Japan Considering Ways to Build Stronger LNG Buffer as Supply Fears Continue

https://www.naturalgasintel.com/japan-considering-ways-to-build-stronger-lng-buffer-as-supply-fears-continue/

BY?THERESE ROBINSON

December 8, 2022

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Japan’s Ministry of Economy, Trade and Industry (METI) is planning a strategic LNG reserve to ensure the country has enough natural gas to meet domestic demand as global competition ramps up.?

METI’s proposal is primarily aimed at preventing gas shortages and preparing Japan, one of the world’s largest buyers of liquefied natural gas, for battling Europe for cargoes in the years ahead as the continent displaces Russian imports.???

Record high natural gas prices in Europe this year have put?upward pressure on the Japan-Korea Marker. Europe has also attracted the most LNG this year given high prices and lackluster demand in Asia, a trend that could shift with colder weather and easing Covid-19 lockdowns in China.??

METI’s proposal for “a strategic reserve has been designed to expand options to cope with acute LNG shortage situations, although details of the proposal need to be further understood,” ?said Hiroshi Hashimoto, head of the gas group at the Institute of Energy Economics in Japan (IEEJ).

The proposal asks Japanese LNG importers to secure supply via term contracts. Importers would be free to sell their “buffer” LNG cargoes into the international market when they aren’t needed. During any fuel shortage emergencies, though, the government would ask sellers to redirect the LNG to regional power and gas companies that are most in need.??

Any losses incurred by LNG sellers would receive financial support from a fund that would be set up within the state-owned Japan Organization for Metals and Energy Security.

Contracts Expiring

Under the proposal, Japan would buy one cargo per month each year, between December and February, for the strategic reserve.? If the plan moves forward and companies are selected, the system could begin in December 2023. The long-term target is to have around 12 cargoes a year for emergency use.

“If it is proven to be effective, it may be expanded in the future,” Hashimoto told NGI. “Although initial volumes may be small, it should show the Japanese government’s willingness to support supply stability.”

METI has sought feedback from Japan’s energy industry on the viability of the LNG proposal that is due by the end of the year.

Supporting a strategic LNG reserve could become more important for the country as up to 6.8 million tons (Mt) of Japan’s long-term LNG contracts are due to expire by 2026, according to IEEJ data.?

Japan may have to?resort to the spot market for supplies?unless it?can extend contracts that are? due to expire with Australia, Brunei, Indonesia, Malaysia, Oman and Qatar. Those contracts in 2021 represented about 9% of Japan’s annual imports of 74 Mt.?

Resource-poor Japan relies on LNG for more than 35% of its power generation needs. Japan has imported 66.6 Mt of LNG through the first 11 months of this year, compared with 67.7 Mt over the same period in 2021, according to Kpler data.??

A? METI survey of Japanese companies published last month showed long-term LNG contracts were sold out until 2026, when more projects planned in the United States and Qatar are scheduled to come online.

Despite?supply problems?at Malaysia LNG and the?ongoing outage?at the Freeport LNG terminal in the United States, Japanese buyers are said to have enough gas for the winter season.??

For the first time in seven years, though, the government has?asked residential and industrial consumers?to conserve electricity between December and March as fears of energy shortages continue.