help us
immensely in fending off an aggressive CCP (Chinese Communist
Party) and get our allies in Japan and Korea off of Russian
gas," he told Reuters by email.
President-elect Donald Trump, meanwhile, is preparing to
approve export permits for new LNG projects that had been halted
under the Biden administration, sources told Reuters.
In May, the Business Council of Canada, an advocacy group,
opened a new office in Japan.
"One of the top markets we are looking at is LNG," said
special adviser Heather Exner-Pirot, citing the opportunity to
displace Russian supplies as Canada prepares to start LNG
exports, including to Japan, next year through the Shell-led LNG
Canada project.
Two smaller LNG projects are due to start operating in 2027
and 2028.
Canadian gas companies are in talks with Japanese firms to
supply more LNG, with production set to begin not far behind the
expiration of the Sakhalin-2 contracts, an industry source said.
Australia's Woodside Energy WDS.AX also sees opportunity
to beef up LNG sales to Japan, including from the U.S., Chief
Executive Meg O'Neill has said, as it already has strong ties to
Japanese companies.
UNCERTAIN BUYERS AND SUPPLY
While those LNG developers court Japan, there is uncertainty
over new Russian contracts as Sakhalin-2's main gas field,
Lunskoye, nears depletion. Stable production is expected only
until 2033, Russian news agency Interfax reported in June,
citing Gazprom.
Gazprom has bet on developing the Yuzhno-Kirinshoe offshore
field nearby, but the U.S. imposed sanctions on it in 2015. The
field was initially expected to start producing in 2021 but
Gazprom secured a drilling platform for its first well only in
July.
Japan has locked in LNG supply to meet demand through 2030,
said Daisuke Harada, a research director at the state-owned
Japan Organization for Metals and Energy Security (JOGMEC).
"However, there is a possibility that in the early 2030s
there could be an LNG shortage ... so some companies don't
necessarily need to renew their contracts (with Sakhalin-2),
while some may have no choice but to do so," he said.
JERA President Hisahide Okuda said in late November that it
had not yet made a decision on whether to renew its Sakhalin-2
contracts, but a company source told Reuters that the project's
proximity to Japan is a key attraction.
"If we can buy without impact of any sanctions we will
continue to source it for energy security," the source said,
declining to be named due to the sensitivity of the matter.
The Sakhalin-2 project plays "a very important role in
Japan's energy security", Japan's industry ministry, or METI,
said by email, noting that global LNG supplies are expected to
be tight. It declined to comment on specific contracts.
Sakhalin-2's project operator, Sakhalin Energy, and Gazprom
did not reply to requests for comment. Mitsui and Mitsubishi
declined to comment.
Japan is increasingly active in trading LNG - it traded 38.3
million tons in the previous fiscal year, or six times the
volume it buys from Russia - giving it the flexibility to divert
cargoes to the domestic market.
"Buyers can allow Sakhalin-2 contracts to expire without
impairing Japan's energy security," said Christopher Doleman,
LNG specialist at the Institute for Energy Economics and
Financial Analysis.
But utilities still prefer the cheapest source of gas.
Yumiko Yao, an LNG executive with Tokyo Gas, which has a 1.1
million tons per annum contract with Sakhalin-2 expiring in
2031, said the utility has a social responsibility to serve
their customers.
"If we stop buying from Russia, we have to buy from other
places which could have a higher price. If we, as a country,
stop entirely buying from Russia, I think it is going to have a
huge effect on our customers," she said.
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Expiration of Japan's long-term contracts with Russia's
Sakhalin-2 LNG project, mln t/year https://reut.rs/4ireDbV
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(Reporting by Katya Golubkova and Yuka Obayashi in Tokyo, Emily
Chow in Singapore and Nia Williams in British Columbia; Editing
by Tony Munroe and Sonali Paul)
((jekaterina.golubkova@thomsonreuters.com;))