Japan’s Declining Gas Demand Will Leave Utilities With Persistent LNG Oversupply Through 2030

The report finds that Japan’s largest utilities — including JERA, Tokyo Gas, Osaka Gas, and Kansai Electric — are likely to face an over-contracted position of roughly 11 million tons per annum (mtpa) for the remainder of the decade.

Due to limited growth opportunities in Japan’s domestic gas market, these utilities are cultivating LNG demand abroad by investing in midstream and downstream gas infrastructure, such as regasification terminals and LNG-fired power plants, particularly in South and Southeast Asia. Government policies have also encouraged Japanese companies to transact higher LNG volumes with emerging markets. 

“The importance of Japan’s shift into LNG resales and marketing should not be underestimated,” says Sam Reynolds, the report’s co-author and LNG research lead at IEEFA. “Rather than absorbing more volumes from the global market, Japanese companies may increasingly find themselves in direct competition with global suppliers for potential customers in emerging markets.”

Based on figures from the Japan Oil, Gas and Metals National Corporation (JOGMEC), LNG sales by Japanese companies to third countries surged from 14.97 million tonnes (mt) in FY2018 to over 38 mt in FY2021. Although domestic sales have declined, the total volume of LNG transacted by Japanese companies increased over the same timeframe.

Japan’s domestic LNG demand is falling due to rising generation from nuclear and renewables, long-term energy and climate targets, and demographic shifts. Meanwhile, the country’s incumbent utilities have lost significant market share since 2017 due to the introduction of retail competition in gas and power sectors.

Government climate and energy plans expect LNG-fired power generation to more than halve by 2030. As a result, IEEFA estimates that Japan’s LNG demand could fall between 25.7 and 31.6 mtpa — or roughly one-third of 2019 levels — if electricity generation targets are achieved. LNG imports have already fallen 22 mtpa since 2014.

Japan’s Ministry of Economy, Trade and Industry (METI) has set a target for companies to transact 100 mtpa of LNG by 2030. This is well above the 79 mtpa that buyers have currently contracted, but in line with recent transaction volumes. Meanwhile, Japan’s Asia Zero Emission Community (AZEC) initiative aims to replicate its energy mix across Asia. 

These policies, as well as the corporate strategies of major utilities, suggest Japanese companies will continue to play a major role in LNG transactions, despite declining domestic demand. For example, JERA executives have expressed a desire to turn the company into a major global LNG portfolio player. At the same time, Tokyo Gas has said that the ultimate target is to form a Southeast Asia LNG value chain.

Moreover, Japanese LNG marketers could face a unique set of challenges amidst a looming global glut. Most of Japan’s purchase commitments contain pricing formulas indexed to oil benchmarks, often at relatively steep rates that may be out of the money compared to falling spot prices. During past periods of global LNG oversupply, some Japanese utilities have lost money on reselling LNG abroad, demonstrating the financial risk involved with LNG trading.