Buyers in Japan are currently evaluating possible alternatives to taking Russian LNG, as they await more updates on the sanctions to be imposed on Russia over its invasion of Ukraine.
Japanese buyers have yet to reject or turn away supplies from the 9.6mn t/yr Sakhalin LNG in far east Russia, including spot and term cargoes, according to industry participants. But several are now considering possible alternatives in the event that they decide or have to ban Russian supplies. These options include cargo swaps with Chinese buyers, buying power from the electricity market, switching to coal for power generation or lowering power output, they said.
Japanese buyers are not avoiding Sakhalin supplies yet but "Meti is researching the number of cargoes coming to Japan from Russia in this year," a trader at a power utility based in western Japan said. Meti is Japan's trade and industry ministry.
Meti has not made any announcement regarding LNG from Russia. Japan's prime minister Fumio Kishida said on 23 February that it had decided to impose sanctions on Russia. This included banning trade with the self-proclaimed Donetsk People's Republic and Luhansk People's Republic in eastern Ukraine, as well as suspending the issuing of new sovereign debt by the Russian government in Japan. He did not mention if sanctions will be imposed on LNG.
At least eight Japanese buyers have term offtake from the Sakhalin Energy-owned Sakhalin LNG at Prigorodnoye port on Sakhalin island. Japanese firms including Jera, Hiroshima Gas, Osaka Gas, Saibu Gas, Toho Gas, Tokyo Gas, Kyushu Electric and Tohoku Electric have contracts to receive a total of around 5mn t/yr from the project.
Sakhalin is responsible for the majority of Russian LNG imports to Japan. It delivered around 6.6mn t out of the 6.91mn t Japan received from Russia in 2021, according to vessel tracking data from Vortexa. Russian supplies constituted around 8.8pc of Japan's total LNG imports of 74.3mn t in 2021. The largest LNG suppliers to Japan include Australia, Malaysia and Qatar.
Sakhalin cargoes destined for Japan continued to load at the facility in the last few days. The 147,624m³ Energy Advance carrier, which loaded at Sakhalin on 23 February and departed a day earlier, is the latest loading. It is scheduled to arrive in Tokyo Gas' 5.3mn t/yr Hitachi terminal on 27 February, Vortexa data showed. A total of 10 Japan-bound cargoes have loaded at Sakhalin so far this month, the data showed.
The Sakhalin Energy consortium is led by Russia's state-controlled Gazprom with a 50pc stake. It includes Shell with a 27.5pc stake, as well as Japanese trading houses Mitsui and Mitsubishi with 12.5pc and 10pc respectively.
Chinese swaps
Cargo swaps with Chinese buyers are the likeliest option for Japanese buyers in the event that cargo flows from Russia are halted, given lingering unmet demand among Japanese buyers and high spot LNG prices.
"Conducting swaps with Chinese buyers is the most possible option at this point," a trader at a Japanese gas firm said.
"Yes, [Japanese buyers] are checking feasibility of swaps. It has not materialised yet," a trader at another Japanese gas company said.
"There is still some spot LNG demand from Japan for April... and the Japanese need those cargoes. So I think it's unlikely they will simply turn away term cargoes without a follow-up action," a trader at a European firm said.
Around three Japanese buyers have spot requirements for 1-2 cargoes each for delivery in April. Colder than expected weather in Japan in February and supply disruptions at various projects including the 30mn t/yr Bintulu LNG in Malaysia and the 3.6mn t/yr Prelude LNG in Australia have drawn down inventories and created spot demand.
"I don't think [Japanese buyers] would buy alternative spot cargoes in such a crazy market," a trader at a Japanese trading house said, saying cargo swaps will be likelier.
Japanese buyers may consider diverting their Russian cargoes to Chinese buyers in exchange for cargoes from non-Russian sources, such as Australia. China is one of the few major powers to have expressed any support for Russia's position as tensions over Ukraine have mounted in recent weeks.
This comes as Asian spot LNG prices have increased, although still shy of their all-time high last December, pulled up by gains in European gas hub prices. The Dutch TTF price rose on 24 February after the invasion of Ukraine earlier in the day sparked uncertainty about supplies of Russian gas to Europe.
The ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia, for the front half-month was assessed at $33.310/mn Btu for second-half March on 24 February, up by $6.895/mn Btu from the previous day and $9.880/mn Btu, or around 42pc, higher than a week earlier. But it was still lower than the record high of $44.980/mn Btu on 22 December 2021. The TTF front-month contract surged $8.320/mn Btu, or 28.3pc, to $37.730/mn btu on 24 February.
Whether or not term cargoes from Sakhalin can be diverted to an alternative destination depends on the diversion clause of each contract and differs on a case-by-case basis. But most Japanese buyers with offtake agreements said that such diversions are possible. The larger concern is with shipping, as well as the prospects of Sakhalin Energy declaring force majeure (FM).
"The problem is that if Russia imposes ban of export, this leads to FM. In the case of FM, there is nothing buyers [can do]," a trader at a Japanese firm said.
Other options
Purchasing electricity from the spot market or switching to coal for power generation is another option for power utilities, industry participants said. But that is out of the question for Japanese gas firms, which supply gas to downstream customers.
"There are some expectations that power prices in Japan will come down in the next few weeks with warmer weather. Then we can buy power instead of LNG," a trader at a Japanese power utility said.
Some industry participants expect that warmer weather in March could reduce power generation needs by power utilities, erasing their need to buy LNG, power or coal as a replacement.
"Economically, lowering generation makes sense, considering the current spot market," a trader said.
The Japan Meteorological Agency on 24 February predicted a 40-50pc probability of above normal temperatures almost throughout Japan from 26 February to 25 March.
