(Bloomberg) — Japan’s tough unused plan to support clean energy is disrupting the liquefied natural gas market it helped pioneer 60 years ago.
The country, the world’s largest importer of liquefied natural gas, has called for more renewable energy sources such as wind and solar power to replace natural gas in a revised plan released final week. The shift aims to nearly halve LNG power generation this decade, creating disruption to Japanese utilities as well as suppliers from Qatar to Australia to the United States.
The stricter guidelines will see Japan’s imports fall by a third by the end of the decade, according to traders and analysts. It will force domestic utilities to desert lengthy-term LNG deals, which have been the backbone of the country’s imports, while increasing reliance on the more volatile spot market.
“This move will dampen the appetite of Japanese LNG buyers to sign lengthy-term deals extending beyond 2030, which could make them more vulnerable to short-term price dynamics if demand ends up overhead target,” said Sol Kavonic, an energy analyst. At Credit Suisse Group AG.
The policy was a surprise to suppliers around the world. Natural gas – once widely seen as a bridge to a green coming – has been unpopular with some governments because it boosts efforts to slow climate change and the cost of renewables drops dramatically. Until recently, Japan was touting the ultra-cold fuel as a cleaner alternative to coal.
It is not clear whether Japan will reach its unused goals. To aid replace the 50% drop in liquefied natural gas, the country will need to restart nearly all of its nuclear reactors — a tricky business given the powerful domestic opposition. The uncertainty will force Japan to dive into the spot market or sign short-term contracts, which together currently make up only 30% of whole imports. This is lower than the global average of 40%.
“Inevitably, the share of spot and short-term buying is expected to increase,” said Hiroshi Hashimoto, a Tokyo-based analyst at the Institute of Energy Economics of Japan. “Utility companies are expected to decrease contract periods as well as volumes not only due to the unused policy, but also due to uncertainty about requirements from individual businesses.”
Japan’s desire for lengthy-term LNG deals has helped build and maintain the industry since the 1960s. Deals lasting more than 20 years are pillars of unused LNG export projects, without which it is firm for developers to get support from banks and investors for unused terminals or expansions.
This is bad news for Qatar, which is aggressively boosting production, and for proposed projects from the United States to Papua New Guinea that are vying for investment.
Traders said that facilities with stakes in LNG export facilities are likely to increase investments in import terminals and power projects across Southeast Asia in order to increase demand for their fuel. This will effectively turn Japan into a medium for LNG with reduced domestic consumption.
Japanese companies were already seeking short-term contracts of less than 10 years, as the country’s declining population and advances in energy efficiency meant their demand for LNG had already peaked in the former decade. But the government’s unused targets unkind demand will fall more than expected, and require utilities to speed up efforts to rebalance their LNG portfolios.
If the 2030 targets are met, Japanese LNG demand could fall by about 25 million tons, according to Bloomberg NEF Olympian-Matee analyst. Japan imported 74.4 million tons in 2020, according to the International Group of LNG Importers.
Meanwhile, Japanese companies will think twice prior renewing old contracts or investing in unused export plants. The oldest Japan-Indonesia liquefied natural gas agreement, which has been in place for nearly 50 years, collapsed final year due to uncertainty exacerbated by the coronavirus pandemic.
(Updates with analyst comment in seventh paragraph.)
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