Relying almost exclusively on LNG imports for its gas needs, Japan accounts for one-third of global LNG consumption. In tandem with the dramatic changes happening in global LNG markets, the country is currently in the midst of sweeping reforms of its gas (and electricity) markets, aimed at making Japanese LNG purchasers more market-oriented and securing a better deal for Japanese consumers, who continue to pay high prices for their gas and electricity compared to their European and U.S. counterparts.
The Japanese gas market initially evolved around a handful of large, vertically-integrated regional gas supply companies, plus a number of smaller, local gas supply companies. At that time the market was fully regulated, with each gas supply company having an exclusive franchise over its own service area and benefiting from a regulated tariff.
Since 1995, the market has been gradually liberalised by way of amendments to the Gas Business Act, but these had, until the current reforms, been limited to larger-scale customers. Japan has also implemented some limited account and functional unbundling regulation, tied to third party access to the transmission and distribution infrastructure. A negotiated open access scheme for LNG infrastructure was also introduced in 2004, together with a lenient service, account and functional unbundling regime. There has so far been no mandatory unbundling of the underground storage sector – unlike in the U.S. and Europe, underground storage in Japan is utilised only on a limited scale for emergency or peak shaving capacity.
Despite close to 62% of the Japanese market now being able to choose its preferred gas supplier, the number of new entrants into the supply mix has been very low. One key structural barrier to entry is the lack of a nationwide pipeline grid, which makes it difficult for a new entrant to access the market unless it has access to an LNG terminal in that area. This is compounded by the fact that the rules in relation to open access to LNG terminals currently only require access to be given on a negotiated basis. Until now, the main competition has therefore come from other gas suppliers, electricity suppliers and oil companies, who have access to their own LNG terminals and/or pipelines.
The Gas Business Act was further amended in June 2015 and provides for the full deregulation of entry into the gas retail sector in April 2017. The retail tariff will be maintained for the existing gas supply companies during a transitional period. However, the next phase of the reforms is anticipated to be implemented by 2022 and will see the abolition of retail price regulations along with the implementation of legal unbundling of the pipeline divisions of the ’Big 3’ gas supply companies (Tokyo Gas, Osaka Gas and Toho Gas).
In addition, the amended Gas Business Act introduces a system aimed at greater third party access to LNG terminals, although the detailed rules regarding such third party access remain to be drafted. The Japanese Ministry of Economy, Trade and Industry (METI)’s Strategy for LNG Market Development, published in May, recognises that the lack of open and sufficient gas and LNG infrastructure would be a barrier to the realisation of a highly fluid LNG market (one of the key aims of the Strategy) and therefore increasing the capacity of LNG terminals, underground storage facilities and long-distance pipelines and the opening up of these facilities to third parties in a meaningful way will be a key focus of the Japanese government’s actions in this area, all whilst taking into account best practices from the European and U.S. markets in particular.
Finally, it is no secret that Japan has ambitions to establish itself as an LNG trading hub, with a view to offering a genuine market-based alternative to the traditional JCC-linked pricing structure. The ongoing energy market reforms, coupled with the current over-supply in the LNG market, will no doubt strengthen the case for the development of such a hub.
Join the Conversation: Do you agree with Kristian? Will Japan establish itself as an LNG trading hub? Leave a comment below.
The Gastech 2017 Call for Papers is Open! Submit an abstract on "Contracting, Pricing & Trading of Gas & LNG". Alternatively, find out more about the conference topics for both commercial and technical streams.
More on Japan’s gas and LNG industry:
Photo Courtesy of Allen & Overy.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.