Japan Walks Away From Qatar After Contracts Expire

Japan has let lapse several of its long-term supply contracts with Qatar since December in a new chapter between the world’s second-largest LNG buyer and second-largest LNG exporter. Japan did not renew a total of 7.2 million tons per year, 6 million tons/yr of which were part of the foundational offtake for Qatargas-1 started in 1997. It now has under 2 million tons/yr contracted with the Mideast LNG behemoth.

Doha has taken the decision as a snub, with the Qataris reportedly telling buyers “we will not care about you next time” LNG supplies are needed, according to Japanese daily Nikkei. While not a complete surprise, the nonrenewals come as a jolt for Qatar which has been trying to sign up contracts to support its blockbuster four-train expansion. Unsurprised by Qatar's comments, a Japanese buyer tells Energy Intelligence they hope Qatar had been flexible enough to "adapt to modern buyers and market requirements."

The move bucks a trend from Asian LNG buyers to commit to term contracts for greater price and supply security amid the extreme spot price volatility. It also comes at a time when Tokyo was approached by the US to divert LNG supplies to Europe if ongoing Ukraine tensions disrupt Russian supplies to Europe. However, Qatar's Asian contracts incorporate destination restrictions and the start of new contracts this year with China, Taiwan and Kuwait mean the exporter faces constraints with sending additional cargoes to Europe.

Flexibility Is Key

Japanese buyers have been seeking contracts that offer flexibility over other terms such as destination, volumes and duration due to the difficulty in forecasting future LNG demand. The development of the global LNG market, decarbonization and domestic liberalization have made it difficult to continue with long-term, large-volume consortium contract, said a spokesperson for Japan’s largest Qatari LNG buyer Jera. But the company will still collaborate with Qatar on various fields, including the development of ammonia, hydrogen and LNG.

Jera could not agree with Qatar during renewal negotiations. Jera wanted a shorter contract duration, but Qatar insisted on a minimum of 10 years or nothing at all. Jera has always opposed signing new contracts with destination restrictions which violate Japan’s Anti-Monopoly Act. Qatar meanwhile pushes ex-ship contracts to discourage reselling and diversions while optimizing its huge shipping fleet. Jera, which inherited the Qatari contracts of its joint-venture partners Tokyo Electric and Chubu Electric, is now left with a 700,000 ton/yr contract from Qatargas-3.

Meanwhile the firm has made new investments in Australia and the US. Last year, it invested in Santos’ Barossa/Caldita gas field which would provide the backfill gas for Darwin LNG project, where it would be entitled to offtake 425,000 tons/yr of LNG from the project when it is completed in 2025. In the US, it invested a 25.7% stake in Freeport LNG which would support plans for a brownfield expansion. Jera is already a 25% shareholder of and holds 2.2 million tons/yr tolling capacity at Freeport’s Train 1.

The Japanese buyer is also securing 1.6 million tons/yr from Mozambique LNG jointly with Taiwan's CPC. And it has found more success with another legacy supplier, Malaysia’s Petronas, with which Jera and Tokyo Gas have agreed on shorter, smaller volume deals when their long-term contracts expired in 2018.

Eyes on New Exporters

Qatar was likely expecting Japanese buyers to return the favor after it supplied additional LNG during the aftermath of the 2011 Fukushima disaster, when it was forced to turn to gas-fired power generation after the shutdown of the country’s nuclear reactors. Qatar supplied almost 17 million tons, or some 20%, of Japan’s total imports in 2013.

To win more long-term contracts post-Fukushima, Qatar has positioned itself as a creative and flexible supplier by packaging short-term supplies with long-term, whereby short-term supplies were priced at a discount to long-term shipments. That led nuclear-reliant utilities Tepco and Kansai Electric to sign up new 10-year deals.

But the reality is that new and existing LNG exporters have eroded Qatar’s market share in Japan, with Australia commanding a 36% share, compared with Qatar’s 12% and 9% for the US.

Japanese firms have been taking up equity positions in various LNG schemes to improve supply diversity. Japan is expecting imports from new exporters LNG Canada, Mozambique LNG, Mexico’s Energia Costa Azul and Arctic LNG-2 in Russia when they start up in the mid-2020s.

What’s Next

Japan’s market size means a sizable LNG trade with Qatar is inevitable. Japanese trading houses are understood to be in talks to invest in Qatar’s delayed expansion, with partner selection now pushed back to June. Jera was heard to be keen in investing and possibly partnering with a Western major.

Japanese companies have also been developing new LNG markets in emerging economies, which also explains the preference for flexible LNG contracts to enable cargo diversions. Jera recently set up an office in Beijing, where it will focus on developing LNG value-chain projects in the world’s largest LNG market. It is also partnering Exxon Mobil in an LNG-to-power project at Hai Phong in northern Vietnam.