Japan's LNG buyers are awaiting updates on whether exports of the fuel from Russia will be included in newly imposed sanctions on the country, suggesting that there could be long-term repercussions on Japan's LNG supply-demand situation even if any short-term impact resulting from such curbs will likely be minimal.
A recent rise in LNG inventories and expectations of milder weather in Japan in the coming weeks could limit the short-term impact of any potential halt in LNG supplies from Russia, industry participants said. But sustained curbs could create additional spot requirements from Japan in the following months and hurt future bilateral collaboration between the two countries, especially with several of Japan's term contracts having expired or due to expire, they added.
Japan's prime minister Fumio Kishida said on 23 February that the country will join the US and EU in imposing sanctions on Russia over the situation in Ukraine, including banning trades with the self-proclaimed Donetsk People's Republic (DNR) and Luhansk People's Republic (LNR) in eastern Ukraine, and suspending the issuance of new sovereign debt by the Russian government in Japan.
He did not mention if sanctions are being imposed on the energy sector, including LNG, but said that the "situation" will not have a huge impact on the country's energy supply. He also said that Japan will "promptly take further measures" if the situation worsens, without mentioning if LNG will be implicated.
"LNG is also in stock for a few weeks at electric power companies and gas companies," Kishida said in his only mention of LNG, as he spoke of the country's 240 days of crude oil reserves. "For this reason, we recognise that this situation will not immediately cause a major hindrance to the stable supply of energy," he continued.
Expectations on whether Japan's sanctions on Russia will be extended to LNG are mixed. "I don't think they will touch the energy sector… it will be a lose-lose situation for both countries," a Japanese buyer said.
But some expect the curbs to cover all sectors, including LNG. "Once they impose a sanction, it means they immediately want to stop trading with that country," a trading analyst said.
Japan imported a total of 6.57mn t of LNG from Russia in 2021, up from 6.14mn t a year earlier. Its Russian imports in 2021 accounted for around 8.8pc of its total LNG imports of 74.3mn t in the year.
It received 645,596t of LNG from Russia in December 2021, accounting for 9.2pc of its total LNG imports in the month. Russia was the country's fourth-largest LNG exporter in December, after Australia, Malaysia and Qatar.
"I am hoping LNG will remain outside of [the sanctions] if they don't want the population to pay," a trader said.
"End users [and the] general population will bear the brunt of energy inflation," he said, adding that high LNG prices have already trickled down to and impacted downstream customers.
Asian spot LNG prices have traded at high levels since September last year, largely fuelled by gains in European gas hub prices. The ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia including Japan, for the front half-month averaged $30.504/mn Btu from 1 September last year to 22 February this year and hit a record high of $44.980/mn Btu on 22 December 2021. It was last assessed at $24.535/mn Btu on 22 February, nearly four times the $6.780/mn Btu assessed exactly a year earlier.
Japan's LNG inventories rise
Japan's LNG inventory levels have picked up slightly in recent weeks, after a fall in coal- and oil-fired generation capacity in end-January increased the call on gas for power generation and led to a dip in stock levels.
Japan's main power utilities held 1.82mn t of LNG as of 20 February, up by 2.2pc from 1.78mn t a week earlier and higher than 1.67mn t on 30 January, according to a weekly survey by the trade and industry ministry. But they were lower than 2.3mn t at the end of February last year.
LNG market participants generally echoed Kishida's views of ample inventories, but cautioned that any cold snap that occurs in the coming weeks would draw down inventories rapidly.
"I think Japanese buyers will be able to cope in the next 2-3 weeks [in the event of LNG sanctions] because inventories are okay," a Japanese trader said. But an unexpected cold snap could draw down inventories significantly. This is also "bearing in mind that Japan's storage capacity is not as huge as in China [or] Europe," a trader at a European firm said.
The Japan Meteorological Agency (JMA) is so far predicting generally warmer-than-usual weather in the country in the coming weeks. It forecast on 17 February a 50pc or high probability of above-normal temperatures throughout Japan from 26 February-4 March, and a 30-50pc likelihood of that from 5-18 March.
But Japanese LNG buyers may have to procure replacement cargoes from the spot market for deliveries further out if their long-term supplies from Russia are disrupted.
"Maybe there won't be so much impact on the prompt market since buyers already bought some spot cargoes, but it may affect their supply-demand balance for summer if they don't get term cargoes from Russia," a Japanese buyer said. The northern hemisphere summer season typically lasts from June-September.
Several Japanese buyers — including power utilities Kansai Electric, Chugoku Electric and Kyushu Electric — have bought March and April cargoes from the spot market in recent weeks, with the supplies sourced from various liquefaction plants, including those in Oman and Australia.
At least eight Japanese buyers have term offtakes from the 9.6mn t/yr Sakhalin LNG project in far east Russia. Major state-owned importer Jera has a contract to receive 1.5mn t/yr of LNG from the facility across 2009-29 on a fob basis, and a separate agreement to receive 500,000 t/yr from 2011-26 on a des basis.
Other Japanese firms including Hiroshima Gas, Osaka Gas, Saibu Gas, Toho Gas, Tokyo Gas, Kyushu Electric and Tohoku Electric have separate contracts to receive a total of at least 3mn t/yr of LNG from the project.
Future LNG collaboration may be in jeopardy
Sustained sanctions on LNG, if they are imposed, could hurt chances of further collaboration between the two countries, particularly at a time when several of Japan's contracts with other LNG suppliers have expired or are expiring and Russian liquefaction capacity is expanding, industry participants said.
The first 6.6mn t/yr train at the planned 19.8mn t/yr Novatek-led Arctic LNG 2 facility is expected to begin operations in 2023, with the second and third equally-sized trains expected to commence in 2024 and 2025, respectively. Novatek has so far signed long-term agreements with Chinese firms that include ENN, Zhejiang Energy Gas and Shenergy to supply LNG from Arctic 2, in addition to trading firms Vitol and Glencore, as well as Spain's Repsol, and may potentially be looking to ink more term deals, industry participants said.
State-owned importer Jera said last November that it would not renew its long-term LNG contracts totalling 5.5mn t/yr from Qatar that were due to expire the following month. Another Japanese buyer has an existing contract with Malaysian state-owned Petronas to buy LNG from the 30mn t/yr Bintulu LNG plant that will expire in March this year.
By Joey Chua
