Japanese utilities have shrugged off the prospect of their LNG supplies being diverted to Europe, arguing that their domestic requirements will take precedence with forecast cold weather in Japan expected to weigh further on already reduced inventories.
Japan's trade and industry (Meti) minister Hagiuda Koichi on 9 February told the US ambassador-designate Rahm Emanuel and the EU's ambassador to Japan Patricia Flor that "as long as the stable supply to Japan is ensured, [it] will co-operate [in diverting LNG to Europe] as much as possible". The US and the EU have requested that Japan send LNG supplies to Europe, in response to a potential shortfall in Europe's gas imports from Russia in the event of an escalation of tensions between Russia and Ukraine. Europe receives around 40pc of its gas supplies from Russia.
Japan will send some cargoes with destination flexibility to Europe in March, Meti told Argus on 10 February. It did not disclose the volume of cargoes that will be diverted, but said that more cargoes from Japanese firms will arrive in Europe in March than in February, as a result of the additional allocation of cargoes to Europe.
No cargo has yet been sent to Europe as a result of the requests, with current Europe-bound shipments being part of existing contracts or trading arrangements, Meti told Argus. European gas hub prices at a premium to Asian spot LNG prices in past weeks had incentivised some Asian sellers with Atlantic supply to keep cargoes within the basin.
Industry participants suggest that any cargo that gets diverted to Europe is likely to be from Japanese trading houses or companies with upstream resources, limiting any impact on Japanese utilities and the supply-demand balance in Japan.
The government has reached out to Japanese upstream group Inpex, asking the firm if it would be possible to divert LNG to Europe in the event of any disruption in Russian gas supplies, Inpex told Argus on 10 February. The firm operates the 8.9mn t/yr Ichthys LNG, and has stakes in the 3.7mn t/yr ConocoPhillips-operated Darwin LNG and the 3.6mn t/yr Shell-operated Prelude floating LNG, which is off line. All three projects are in Australia.
"I think the government is now talking with Japanese traders," a trader at a Japanese trading house said. "They have some trading volume not for Japanese utilities. So if the government asks them to allocate, they will use such volumes. Allocated volumes will probably not be from Japanese utilities."
Gas storage levels in Europe remain below average despite brisk LNG arrivals to the region and high sendout in recent weeks, industry participants said. Gas storage sites in Europe were 35pc full at 393TWh on 8 February, down from 54pc and 602TWh on 1 January, and 47pc and 528TWh on 8 February 2021.
Trading flexibility
Several Japanese trading houses have long-term contracts with US suppliers.
US volumes are sold on a fob basis and do not have destination restrictions, granting buyers greater flexibility to trade and optimise cargoes. Mitsubishi and Mitsui each have a term supply agreement to receive 4mn t/yr of LNG from the US' 15mn t/yr Cameron terminal in Louisiana.
State-controlled Jera and utility Osaka Gas hold 2.3mn t/yr each in offtake from the 15mn t/yr Freeport LNG facility, while Tokyo Gas has 1.4mn t/yr in fob supply from the 5.75mn t/yr Cove Point terminal.
"We don't know how much volume [will be sent from Japanese firms], but it should be small," the trader added.
The Japanese government has not approached utilities in the country to divert supplies to Europe, industry participants said. But most utilities will be reluctant if asked, several market participants said.
"Meti will sooner or later ask if we have enough stock to divert to Europe, and all will answer 'no'," a trader at a power utility based in western Japan said, adding that there is currently not yet enough urgency from Europe to secure supplies as it is "not in an energy crisis yet".
"Most Japanese buyers will face low inventory from March to April, both because of the DQT [downward quantity tolerance] from Malaysia and lower temperatures," a trader at a Japanese gas utility said.
Malaysia's state-owned Petronas has since last year exercised the DQT clause in its contracts to cancel term deliveries from its 30mn t/yr Bintulu LNG from last November to potentially the fourth quarter of this year over production issues at its Pegaga field. This has pushed many term offtakers, most of which are Japanese importers, to buy replacement cargoes from the spot market.
Domestic priority
Forecasts of even lower temperatures in Japan in the next few days could draw down LNG stocks further, with the past few weeks of cold weather having already weighed on inventories and spurred spot requirements for March-April deliveries.
Weather in the Tokyo metropolitan area, the largest power consumption area, is expected to get even colder in the coming days, with sub-zero temperatures having already been seen more than 10 times this year. The Japan Meteorological Agency on 9 February warned of heavy snowfall in Tokyo across 10-11 February, predicting that the city will get 5-10cm of snow.
Japan's main utilities held 1.63mn t of LNG stocks as of 6 February, down by 2.4pc from 1.67mn t a week earlier and lower than the 2.3mn t at the end of February last year, according to a weekly survey by Meti. The latest stocks were also 17.7pc lower than the four-year average of 1.98mn t. Inventories started dropping after hitting 2.42mn t on 23 December.
Nine Japanese buyers have purchased at least 10 cargoes for March since the start of the year. A power utility is seeking an April cargo, while another utility has a spot requirement for a delivery between the end of March and early April.
"Japanese buyers feel that keeping ourselves warm during winter is most important… it is difficult to ask us to give our blanket to other countries when we don't have enough cloth," another trader at a Japanese gas firm said.
