Katya Golubkova and Yuka Obayashi
TOKYO (Reuters) – Resource-strapped Japan is boosting long-term supplies of liquefied natural gas from close allies Australia and the United States as key contracts with suppliers including Russia expire by the early 2030s.
Japan’s largest energy company JERA last month agreed to buy a 15.1% stake in Woodside (OTC:) Energy’s 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 neighbor, making it more important to find reliable long-term sources of supply.
LNG accounts for about a third of Japan’s electricity production and is the world’s second-largest importer after China.
It remains a key part of Japan’s energy mix even though imports fell 8% last year to the lowest level since 2009 as the country increased its use of renewable energy and restarted some nuclear reactors after shutting them down following the Fukushima disaster in 2011.
Since 2022, Japanese LNG buyers have entered into equity deals in five projects in Australia and the US, including an exploration block. They have struck 10- to 20-year contracts to supply more than 5 million metric tons of oil a year from those countries, or 8% of Japan’s consumption in 2023, dwarfing deals elsewhere in the world, according to Reuters calculations.
Political challenges, including Australia’s new carbon emissions rules introduced in mid-2023 and President Joe Biden’s January freeze on new LNG export licenses to the United States, have not dampened Japan’s appetite for long-term supplies from those countries.
Kyushu Electric Power, one of Japan’s top five power companies, said it is considering buying a stake in Energy transfer (NYSE:) for the Lake Charles LNG project in the US, despite the fact that its US license is currently frozen.
This will be its second direct share in gas production after Australia.
“North America and Australia continue to see stable supply compared to other projects,” said Kyushu Electric chief executive Takashi Mitsuyoshi.
“There are some concerns about North America because of Biden’s recent (LNG) move, but they, along with Australia, are allies and that means a lot.”
Japan and the US are members of the Group of Seven (G7) alliance of developed countries and are Australia’s partners in another regional security body, the Quadrilateral Security Dialogue, also known as the Quad.
Kyushu Electric has long-term power supply contracts with Australia, Indonesia and Russia, some of which expire between 2027 and 2032.
Mitsuyoshi said Indonesia may have limited export opportunities in the future due to strong domestic demand driven by a growing economy.
Qatar, another Japanese supplier, has been ramping up production, but some buyers are frustrated by its contracts, which limit flexibility in cargo trade, and Japan’s industry minister last year called for the destination clause to be scrapped.
Since 2022, Japanese LNG buyers have increased their presence in Oman, but on a smaller scale compared to Australia and the US, while Inpex has acquired new exploration licenses in Malaysia.
REPLACEMENT OF RUSSIA
According to Japanese customs, LNG flows to Japan have changed over the past decade, including significant declines from Indonesia, Malaysia, Qatar and Russia, as well as from the United States and Papua New Guinea, which have become major new suppliers.
Throughout this period, Australia has been its main supplier, although other new sources are emerging.
G7 member Canada is preparing to launch its first major export facility, with shareholder Mitsubishi Corp expected to receive more than 2 million tonnes of LNG annually.
Yoko Nobuoka, senior analyst for Japanese energy research at LSEG, said the importance of cooperation with allies for Japan’s energy security, including LNG, has increased amid the energy crisis triggered by Russia’s invasion of Ukraine.
Russia was Japan’s third-largest LNG supplier last year after Australia and Malaysia, but imports fell 10.7% from 2022.
Most of Japan’s Russian LNG comes from the Sakhalin-2 project, but many long-term contracts expire around 2030, providing further incentive to pursue deals elsewhere.
The huge new Arctic LNG 2 project, in which Mitsui & Co and the state-run Japan Metallurgical and Energy Security Organization (JOGMEC) jointly own a 10% stake, highlights the dangers of Tokyo’s dependence on Russian gas.
Washington imposed sanctions on the project in November, prompting its operator Novatek to declare force majeure and Mitsui to record an additional reserve of 13.6 billion yen ($91.94 million).
“But the G-7 members can’t get rid of this dependence (on Russian LNG) overnight, so they need increased supplies of LNG from allies,” said David Boling, a director at the Eurasia Group consulting firm who was deputy assistant US trade representative in Japan from Japan. 2015–2022.
($1 = 147.9300 yen)