Japan Reboots LNG Term Buying on Energy Security Concerns

Japanese LNG buyers are casting a wide net to sign more term supply contracts as energy security and plans to revive nuclear power take center stage following the Russian war in Ukraine. This means that Japanese companies are switching focus from spot and short-term trade to longer-term contracts, while prioritizing supply flexibility.

Japanese buyers have recently returned to the contracting market with a slew of new deals. Inpex and trading house Itochu have committed to volumes with US developers Venture Global and NextDecade, respectively, while Jera, Itochu and Mitsui signed binding term sheets with Oman LNG as part of a tender issued last year. The Mideast producer is seeking to renew contracts with existing buyers and sell to new buyers.

Despite the war, Russia still retains an important role in Japan’s energy mix. Japanese traders Mitsui and Mitsubishi have retained their equity stakes in the existing Sakhalin-2 project in Russia’s Far East and Japanese buyers have signed new contracts with the new project operator. But question marks remain over the future of Novatek’s three-train 19.8 million ton per year Arctic-2 project, still under construction, in which Mitsui and Jogmec hold a combined 10% stake. Novatek said the first 6.6 million ton/yr train is planned to start at the end of 2023, but the fate of the other two trains and future expansion plans is less clear given the exit of Western technology providers.

Flexible North American LNG

The war in Ukraine prompted a lower Japanese intake of US LNG, as Japanese offtakers sent more cargoes to higher priced Europe last year. As a result, the US’ share of total Japanese imports fell to 5.7% in 2022 from 9.5% in 2021. Meanwhile, Australia’s share rose to 42.7% last year from 35.8% in 2021. More Australian LNG was likely needed due to lower volumes from Qatar after Japanese buyers did not renew major contracts after they expired in end-2021.

But Japan is still interested in expanding its US commitments as exemplified by the deals clinched by Inpex and Itochu. Two unnamed Japanese companies are also understood to have signed nonbinding agreements with Energy Transfer, the developer of the Lake Charles project in Louisiana. Additionally, Japan’s largest LNG buyer Jera invested $2.5 billion in 2021 for a 25.7% stake in Freeport LNG, which is looking at building a fourth train.

Japanese buyers are already significant offtakers from the first wave of US projects — Freeport, Cameron, Cove Point — enticed by the promise of full destination flexibility and gas indexation. Strong geopolitical relations between the two countries are also a plus, with Tokyo encouraging the procurement of US LNG as the country is seen as politically stable and its terminals are owned by private players.

In Canada, Japan has a modest footprint, with Mitsubishi holding a 15% stake in Shell’s LNG Canada project, still under construction. Previous proposed Canadian projects have been plagued by opposition from First Nations and costly pipeline infrastructure. But the short shipping distance to Japan makes Canada an attractive supplier. A recent visit by Prime Minister Fumio Kishida to Ottawa, calling for Canadian LNG to play a role in Japan’s energy transition seems to have fallen on deaf ears as Canadian Prime Minister Justin Trudeau instead promoted Canada’s clean energy and technology exports to Japan.

Expected high LNG prices have encouraged new projects to be proposed in Canada, such as Western LNG’s 12 million ton/yr Ksi Lisims project in British Columbia, just nine shipping days away from Japan. The project is expected to adopt market-based pricing, instead of a cost-plus structure commonly used by US projects.

In Mexico, only Mitsui has signed up to offtake 2.5 million tons/yr jointly with TotalEnergies from Sempra’s Energia Costa Azul project. Aspiring developer Mexico Pacific Ltd. (MPL) is understood to be holding talks with Japanese buyers, but it has been facing delays in receiving an export permit from the Mexican government. As the project will be sourcing feed gas from the Permian Basin, MPL is selling its LNG indexed against the West Texas Waha hub, expected to trade at a discount to US benchmark Henry Hub. But buyers unfamiliar with Waha pricing may hesitate committing to Mexican supplies.

Lower Costs From Existing Projects

Japan is also reaching out to existing producers with LNG plants that may have depreciated and have lower costs compared to new projects. They are also seeking suppliers that are more likely to offer flexible terms. Oman LNG, for example, is experiencing a gas output boom, which has allowed it to renegotiate long-term contracts expiring between 2024-26. Jera, Itochu and Mitsui have signed up for 5-10 year, oil-indexed deals believed to have been priced at a Brent slope in the mid-13%s on an f.o.b. basis. This would set a new reference price for Asia’s oil-linked deals.

Japex recently signed a deal with Brunei for supplies starting in April, although details were not available. Brunei LNG CEO Farida Talib, who was in Tokyo recently, said the firm hopes to sign more contracts with Japan. “Brunei LNG is looking forward to securing a third gas supplier in the near future,” she told local media, challenging the idea that Brunei’s LNG supply would diminish soon. One possible source of new gas supplies is the Kelidang cluster comprising the deepwater Kelidang North East and Keratau gas fields, located within Brunei's Block CA-2.

Additional supplies on f.o.b. delivery terms from Inpex’s Australian Ichthys project in Darwin are also expected after a debottlenecking by 2024.

Reconsidering Qatar

One of the biggest questions facing Japanese buyers is whether to clinch more Qatari supplies after deciding not to renew contracts representing a total of 7.2 million tons/yr, which expired in 2021. Last year, Japan imported 2.9 million tons of Qatari LNG, a significant drop from 2021’s 9 million tons.

In hindsight, the decision to not renew Qatari supplies seems like a bad one. Qatar was understood to have offered Jera a very competitive Brent oil-indexed price at low 10%s, but Jera preferred destination-free delivery terms. Observers note Jera’s decision was not considered mistaken at the time, when spot prices were more attractive.

Former shareholders of Qatargas-1, Marubeni and Mitsui, are keen to become QatarEnergy’s value-added partner (VAP) in the first phase of the North Field East project. But QatarEnergy has set a high bar for its VAPs, asking them to offtake 4 million tons/yr in return for equity participation. This could be too much for a country expecting its LNG demand to decline in the long term.

Japanese utilities are in a bind — they likely prefer to buy directly from Qatar instead going through a trading house. But at the same time they are cautious of Qatar’s conditions offering large contracted volumes and destination restriction terms, considered anticompetitive by the Japanese regulator. Japanese buyers do not expect to secure the mid-12%s Brent slope agreed by China’s Sinopec for a recent huge 4 million ton/yr, 27-year contract with Qatar. Instead, they are likely to use the recent contracts with Oman LNG as a price reference.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >