Japan could be poised to take spot LNG next year, as more than 6 mill tonnes per year of long-term LNG supply contracts are due to expire - a trend that is likely to continue.
This comes at a time when Japan faces stiff competition for LNG from Europe.
Of the roughly 6.1 mill tonnes of long-term LNG contracts, due for expiry in 2023, Brunei LNG will account for 56% of the contracts, according to S&P Global Commodity Insights LNG database.
These contractual expiries represent about 8% of Japan’s annual LNG imports of around 74 mill tonnes, which will be difficult to replace with incremental supply from other long-term term contracts or short-to-mid-term contracts amid tight LNG markets.
“Everybody is seeking term [supplies] including for strip and mid-term [contracts],” a Japanese buyer told S&P Global. “We tapped a few [suppliers] but there are no [suppliers] offering oil-indexed long-term contracts.
“So we are in a situation [where we have] to keep the door open for spot [volumes] because sellers are not willing to offer,” he said, adding that Japanese buyers cannot secure their LNG requirements in advance.
Supply uncertainty
The Russian invasion of Ukraine, which has tightened the LNG supply/demand balance and increased uncertainty over supply, including from the Sakhalin 2 project, is also impacting Japanese companies’ LNG procurements in 2023, said Hiroshi Hashimoto, senior analyst and head of gas group at Japan’s Institute of Energy Economics.
“Of course, [Japanese companies] must have taken steps for contractual expiries in advance but the situation has slightly changed, which has created the need to move additionally,” he said, adding that this included not only pursuing more long-term LNG supply than previously expected but also seeking spot LNG procurements.
Japanese buyers have mostly secured sufficient LNG for the upcoming winter through March, 2023 despite facing some supply issues, including from Malaysia LNG and US Freeport LNG, with some still in the middle of working out their annual delivery programmes for 2023, according to market sources.
However, the country’s overall LNG procurements might fall in 2023, due to the expected restarts of two nuclear reactors during the year.
Japan’s economic outlook for 2023 remains challenging and the country’s overall power demand will be at a similar level to 2022, said Kaori Tachibana, S&P Global’s associate director of gas, power & climate solutions.
“With the ramp up of up to 10 reactors by February, 2023, and a further two scheduled for restart next summer, the pressure on LNG is expected to be lifted.
“With tight supply expected to continue for the next few years, Japan’s nuclear restart strategy will help alleviate the situation,” she said. “However, nuclear restart remains highly uncertain and delays will place pressure on the tight LNG market, as well as on domestic power supply.”
Japan’s exposure to spot LNG trades will continue in the next few years unless it is able to secure some sort of extension to expiring long-term contracts or short-to-mid-term contracts.
The country’s long-term LNG contractual volumes are forecast to fall to around 62.86 mill tonnes in 2030, compared with 85.11 mill tonnes in 2025 and 89.83 mill in 2023, according to S&P Global data.
