Japan, Russia Bond over LNG, Causing Russia's Share of Japanese Market to Grow

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Researched by Industrial Info Resources (IIR) (Sugar Land, Texas)--Russia is home to the second-largest proven reserves of natural gas in the world, behind Iran. Japan is the world's largest consumer of natural gas, importing more than 83 million metric tons of liquefied natural gas (LNG) in 2012. Yamal LNG JSC, a joint venture company majority-owned by Novatek OAO (LSE:NVTK) (Tarko-Sale, Russia), is currently working with Japanese engineering and construction firm JGC Corporation (TYO:1963) (Yokohama, Japan) as one of its contractors on a new LNG export terminal in the northern reaches of Russia. This plant has the potential to supply up to 9% of Japan's total LNG imports by 2019. This is in addition to the market share already enjoyed by Russia's state-owned gas company, and sole licensed exporter of LNG, Gazprom OAO (LSE:OGZD) (Moscow, Russia).

The Yamal LNG plant is to be built in phases, with the first expected to be brought online in early 2017, according to Industrial Info's data. Each phase will have an LNG production capacity of 5.5 million tons per year (MMT/yr). If Yamal LNG were to dedicate the entirety of its capacity to Japanese-bound shipments, it could supply up to 6% of Japan's LNG each year, based on 2012 import figures. However, Yamal LNG plans to ship eastward, via the Northern Sea Route, which runs along the Russian arctic coast from the Atlantic to the Pacific. This route is only passable in the warmer half of the year, so Yamal LNG will ship eastward to Asia in summer and westward to continental Europe in winter.

As it stands, Japan sources between 8% and 9% of its LNG from Russia, depending on industry. This gas comes primarily from the Sakhalin-II LNG production facility in the Russian Far East, owned and operated by Gazprom. This gas takes only about three days to reach Japan, making it a very stable supply source. Gazprom has supply contracts with the four largest Japanese gas companies, as well as with four of the 10 regional power monopolies in Japan.

Yamal LNG has seen considerable interest from Japanese gas buyers Mitsui & Company Limited (TYO:8031) (Tokyo), Mitsubishi Corporation (TYO: 8058) (Tokyo), Tokyo Gas Company Limited (TYO:9531) (Tokyo), Tokyo Electric Power Company Incorporated (TYO:9501) (Tokyo) (TEPCO) and Marubeni Corporation (TYO:8002) (Tokyo). Novatek has held meetings with executives from these corporations and may accept a bid to own part of the project. If TEPCO takes part in this venture and starts to source gas from Russia in the long term, it will mean that half of Japan's power companies are sourcing gas from Russia. Along with other planned LNG projects in the Russian Far East, it is possible that Japan could source around 20% of its LNG from Russia by the time Yamal LNG completes its third train in 2019.

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