Gas 2023 Issue

Future of LNG demand in Japan As oil, coal, and other energy sources decline in the energy transition to net zero, LNG demand will remain strong in the long transition to renewables

Jeremy Goh Baker and O’Brien Inc.

J apan has had a long history of LNG imports, with the first cargo arriving more than 50 years ago in November 1969. Since then, Japan has historically been the l argest importer of LNG in the world. In 2021, China overtook Japan as the largest importer. This trend was interrupted in 2022 as high LNG prices contributed to a drop in Chinese LNG demand, while Japanese LNG imports remained relatively stable. In addition, against the backdrop of an ageing and shrink - ing population and recent announcements that the official government energy policy target is net zero carbon emis - sions, the future for Japanese LNG imports warrants a further review of new factors coming into play, such as renewables. In parallel, government policy on nuclear and renewables and the significant impact it is projected to have on Japan’s future gas and LNG demand should be considered. Dependence on imported energy Japan’s geography has historically limited the range of energy solutions it has been able to rely upon for its large industrial economy. Japan is geographically expansive, stretching about 1,900 miles from tip to tip, or about the dis - tance from Houston to Seattle. Located on the Pacific Ring of Fire, this island nation includes around 6,852 islands, although most people live on one of the four main islands. From north to south, Japan stretches over a wide range of latitudes, approximately the equivalent of Minneapolis to Mexico City. Most of its land area is mountainous, seismically active, and occasionally volcanic, with less than 20% of the land being arable. Japan also lacks major oil and gas basins, so less than 2% of Japanese gas needs are met by indig - enous production. Although coal resources do exist at both ends of the country on the southern island of Kyushu and Hokkaido in the north, these are not cost competitive with imported coal. The mountainous terrain also leads to isolated energy markets with limited interconnections. Consequently, Japan’s electric utilities have historically been regionally based and mostly self-sufficient. As a result, Japan must import most of its energy needs and spread out the sources of power generation due to the isolated markets and demand centres. Most LNG used for electricity generation Eighty-five per cent of Japanese primary energy comes from oil, coal, or natural gas. After the 1970s oil crises, Japan

Major LNG importing countries

Country

2021 LNG imports, Mt/y

China Japan

79 74 47 24 19

South Korea

India

Taiwan World

372

Table 1

began to diversify its energy sources with the introduction of coal, gas, and nuclear power stations (see Figure 1 , left). As gas-fired power generation demand grew, the lack of indigenous gas supplies meant that LNG imports were necessary. In 2020, the power sector consumed about two- thirds of the gas supply (see Figure 1 , right). As a result, to understand Japan’s future LNG and gas demand, it is impor - tant to understand how Japan’s power mix may evolve. Unique grid system Uniquely amongst developed nations, Japan has two power grids with different voltages and frequencies. One, in the east, runs on the 220 V/50 Hz system; the other, in the west, runs on the 110 V/60 Hz system. This is a historical legacy – in the 1800s, Tokyo bought 50 Hz generators from Germany, whereas the Kansai region, where Osaka lies, bought 60 Hz generators from GE in the US. Over time, most countries have rationalised their mul - tiple electrical systems into a national grid. However, the cost-benefit trade-off for transitioning to a single electrical

Japan, primary energy mix 2020 (EJ)

Japan, gas consumption 2020 ( Mt/y )

Hydro 0.7 Nuclear 0.6

Renewables 1.3

Residential 6.3

Commercial 8.2

Oil 6.6

Industrial 8.9

Coal 4.8

Power generation 57.5

Natural gas 3.7

Figure 1 Gas provides 3.7 EJ of Japan’s primary energy mix and 57.5 Mt/y of LNG is consumed in power generation

Gas 2023