Chairman’s Message

<Main Points>

Japan’s 7th Strategic Energy Plan recognizes the important role of LNG.

LNG imports in 2040 are expected to be between 54 Mt and 74 Mt.

Long-term contracts important for Japan will start expiring after 2029.

Unleashing Asian demand is important to support large projects.

Expansion of LNG supply from North America is important.

Four North American options (Gulf, Mexico, Canada, Alaska) each have pros and cons.

1. Japan’s 7th Strategic Energy Plan recognizes the important role of LNG.

Japan’s 7th Strategic Energy Plan that was decided by the Cabinet on February 18th attaches important roles for LNG. To meet the expected increase in the demand for power driven by AI, electrification and reshoring, gas-fired power plants are expected to play a key role in the power mix in 2040. For the industries to reduce their carbon emissions, the transition from coal to LNG is vital. Additionally, to address the intermittency caused by the further deployment of variable renewable power, gas-fired power plants are expected to provide crucial dispatchable power.
　While the Japanese government is pushing to restart the existing nuclear reactors, complete construction of new power plants, and replace retired nuclear reactors, the share of nuclear will reach a maximum of 20% of the power mix. Meanwhile, renewable energy in Japan faces various challenges. Even with the strong push from the government, the ratio of renewable energy is expected to reach only 40-50% in 2040. Gas-fired power plants will be essential to supplying the remainder of the power needs.

2. LNG imports in 2040 are expected to be between 54 Mt to 74 Mt

Japan’s 7th Strategic Energy Plan has two sets of scenarios for 2040. The main set is designed to put Japan on the path toward realizing carbon neutrality by 2050. Within this set, four sub-scenarios vary based on assumptions about the deployment of technologies such as renewables, hydrogen, and CCS. LNG imports in 2040 are expected to range from 54 Mt to 60 Mt. This will represent a modest reduction from the 66 MT imported in FY 2022.
　A unique aspect of the 7th Strategic Energy Plan is its inclusion of a Plan B alternative scenario. Plan B assumes that the desired deployment of technologies will not materialize as expected, resulting in Japan deviating from the carbon-neutral pathway. Under this scenario, LNG imports would rise to 74 Mt, which will be an increase from the recent import level. The expected increase reflects the importance the Strategic Energy Plan attaches to LNG. The Strategic Energy Plan also emphasizes the importance of cleaner LNG, particularly methane emissions management throughout the LNG value chain.

3. The Importance of long-term LNG contracts for Japan

The impact of the energy crisis triggered by Russia’s invasion of Ukraine was relatively contained for Japan compared to European countries, thanks to Japan’s long-term contracts. Recognizing this, the Strategic Energy Plan emphasizes the importance of long-term LNG contracts for Japan.
　Currently, Japan has an adequate level of long-term contracts, but many will begin expiring after 2029. Japan will need to address the significant gap between its projected demand and its already secured long-term contracts.
　Given that past long-term contracts for Japanese buyers were often 20 years or longer, projected LNG demand in 2040 is a major consideration for new contracts. The 20 Mt gap in the 2040 LNG import projection, ranging from 54 Mt to 74 Mt, poses a challenge. Japanese players will be cautious about engaging in long-term contracts that fall within this range. This is why the Strategic Energy Plan mentions the necessity of policy measures to mitigate the risks associated with engaging in long-term contracts falling within this range.

4. LNG demand from Asia is crucial

While Japan’s LNG demand remains strong, the need for new long-term contracts is limited to covering the gap between expected demand and existing contracts. This alone will not be enough to justify new LNG projects.
　Aggregating demand from Korea and Taiwan is important, but it is even more important to unlock the potential of LNG demand from Southeast Asia and South Asia, which is expected to be growing substantially in the coming years.
　However, there is a challenge here. These Asian countries face difficulties in securing financing for their LNG related projects including gas-fired power plants and LNG receiving facilities. The G7 Leaders’ Statement discourages financing for LNG related projects.
　Multilateral Banks, such as the Asia Development Bank, are reluctant to provide finance for such projects. Additionally, the international private financial sector is also reluctant due to their commitments under the Glasgow Financial Alliance for Net Zero (GFANZ).
　The U.S. Department of Treasury under the new Administration appears to have revoked its directive given to its representatives to the boards of MDBs to oppose projects related to fossil fuels. Several U.S. banks, followed by a Japanese financial group SMBC, have announced their exits from GFANZ. Such steps could contribute to unlocking financing for LNG projects in Asia. However, more steps must be taken to realize the full potential of LNG in supporting economic growth and reducing GHG emissions by enabling the transition from coal to gas. One of the first tests is the language of the Leaders’ Statement of the G7 Summit Meeting in June, to be chaired by Canada.

　5. LNG Supply from North America is important

So where should Japan get the additional LNG supply? Currently, Russia accounts for 9% of Japan’s LNG demand. Considering the turmoil created by Russia’s invasion of Ukraine and the energy security concerns, it would not be easy for Japan to continue depending on Russian LNG.
　Before the invasion, Russia supplied 25% of the global gas market. There are basically only two production regions that can replace Russia at scale. One is Qatar and the other is North America. Qatar still insists on having a destination clause in its long-term contracts, which is increasingly problematic as Japan needs more flexibility to address the uncertainties in future demand. East Africa has substantial potential, which may make it a third possibility, although it may take more time to realize its full potential.
　This leaves North America as the most likely main source to supply LNG to Asia in the future. The return of President Trump unquestionably reinforces this prospect. The pause for LNG export authorization that was introduced by the previous Administration has been revoked and permits for pending LNG projects are being issued.

6. Pros and Cons of North American LNG options

There are roughly four options for LNG from North America. Each has its pros and cons.
　The first option is LNG from the Gulf of Mexico (or America). The biggest challenge is that due to low water level or higher costs, most LNG vessels are not going through the Panama Canal. Instead, they are making the long voyage via the Cape of Good Hope and through the South China Sea. It is costly, increases the carbon footprint, and is exposed to geopolitical uncertainties. On the other hand, as they do not need to construct significant infrastructure like pipelines, their CAPEX is relatively lower so they can deliver LNG sooner.
　The second option is to source natural gas from the Gulf region or from the Rockies, send it across Mexico for liquefaction, and export LNG from the Pacific coast of Mexico. The first LNG cargo is expected to depart next year. However, uncertainties remain regarding the extent of necessary pipeline capacity expansion. The costs and length of time will be affected by how much additional pipeline is needed.
　The third option is Canadian LNG. The first LNG cargo from British Columbia to Asia is expected to depart this summer. There is room for expanding this project and possibilities of developing other projects. The First Nation People appear to be generally on board to support such projects. The big question mark is to what extent Canada’s Federal Government is committed to LNG exports. The results of the expected national election may change the prospect of Canadian LNG.
　The fourth option is Alaskan LNG. In his State of the Union Speech, President Trump specifically mentioned Alaskan LNG. At the recent CERAWeek, Governor Dunleavy of Alaska made a pitch to realize the Alaska project to export LNG to Asia. Alaska’s location is the closest among the four options to Asia, but it has major challenges that must be addressed.
　First, the price tag for Alaska LNG project is $44B, much larger than a comparable project in the Gulf, which is about $20B when it does not require new upstream gas production, processing, or transportation capacity. To narrow the big cost gap, substantial policy intervention is crucial. The concrete magnitude of financial support from the state government is not yet clear. Beyond the $30B loan guarantee, the budget support from the federal government is also not clear.
　Timeliness and timeframes are crucial for Asian players, especially Japanese players. Can the project be ready to deliver LNG by around 2029 to address the expiration of existing long-term contracts? What are the risks of the project being delayed by court challenges or by the change in political leadership? Can the offtake commitments be allowed within the timeframe by 2050, which is the year pledged to realize carbon neutrality by many countries including Japan? Can the project recover the investment by 2050? These questions must be satisfactorily answered.
　The recent imposition of tariffs on steel products will further handicap Alaskan LNG, which requires the construction of an 800 mile or 1300 km pipeline. The project will be made even more expensive if tariffs continue.

7. The Way Forward

There is homework for the relevant players in the LNG sector to materialize the potential of LNG:

The Japanese government must design policy measures to mitigate the risk associated with engaging in long-term LNG contracts for Japanese players.

Steps must be taken to unlock financing for LNG related projects especially in Asia. The G7, MDBs, and the international private financial sector, all have their roles.

Potential exporters to Asia must enhance the competitiveness of their projects. While there is demand for LNG, it is clear that not all of the projects can find their customers. Costs and timeliness are extremely important in this regard.

If the relevant players complete their homework, I believe that there could be a very positive future for LNG especially for Asia.