The main market opportunities for international LNG players in Japan

Gavin Thompson's picture
Gavin Thompson, Vice President Energy Research, Wood Mackenzie
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When Gastech News asked Gavin Thompson about his views on the main market opportunities for international LNG players in Japan, he said: "While the outlook for LNG demand in Japan looks more challenging, the global LNG industry still recognizes that Japan is the world’s largest LNG market, and will continue to be so.

Even though we expect Japan's LNG demand to decline, post-2020 un-contracted demand will rise as existing contracts expire. This will create opportunities for international players to close deals with Japanese companies looking for new supply contracts. We also continue to see opportunities for Japanese investment in new LNG supply projects; it was Japanese investment and contracting that underpinned the major growth in Australian supply in recent years and it was a similar level of procurement leadership by Japan that pushed forward much of the US LNG capacity currently under construction. While Japanese LNG demand looks less assured and market liberalization is creating uncertainty for incumbents, the LNG industry will continue to look to Japan both as a critical market and as an investor for future LNG supply.

Japanese baseload power capacity (coal and nuclear) is ramping up at a time when overall power demand is declining. Both gas and power demand in Japan are being hit by a weaker global economy, slower export growth and challenging GDP performance at home. Knock-on effects of the slowing Chinese economy is particularly impacting industrial gas and power demand. This is reducing electricity-intensive heating and air-conditioning demand. We have consequently revised down both our short-term and long-term LNG import forecast for Japan, and a continued decline in demand will have implications for some buyers seeking to manage over-contracted positions as well as for suppliers looking to secure contracts into the market.

As a result, the way Japan is contracting LNG is also changing. As the world's largest LNG buyer, Japan has developed a large and diverse LNG supply portfolio with long-term contracts in place across ten supply countries. Japan has also signed several deals with portfolio players. Before 2011, Japan had a relatively low dependence on the spot market in comparison to its market size, but Japanese companies are now seeking out short-term and spot deals both out of necessity and as a new strategy. Demand uncertainty, combined with having a large base supply over the short-term, has led utilities to opt for shorter-term deals. However, some companies have made it a strategic goal to double their exposure to the spot market. With increased consolidation, Japanese companies are looking for ways to increase the flexibility of their supply, even with the potential for global trading. Flexibility is becoming the new benchmark for energy security.

The corporate landscape in the Japanese gas and power sectors is also changing. April 2015 marked the beginning of a new path for TEPCO and Chubu Electric, which will see the merging of several of their business units together into a new, separate company, called JERA. JERA is now the largest LNG buyer in the world and one of the largest coal buyers. It will also account for half of Japan's total power generation. With rising competition in the Japanese energy sector, it is possible that we will see further consolidation between existing players as they seek to defend market share against new entrants. Japanese gas and power utilities will be forced to break out of their historical business models and will be increasingly looking for new revenue streams. Partnerships with international players are one way Japanese companies are evolving. Furthermore, Japanese companies are making headway into new markets, investing further downstream, which could have benefits for future international partners.

With changing contracting models and a weaker demand outlook, many LNG suppliers are now re-evaluating their understanding of the Japanese market. But it is essential to remember that Japan will remain the world's largest and most important LNG market. With numerous legacy contracts coming to an end, the Japanese LNG market, and Japanese LNG buyers, will continue to be critical to the industry as a whole and will continue to play a pivotal role in defining the future of the sector for decades to come."

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