Japan’s recent Strategic Energy Plan (SEP) revision lowers the targeted share of LNG in the country’s power generation mix in 2030 to 20% from 27% as a measure to cut emissions. However, the targets could be too ambitious and changes the plan will bring will mostly be in the structure of commodities trading, according to recent Rystad Energy analysis.
Before Japan outlined its sixth SEP, Rystad Energy considered the earlier 27% target an underestimation, as it expects the country’s LNG reliance to be higher in 2030.
According to Rystad Energy’s calculation, if Japan’s sixth SEP’s targets were to be realized, in absolute terms, Japan’s LNG demand in 2030 would be cut by 18 million tonnes (Mt) from its previous estimate of 66 Mt.
However, in a base case of Rystad’s analysis, the country’s revised plan is only likely to remove 4.6 Mt of demand in 2030, bringing total LNG demand to 61.4 Mt, with the entire reduction coming from the power sector.
Japan will fail to meet its new LNG target share because the plan overestimates the potential contribution of renewables and nuclear in its power generation, Rystad said.
The new plan’s proposed 20-22% share for nuclear power will require upwards of 25 gigawatts (GW) of nuclear capacity to become available. This represents a restart for several, if not all, inactive reactors, on top of the currently operational 10 GW nuclear capacity in Japan. The required capacity is a daunting prospect given the widespread local opposition and safety concerns around nuclear power. Renewables might also be difficult to deploy as Japan’s small proportion of flat land area (30%) would constrain solar capacity, and the surrounding deep and turbulent seas would limit economically viable offshore wind capacity.
“Even if it is unrealistic, the challenging LNG import reduction target may bring uncertainty to Japanese companies. Legacy contracts will expire in the coming years and could end up being replaced by spot and short-term purchases,” said Kaushal Ramesh, gas and LNG analyst at Rystad Energy.
Companies with short positions will be tested during periods of extreme weather and high-power demand and will have to buy from an increasingly volatile spot market, which might intensify price seasonality in the region. Those with long positions may operate as portfolio players and on-sell volumes to other regions, Ramesh said.
Irrespective of its final size, Japan’s demand reduction may affect multiple producers, but disproportionately impact some Asia-Pacific basin players such as Brunei and Papua New Guinea that have historically leaned on Japan for LNG revenues. While producers have enjoyed exceptional stability and operational performance from Japanese importers, China is broadly expected to absorb some of the LNG volume growth lined up for the market.
“Like we expect in Europe, producers looking to supply Japan’s remaining LNG demand in the years ahead will likely have to demonstrate strong emissions credentials (such as by supplying carbon-neutral LNG) on top of higher flexibility and lower costs. This could put some emission-intensive projects in Australia (Ichthys, Barossa, Prelude) on the back foot, while volumes out of US and Russia could face scrutiny over upstream flaring and venting.”
Before Japan’s recent revision, Rystad Energy estimated the global LNG supply deficit in 2030 at 104 Mt. Based on currently operational and under-construction LNG projects, Japan’s realistic LNG demand reduction of 4.6 Mt in 2030 is only a small trimming to the expected deficit and therefore will only have a limited market impact.
“In an era when projects are struggling to progress due to construction delays, financing delays or environmental concerns, the accelerated energy transition could disproportionally impact the supply side by discouraging investment, and high prices and volatility could continue even if demand falls,” Ramesh said.