Japan Diversifies LNG Import Portfolio

Japan is the world's largest liquefied natural gas importer, second-largest coal importer, and third-largest net importer of crude oil and oil products.

According to the OGJ, Japan had 738 billion cubic feet (Bcf) of proved natural gas reserves as of January 2015. Natural gas proved reserves have declined since 2007, when they measured 1.4 trillion cubic feet (Tcf). Most of Japan's natural gas fields are located along the western coastline.

Japan's natural gas production has been low and flat for more than a decade as a result of declining reserves. In 2013, production was 161 Bcf, down from an average of 182 Bcf over the past 10 years (2003-2012). Japan's largest natural gas field is the Minami-Nagaoka on the western coast of Honshu, which produces about 40 percent of Japan's domestic gas. Exploration and development are still ongoing at that field which Inpex discovered in 1979. 

The gas produced is transported via an 840-mile pipeline network that stretches across the region surrounding the Tokyo metropolitan area. In 2013, Inpex installed an LNG terminal with a 73 Bcf/y capacity at Naoetsu port in Joetsu City, which connects to this domestic pipeline network and supplements the domestic gas supply with imports. 

Japanese companies are using innovative methods to produce hydrocarbons and have discovered methane hydrates, natural gas deposits trapped within crystalized ice structures, off the country's east coast. In March 2013, JOGMEC conducted the first successful testing of methane hydrates offshore and confirmed Japan's estimates of 40 Tcf of methane hydrates in the Nankai Trough on the southeast coast of the country. 

Japan hopes to begin production by 2018, and a joint venture of eleven Japanese companies formed in late 2014 to advance the production and commercialization of methane hydrates. However, the high cost of such developments could push back production plans.

Because of its limited natural gas resources, Japan must rely on imports to meet nearly all of its natural gas needs. Japan, the world's largest LNG importer, accounted for 37 percent of the global market share of LNG demand from 2012 through most of 2014, rising from 31 percent in 2010, the lowest share in four decades. Japan began importing LNG from Alaska in 1969, making it a pioneer in the global LNG trade. 

According to IGU, Japan operated 23 major LNG import terminals, including expansions and satellite terminals, with a total gas send-out capacity of 9 Tcf/y in 2014, which is well in excess of demand. However, Japan is still constrained on how much LNG it can receive based on berthing, ship size and other infrastructure limitations. 

Japan also has the largest regasification storage capacity in the world, holding 551 MMcf, which serves as a buffer during seasons of higher LNG demand. Most of the LNG terminals are located in the main population centers of Tokyo, Osaka, and Nagoya, near major urban and manufacturing hubs and are owned by local power companies, either alone or in partnership with gas companies. These same companies own much of Japan's LNG tanker fleet. Three terminals now under construction or undergoing trial operations are anticipated to come online by 2016, adding at least 145 Bcf/y of capacity, and other projects are proposed for construction by 2020.

Asian LNG prices traditionally have been linked to international crude oil prices, which rose sharply between 2008 and 2014. Japan's higher natural gas demand for power, a tighter LNG global supply market over the past few years, and higher oil prices have led to a significant increase in Asian spot LNG import prices, climbing from an average of $10/MMBtu before the Fukushima crisis to around $18/MMBtu in mid-2012. The recent decline in international oil prices at the end of 2014 will likely provide some relief for Japanese customers purchasing LNG for delivery in 2015.

About 30 percent of Japan's LNG imports originate from regional suppliers in Southeast Asia, although the country has a fairly balanced portfolio with supplies coming from other regions. After the March 2011 disaster, several suppliers from Qatar, Russia, Malaysia, and Indonesia exported cargoes to Japan through swaps, diverted cargoes and short-term arrangements to quickly provide natural gas to power facilities. Qatar, the world's largest supplier of LNG, overtook Indonesia and Malaysia to become Japan's second largest supplier, behind Australia, since 2012. 

LNG supplies from traditional suppliers Malaysia and Indonesia are becoming more constrained, and Japan is seeking to diversify its contracts and investments in other LNG ventures. Australia surpassed Malaysia to become Japan's largest LNG supplier in 2012, and Japanese companies are investing in small-equity stakes in Australia's liquefaction projects. Japanese electric and gas companies and trading houses have signed supply contracts with various large LNG projects in Australia, most notably the Chevron-led Gorgon project, Wheatstone LNG, and Ichthys LNG, all of which are slated to come online by 2017. 

Japan began importing LNG from Russia's Sakhalin terminal in 2009, and the two countries are discussing ways to increase gas imports to Japan via a proposed pipeline or more LNG shipments.

Additional LNG supplies over the medium and long term are likely to come from new projects in North America. Japan is in discussions with U.S. exporters for more natural gas supply, although negotiations depend on approval of export licenses by the United States. In May 2013, the U.S. Department of Energy gave approval for its Freeport LNG terminal in the Gulf of Mexico to ship LNG to countries that do not hold free trade agreements (FTAs) with the United States. This decision allows Japanese utilities to formalize deals for LNG supply from the terminal's operator. 

Japan's Chubu Electric and Osaka Gas signed preliminary agreements to import more than 100 Bcf/y each for 20 years from Freeport LNG starting in 2017, marking a potential reduction in the high LNG prices that Japan currently pays. The companies also plan acquire half of the assets of Freeport LNG's first train.