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    Japan Gas Trade Forecast


    January 20, 2022 - Fitch Solutions Sector Intelligence

     

      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Japan Gas Trade Forecast

      • 19 Jan 2022
      • Japan
      • Oil & Gas

      Key View: The outlook for Japan's LNG imports into the remainder of the forecast period is stable based on the expectation that gas will remain a prominent fixture in the national energy mix moving forward, although the fuel does face long-term competition from the rise of alternative, low-carbon energy sources such as hydrogen and ammonia.

      Latest Updates
      • Japan has lost its spot as the world’s largest importer of LNG despite seeing imports having increased marginally in 2021.
      • Spot LNG purchases towards the end of 2021 is likely to have been curtailed by the severe run-up in prices brought on by a global supply crunch, leading importers to temporarily switch to alternatives such as diesel and fuel oil.
      • However, this does not appear to have swayed from Japan’s largest importer JERA from recalibrating its import portfolio in favor of spot purchases and shorter duration deals, as opposed to long-term contracts.
      • The outlook for LNG imports moving forward mirrors that of gas demand, with the fuel set to remain a prominent part of the national power mix although facing competition from shifting government regulations and accelerating developments in renewables.
      • Growing research and investments into hydrogen, ammonia, synthetic methane in particular look set to offer competition for LNG in power generation and shipping.
      • The government has a roadmap to launch ammonia-fuelled commercial ships by 2028. A portion of the government's USD18bn green innovation fund can be used to offset cost of ammonia bunkering infrastructure building in Japan.
      • Japan’s 2050 net zero goals come attached with conjoint plans to become less reliant on coal and gas-generation, although gas’ share will be afforded room to thrive, not least due to the gradual pace of renewables developments and challenges to bringing back shut nuclear power capacities.
      Structural Trends

      Japan lost the top LNG importer spot in the world to China but still remains a formidable importer of the chilled fuel. Japan's LNG imports primarily come from oil-indexed long-term contracts with Australia, Malaysia, Qatar. The US has seen its market share increase strongly over the past few years (more below) on the back of a slew of long-term contracts that came into effect over the 2018-2019 period.

      LNG deliveries from Russia have also gradually increased in recent years, in light of start of deliveries from Yamal LNG in July 2020. Japanese firms are also investors in two additional Russian LNG projects - first is the 6.2mtpa, USD9.1bn Sakhalin 2 project, in which a Japanese consortium comprising METI, Itochu, JAPEX and Marubeni, as well as ExxonMobil, Rosneft and Sakhalin Oil and Gas Development are working to bring online by 2027. The second is Novatek's 6.6mtpa Arctic LNG 2, aiming to begin first production by the end of 2023, of which 10% of the gas will be sold to Japan's JOGMEC and Mitsui.

      About 12% of the contracted LNG purchases consist of deliveries from global portfolio players such as BP, Petronas, Shell and Total. This dynamic will hold through to the end of the forecast period to 2031, with average duration of existing contracts being about eight to nine years still. Japan has made no secret of its plans to integrate more shorter-term contracts and spot purchases into its portfolios over the coming years, so as to secure greater flexibility and leverage competitive spot rates.

      LNG To Maintain Role Amidst Energy Transition
      Japan - Gas Net Exports Forecast (2020-2031)

      Note: Negative implies imports; e/f = Fitch Solutions estimate/forecast. Source: GIIGNL, JODI, Fitch Solutions

      The US has significantly expanded its market share in recent years; Japanese companies have been among the most active in signing up to US Henry Hub-linked export projects and are looking to benefit from the lower prices expected from the non-oil-linked contracts. First shipment from Cameron LNG began in 2018 followed by long-term supply contracts with Cove Point and Freeport LNG projects. JERA has also partnered Taiwan's CPC to sign an agreement for 1.6mtpa from the Total-led Mozambique LNG, which would kick-in from the start of commercial production (2024-2025) and remain in effect for 17 years.

      With LNG due to remain a key fixture in the national energy mix in the years to come, Japan has deepened collaboration with regional LNG buyers in an attempt to keep global LNG prices under control, while also promoting greater contract flexibility, smaller volume cargoes and pressure sellers to renegotiate rigid existing contract terms. In June 2017, the Japanese Fair Trade Commission (FTC) concluded that restrictive destination clauses contained within existing FOB contracts - and to a lesser extent some contracts delivered-ex-ship (DES) - may be in violation of domestic competition laws. The relaxation of restrictive destination clauses from existing long-term LNG contracts in Japan is firmly under way.

      Australia Dominant, Flexible US Cargoes To Benefit
      Japan - % Share Of LNG Imports

      Source: Trade Map ITC, GIIGNL, Fitch Solutions

      Reliance On Gas To Drive LNG Imports

      Japan's consumption of natural gas, and with it LNG imports, will remain on a gentle uptrend over the coming years. Gas demand will primarily be driven by the power sector, where we see headwinds to the government's nuclear revival plans and as investments into boosting renewables capacity take time to pan out. This will see continued reliance on gas-fired generation, which already accounts for 37% of Japan's overall power mix, and is set to continue to occupy a central role in the country's power generation mix (see 'Gas Consumption' section of this report).

      Japan's net LNG imports will increase from an estimated 112bcm in 2019 to about 120bcm in 2030, a gentler forecast than previously forecast, due to the fall in demand in 2020 amidst the Covid-19 pandemic and greater competition from new energy alternatives such as hydrogen, ammonia and even synthetic methane in power generation and shipping.

      Even as a mature consumer market and as nationwide energy conservation efforts drag on the pace of growth, Japan will remain one of the largest LNG importers in the world through to the end of our forecast period. Imports could accelerate further in the latter half of our forecast period, as Japan's current portfolio of rigid, oil-indexed long-term LNG contracts roll off. This could create opportunities for buyers to capitalise on favourable spot rates and explore potential re-export opportunities to regional markets.

      Supporting our bullish outlook for LNG off-take by Japan is a domestic power projects pipeline that remains overwhelmingly in favour of gas. In spite of Tokyo's long-term desire to steer the national energy mix towards nuclear and renewable energy sources, gas-fired power generation capacity accounts for 40% of the planned and proposed capacity additions out to 2024, according to our Key Projects Database.

      The government's long-term strategy calls for nuclear and fossil fuel with carbon capture utilisation and storage (CCUS) to account for 30-40% of the national energy mix in 2050. However, the expectation is still for nuclear restoration efforts to encounter significant difficulties - from public, legal and cost standpoints. This will leave gas, LNG to continue on as the dominant power source in Japan with CCUS helping to reduce emissions. The plan also forecasts renewables to contribute a larger share of 50-60% and hydrogen and ammonia, 10%.

      Relaxing Destination Clauses

      Despite an increase in our LNG import requirement forecasts for Japan, we note sales flexibility will still remain key to avert a large LNG overhang in Japan. When Japan rushed to secure LNG supplies following the Fukushima disaster in 2011, it was mostly done via restrictive, long-term contracts. However, compared with 2010-2014 when LNG demand posted average annual growth of 8.0%, consumption contracted by 3.0% over 2015-2016. This was due both to slower economic growth and rising competition from alternative power sources, notably coal, leaving Japan to figure out a way to manage its excess contracted LNG volumes.

      In June 2017, the Japanese FTC concluded that restrictive destination clauses contained within existing FOB contracts - and to a lesser extent some contracts DES - may be in violation of domestic competition laws. Although FOB contracts see ownership of cargoes transferred from sellers to buyers at the point of loading, buyers are not able to freely re-sell cargoes. The FTC's finding will likely pave the way for some of Japan's existing contracts to be revisited to include greater freedom to resell cargoes. Japan's position as a leading LNG player, precedence of a similar ousting of destination clauses in Europe and mounting pressure on sellers to protect market share amid an increasingly competitive market are all set to lend strength to domestic buyers' negotiating positions.

      About 25% of Japan's contracted LNG volumes are under FOB terms (mostly with Qatar, Malaysia), of which about half reportedly carry clauses that require the buyer to obtain seller's consent prior to re-directing cargoes outside of Japan, and another quarter that restricts any re-selling outright. Japan's need for greater sales flexibility is clear. Even as a renewed backing for gas-fired power generation is anticipated to support LNG demand over subsequent years, the domestic LNG market is still set to see average surplus of about 3bcm over the next two years, based on analysis of its existing contracts compared to current demand projections.

      However, over the past year, non-long term imports into Japan have fallen, given the ramping-up of LNG imported from Australia, which is under long-term contracts.

      Gas Net Exports (Japan 2020-2025)
      Indicator 2020 2021e 2022f 2023f 2024f 2025f
      Dry natural gas net exports, bcm -106.7 -112.6 -115.3 -116.7 -117.5 -118.3
      Dry natural gas net exports, % y-o-y -4.4 5.5 2.4 1.2 0.7 0.7
      Dry natural gas net exports, USDbn -22.0 -37.5 -39.6 -40.6 -42.1 -44.1
      Pipeline gas net exports, bcm 0.0 0.0 0.0 0.0 0.0 0.0
      Pipeline gas net exports, % of total 0.0 0.0 0.0 0.0 0.0 0.0
      LNG net exports, bcm -106.7 -112.6 -115.3 -116.7 -117.5 -118.3
      LNG net exports, % y-o-y -4.4 5.5 2.4 1.2 0.7 0.7
      LNG net exports, % of total gas exports 100.0 100.0 100.0 100.0 100.0 100.0
      e/f = Fitch Solutions estimate/forecast. Source: GIIGNL, JODI, Fitch Solutions
      Gas Net Exports (Japan 2026-2031)
      Indicator 2026f 2027f 2028f 2029f 2030f 2031f
      Dry natural gas net exports, bcm -117.2 -115.6 -113.8 -112.8 -110.6 -107.4
      Dry natural gas net exports, % y-o-y -0.9 -1.4 -1.5 -0.9 -1.9 -3.0
      Dry natural gas net exports, USDbn -43.7 -43.1 -42.5 -42.1 -41.3 0.0
      Pipeline gas net exports, bcm 0.0 0.0 0.0 0.0 0.0 0.0
      Pipeline gas net exports, % of total 0.0 0.0 0.0 0.0 0.0 0.0
      LNG net exports, bcm -117.2 -115.6 -113.8 -112.8 -110.6 -107.4
      LNG net exports, % y-o-y -0.9 -1.4 -1.5 -0.9 -1.9 -3.0
      LNG net exports, % of total gas exports 100.0 100.0 100.0 100.0 100.0 100.0
      f = Fitch Solutions forecast. Source: GIIGNL, JODI, Fitch Solutions
      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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