Japan’s strategy for LNG imports has been based on security and reliability of supply, with JERA, the country’s largest LNG buyer, reliant on supply contracts that can last for 20-25 years. Those deals have been of paramount importance since imports to Japan started in 1969, but things are changing in a big way. In parallel with Japan’s plan to decarbonize its economy, JERA has made clear its intention to reduce its dependence on long-term LNG contracts and instead focus more on short-term deals supplemented by spot market purchases. This decision will have several important effects, and in today’s RBN blog, we look at what it may mean for the LNG industry.
JERA was formed in 2015 as a joint venture (JV) of Tokyo Electric Power Co. (Tepco) and Chubu Electric Power Co.’s fuel purchasing arms. Both companies’ thermal power generating assets — including overseas projects under development — were added to JERA in 2019. The JV also combined its fuel portfolio with that of EDF Trading in 2019 to become JERA Global Markets, a trading company. JERA’s portfolio amounts to approximately 35 million metric tons per annum (Mtpa) of LNG, or just under half of total Japanese demand of about 74 Mtpa in 2020.
For decades, Tepco and Chubu Electric have been securing the vast majority of the LNG they need via long-term contracts. The approach worked well through an era when LNG had not yet become a commodity widely available on the spot market. When JERA was created, responsibility for Tepco and Chubu Electric’s contracts was transferred to the JV. Over the past few years, the long-standing rationale for the utilities’ dependence on long-term LNG deals has been undermined by two major changes. First, the expanded availability of LNG from a variety of sources, including new projects in Australia and the U.S., and the heightened role of global LNG marketers have helped to “commoditize” LNG and increased its availability outside of bilateral contracts. Second, an international consensus has emerged regarding the need to reduce greenhouse gas (GHG) emissions and quickly decarbonize industrial economies. That has led many nations, including Japan, to reassess their long-term energy plans and forced entities like JERA to rethink their assumptions about long-term energy procurement.
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