If the Sakhalin supply is cut, how can Japan acquire enough gas?

Tokyo, July 8 (Reuters) – As hostilities with Moscow increase, Japan is at extremely high risk for energy independence interruptions when the gas is scarce, and market prices are of Therrell high.

The other week, Russia took total control of the Sakhalin-2 gas and oil project in its far east, which is currently owned by Shell (SHEL.L) and Japanese shareholders under 50%.

Notwithstanding Moscow’s claim that there was no rationale for suspending Sakhalin-2 exports, the action expressed concern that it may affect the already volatile LNG market. Ten percent of Japan’s annual LNG imports originate from Russia, primarily under long-term contracts with Sakhalin-2.

As part of the Coalition of Seven’s broad financial sanctions against Moscow for its invasion of Ukraine, Japan has opted to lessen its reliance on Russian energy, specifically coal and natural gas. Still, it needs to continue to procure liquefied natural gas (LNG) despite soaring spot prices as Europe works to improve LNG imports.

What possibilities does Japan have to get alternatives quickly?

In Japan, LNG compensates 39% of the nation’s power mix and 24% of its primary power mix.

After China, Japan was the second-largest LNG producer in the world in 2021, purchasing 74.32 million tonnes of the fuel, 6.57 million of those which came from Russia, the nation’s fifth-largest LNG supplier.

Experts assert that Japan’s options to obtain substitution supplies in a Sakhalin LNG crisis are limited.

Thus according to Hiroshi Hashimoto, chairman of the gas group at the Institute of Energy Economics in Japan, electric companies and city gas wholesalers, who currently acquire about 80% of LNG via long-term agreements, would therefore temporarily ask their suppliers for additional quantities and keep competing for spot cargoes (IEEJ).

Upward Quality Tolerance (UQT), financial flexibility that is frequently included in long-term contracts that permits consumers to seek volumes that are between 5% and 10% higher than what has been originally promised, is a phrase that buyers use.

Koichi Hagiuda, Japan’s industry minister, the United States, and Australia have requested additional sources to assist the country in diminishing its reliance on Russian energy.

The senior analyst at Wood Mackenzie, Lucy Cullen, highlighted that European consumers use the preponderance of U.S. LNG volume. At the same time, Australian producers must cope with a local winter’s energy problem. Nonetheless, any rise in supply from either of the two nations in the nearish term would be restricted.

Although it will be considerably more expensive since spot prices are far higher than the market supply from Sakhalin-2, replacement Russian LNG will be doable, according to IEEJ’s Hashimoto, even if it won’t be simple.

According to Japan Oil, Gas and Metals Development Corp, Japanese purchasers paid $12.15 per million British thermal units (mmBtu) of Russian LNG in May, less than the average tariff price of $15.58, the market price cargo price for transport to Japan of $31.1. (JOGMEC).

Due to intense competition from Europe, which would be preparing for a potential disruption of Russian gas, Asian spot LNG prices are currently trading at about $39 per mmBtu.

According to WoodMac’s Cullen, “increasing Japanese spot purchases will further tighten the global marketplace.”