Japan Invests Heavily In U.S. LNG Exports Amid Unpredictable Demand

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Researched by Industrial Info Resources (Sugar Land, Texas)--As the U.S. enters the world energy market as a supplier, it is important to look at its potential buyers, especially the world's largest importer of liquefied natural gas (LNG), Japan. Japan's power mix is still in a state of limbo as nuclear power comes online and offline irregularly after being shut down following the March 2011 earthquake, tsunami and nuclear meltdown triple disaster. The role of LNG in the island nation's power generation scheme fluctuates between temporary measure and staple.

However, due to its huge import levels of over 8 million tons per year (MM tons/year), Japan is beginning to leverage its buying power to influence change in the Asian LNG market, which has traditionally been a rigid structure of long-term, fixed-price contracts. Several major gas consumers in Japan have signed long-term supply contracts with American LNG suppliers for full-liquefaction-train amounts of gas. However, it is expected that short-term and spot purchases of LNG will become more common in the Asian market, according to presenters at IHS Energy's (Englewood, Colorado) CERAWeek event in Houston, Texas.

In April 2015, two of Japan's largest LNG consumers, Tokyo Electric Power Company Incorporated (TEPCO) and Chubu Electric Power Company Incorporated (Chuden) (Japan), formed a joint venture company, JERA, to oversee both companies' procurement of LNG and promote their interests in the world LNG market. JERA is linked directly to the U.S. export market as Chuden owns a full train-worth of LNG (4.4 MM tons/year ) from the planned Freeport LNG export terminal, which is scheduled to come online in late 2018. Additionally, TEPCO has signed supply agreements with Mitsui & Company Limited (Tokyo) and Mitsubishi Corporation (Tokyo), who are themselves purchasing 5 MM tons/year of LNG from the U.S.' Cameron LNG project, which is being developed by a unit of Sempra Energy (NYSE:SRE) (San Diego, California) and is set to come online in late 2017. Both of these supply agreements are in place for 20 years.

These two large agreements represent a significant amount of LNG, over 9 MM tons/year, which translates to more than 10% of Japan's average annual consumption. While this is significant, the rise in LNG imports to Japan has hinged on its nuclear reactors not being restarted, causing LNG to take over the 30% of the power mix which the reactors t represented. As reactors come online for months at a time between mandatory annual inspections, the spot demand for LNG is ever-changing, creating greater demand for flexibility in supply. JERA expects these spot purchases to represent a greater proportion of the LNG trading in the region over the next 10-15 years; however, this may have little effect on the U.S.'s energy exports, as, so far, Japanese purchase agreements have been the more traditional, long-term contracts.

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