Gas 2023 Issue

However, the 6th SEP’s adoption has begun to produce some changes. On 21 December 2022, Japan’s Nuclear Regulation Authority proposed a new rule allowing the cur- rent 40-year normal operating period to be extended to 60 years or more. In addition, new reactors meeting upgraded post-Fukushima safety standards have been proposed to replace retiring reactors. Achieving nuclear ambitions, therefore, is still very uncertain, but at least now it has stronger backing. Wide range of uncertainty In Figure 2 , we also present a low-nuclear scenario, where nuclear power is restricted to the 2019 levels of 6%. In this scenario, gas accounts for 28% of the power mix in 2030, up from 20% on the 6th SEP. However, the energy mix plans are only strategic directions and must be implemented by utility companies. Adding up the latest (2022) utility plans and expectations for generated power in 2031 shows that these plans include 6% nuclear, like 2019, and fewer renewables than on the 6th SEP. In this scenario, gas accounts for 31% of all power generated. Therefore, there is a wide range of plausible gas and LNG demand scenarios for Japan by 2030 – gas demand may differ by as much as 50% depending on nuclear and renew- ables generation. Meeting this gas demand uncertainty requires flexibility. Flexible LNG contracts Although total Japanese gas demand may fall slowly over time, a contracting gap will open up by 2025 in our low nuclear scenario as older contracts expire. In addition, the 5 Mt/y of Russian gas imports are widely expected not to be renewed. Thus, new LNG contracts are necessary to secure LNG supplies. Historically, LNG import contracts have been restrictive, with minimum take or pay terms, restricted destinations, restrictions on reselling, and long durations of typically 15-20 years. However, given the large uncertainties in the adoption rates of renewables and nuclear policies, Japanese utilities need to seek more flexible LNG contracts, especially with improved destination and reselling flexibility to enable portfolio optimisation and trading of surplus volumes, which maximises the value of their offtake contracts. Notably, Japan did not renew Qatari contracts when they expired in 2021 (see Figure 3 ). LNG cargoes from the US Of the major new sources of LNG supply coming on stream by 2025, the US stands out for being flexible in terms of volumes, reselling, and destination clauses. Approximately 28 Mt/y (5 Bcf/d) of new LNG capacity is under construction in the US, which should come on stream by 2026. Japan is already one of the most important destinations for US LNG, behind only South Korea, with 25.9 million tonnes of LNG (1,246 Bcf) of LNG imported since 2016. In May 2022, Japanese economy minister Koichi Hagiuda visited the US and noted that Japanese companies are interested in buying US LNG. Furthermore, the recent visit of Prime Minister Kishida to Canada, which resulted in no concrete commitments, also

Supply gap opens up from 2024 onwards

LNG demand (low nuclear scenario)

Other

Russia

USA

Australia

Qatar

Figure 3 Japan LNG contracted supply

Top 5 US LNG destinations

Country

US LNG exports 2016-2022 (MT LNG)

South Korea

35.8 25.9 21.9 20.6 20.5

Japan Spain

United Kingdom

China

Table 2

underscores Japan’s need to secure future LNG imports from stable countries with low political risk. Unsurprisingly, recently there has been some activ- ity by Japanese companies in securing long-term US LNG supplies. In December 2022, Inpex announced that it had signed a 20-year 1 Mt/y LNG supply from Venture Global’s Calcasieu Pass LNG project. In January 2023, Japan’s Itochu Corporation was reported to have signed a 15-year 1 Mt/y LNG supply contract with NextDecade from its Rio Grande LNG export project in Brownsville, Texas. Conclusion LNG will play a key role in the long-term Japanese power mix for the foreseeable future. However, Japan is a good example of why the energy transition (in Asia and else- where) towards low-carbon sources requires a more flex - ible long-term supply model. The uncertain quantity and rate of adoption of nuclear and renewables generation creates a wide range of potential future Japanese LNG demand requirements. As a result, traditional restrictive long-term supply LNG contracts are unlikely to provide suf- ficient flexibility. So, Japan could increasingly look to the US for long-term LNG supply unless other suppliers follow its lead and loosen destination or resell restrictions. Jeremy Goh has over 20 years of experience in the energy industry in a wide range of roles. He focuses on global gas and LNG, as well as proj- ect development processes and project economics. He has a Master’s in engineering science from the University of Oxford, and an Executive MBA from Texas A&M. Email: Jeremy.goh@bakerobrien.com

Gas 2023