Japan’s climate goals spark uncertainty for global LNG

Japan’s 2050 Net Zero pledge and shorter-term climate goals have triggered increasing uncertainty around the country’s liquefied natural gas (LNG) demand outlook, which energy experts say will likely spark more volatility for global LNG markets.

The country, which has been an instrumental player in the development of the global LNG industry over the past five decades, has set ambitious decarbonization targets.

In April 2021, Japan made its shorter-term emissions reduction target more ambitious by setting a goal to cut greenhouse gas emissions by 46% by 2030, compared with 2013 levels. The previous 2030 commitment had been a cut of 26%.

As a result of the new goal, the Ministry of Economy Trade and Industry (METI) revised Japan’s Basic Energy Plan, which was approved by the Cabinet in October 2021, to make it consistent with the latest 2030 emission reduction targets.

The latest plan focuses on cutting emissions further by promoting more nuclear and renewable energy sources, as well as fading out inefficient thermal power fueled by coal and natural gas. It also encourages co-firing of decarbonized fuels, such as hydrogen and ammonia, and implementing carbon capture, utilization and storage (CCUS) facilities.

Still, most analysts believe the latest climate target will be difficult for Japan to achieve in such a short space of time and they also doubt the feasibility of the 6^th Basic Energy Plan.

There is a lot more uncertainty for the future of LNG in Japan, said Martin Lambert, senior research fellow at the Oxford Institute for Energy Studies (OIES). “If you believe the METI plan then LNG demand will become a lot less, but in reality, it could be that LNG does pretty well in Japan as there are not many other options,” he told Gas Outlook.

Dan Shulman, a Tokyo-based Japan energy market expert, and principal of Shulman Advisory, believes the new 2030 power generation mix target will be “quite challenging to achieve.” In 2019, just 24.2% of the nation’s power mix was supplied by non-fossil fuel sources, but in eight years Japan is targeting to raise this to 59%, as the government expects a larger contribution from solar photovoltaics (PV) and nuclear, Shulman told Gas Outlook.

Shulman believes that LNG demand could rise in the short to medium-term given the 2030 non-fossil fuel power generation goals will be hard to hit.

Nuclear restarts

Although the government is banking on more nuclear power generation, Lambert remains bearish on restarts. “My logic for that is that it’s been ten years since Fukushima, and they have been trying to restart them for ten years. They have about 9GW of capacity operating, which is about one-third of where they could be. To get the other two-thirds started up, it’s hard to see what’s going to change in the next ten years compared to the past ten years. I don’t think there will be a sudden resurgence in the nuclear fleet,” he said.

Yuriy Humber, president of the Tokyo-based Yuri Group, a research firm, and founder of the Japan NRG platform, which publishes energy reports, told Gas Outlook that the nuclear restart process remains very complex, as it is intertwined with local politics and relationships.

“It’s hard for the national government to speed it up and even then, other pitfalls can appear, such as citizen groups winning court cases against restarts. So, the restart process will likely continue at a measured rate over the next few years barring any unexpected troubles at existing reactors,” said Humber.

Japan has done well with solar development and that will probably carry on, but it only helps some of the way on the decarbonization journey, said Lambert, adding that progress on wind power is lagging and may be slow to ramp up, despite the significant potential.

Implications for LNG

There is a considerable range of uncertainty for LNG demand, according to a report by the OIES published last November entitled Energy Transition in Japan And Implications For Gas, which analyzed various power generation scenarios.

While LNG accounted for 409 TWh of generation in 2019, requiring around 50 million tonnes per year (t/y) of LNG, the level of generation in 2030 ranges from a low of 187 TWh, using around 24 million t/y of LNG, in the METI plan, to 330 TWh, requiring 42 million t/y of LNG, in the OIES rapid renewables scenario. Although to achieve targets under OIES’ rapid renewables pathway “would require a step change in Japanese government policy regarding wind power,” Lambert wrote in the report.

This uncertain outlook will lead to increasing volatility for global LNG, Lambert told Gas Outlook. “Due to the uncertainty, it will be harder for Japanese LNG buyers to commit to long-term contracts in the same way as was common practice in the past. This means it will be harder for new LNG plants to be financed,” he added.

As a result, “there will be more of a boom-bust cycle than we have seen in the past. There will be a lack of commitment to new LNG facilities in a timely manner. A lot more volatility will be the implication,” said Lambert.

Shulman also agrees that Japanese buyers will be increasingly wary of signing 10-25 year take-or-pay term deals due to the demand uncertainty.

Meanwhile, although Japanese officials have often said that domestic purchases of LNG may decline over the coming years, Japan wants to continue to be a major player in the Asian LNG market by helping to develop the infrastructure to expand LNG use in countries such as Vietnam, Indonesia, India and Sri Lanka, noted Humber.

“The rationale being that LNG is cleaner than coal and provides baseload power to developing Asian economies that would not be able to shift to mass-scale renewables in the near term, such as Vietnam, Thailand and Indonesia. With the current government and policies, it’s unlikely Japan will turn away from LNG. In fact, one could argue LNG’s influence on Japan’s power market is only growing,” added Humber.

“Over the longer-term horizon, methanation, biomethane, and co-firing with ammonia/hydrogen will surely impact LNG demand in Japan and elsewhere, but it’s too early to predict how much demand will drop. In a sense, development of other energy technologies will play a bigger role in LNG demand than consumer fundamentals,” said Humber.

Losing the LNG crown

Japan was the world’s largest buyer of LNG since the early 1970s until China took the crown in 2021. China imported 81.4 million tons of LNG in 2021, up 17.8% from a year earlier. Japan’s imports rose 0.2% to 75 million tons, according to a report by energy industry consultancy IHS Markit.

With Japan taking a smaller role in the market, the overall dynamics will change, predicted Humber. “China will likely take Japan’s place to a certain degree, but Chinese buyers are not a like-for-like replacement for Japanese trading houses or utilities. For one, growing US-China tensions make investments from state-affiliated entities more problematic for some western operators,” he added.

Ultimately, Japan’s ambitious climate goals have created considerable uncertainty for Japanese LNG demand this decade. Unless Japan can rapidly ramp up nuclear and renewable power sources, which seems unlikely, then LNG demand will not decline significantly and may even rise. Moreover, LNG could even be used to help phase out coal as Japan looks to achieve its emissions reduction targets closer to the 2030 deadline.

More renewable energy will come online, but probably slower than expected. Still, if significant renewable energy capacity is developed by 2030, LNG’s role will no longer be mid-merit – instead it will be backing up renewable power sources. This means planning LNG deliveries will get much harder.

“In future, there will be a greater need for flexibility, as if suddenly it’s not very sunny or windy, Japan will need a lot more LNG. Maybe they will need more storage for LNG or probably more flexibility on receiving LNG,” said Lambert.

Whatever the outcome, Japan looks set to remain a major LNG buyer for at least another decade.