Japan's largest LNG buyers have a surplus problem

Executive Summary

For most of the last 50 years, Japan has been the world’s largest, most important buyer of liquefied natural gas (LNG). Japanese companies were critical to the foundation of the industry, providing creditworthy commitments to purchase LNG that underpinned long-term investments in the global supply chain.

However, Japan’s demand for LNG has fallen rapidly in recent years, marking an important shift in global markets. Japanese utilities — once considered purely consumers of LNG — are increasingly focused on marketing and reselling the fuel abroad, putting them in more direct competition with global suppliers. Rather than absorbing more volumes from the global supply pool, Japanese companies aiming to resell LNG may add to a looming global glut later this decade. 

Rather than absorbing more volumes from the global supply pool, Japanese companies aiming to resell LNG may add to a looming global glut later this decade.

Their emphasis on overseas growth is driven by declining opportunities in Japan’s domestic gas market. Higher generation from restarted nuclear facilities and additional renewable energy capacity are displacing the need for LNG in the country’s power mix. In the longer term, net-zero emissions targets and demographic fundamentals present hard limits to domestic expansion. Meanwhile, Japan’s incumbent utilities have lost market share since 2017 due to the introduction of retail competition in gas and power sectors.

For some companies, consumer demand is falling faster than volume commitments in LNG purchase contracts. As a result, the Institute for Energy Economics and Financial Analysis (IEEFA) finds that the over-contracted position of Japan’s four largest utilities — JERA, Tokyo Gas, Osaka Gas, and Kansai Electric — could increase to almost 12 million tonnes (mt) in the coming years. Moreover, the share of Japan’s contracts without destination restrictions is set to rise through 2030, indicating companies will have greater flexibility to resell volumes overseas.

With a flexible surplus of LNG, these companies are looking to cultivate demand in Asia’s emerging markets. They have invested heavily in the midstream and downstream gas sectors of South and Southeast Asia, including in regasification terminals, LNG-fired power plants, and gas distribution infrastructure. Government policies have aligned with corporate strategies to transact higher volumes of LNG and develop demand abroad, while Japanese companies are actively engaged in negotiations for new LNG purchase contracts despite declining demand at home.

According to figures from the Japan Oil, Gas and Metals National Corporation (JOGMEC), LNG sales by Japanese companies to third countries have increased 2.5 times since FY2018, from 14.97 mt to 38 mt in FY2021. Although domestic sales have declined, the volume of LNG transacted by Japanese companies increased over that timeframe. Today, the volume of LNG sold abroad is nearly 50% of the volume consumed domestically.

These trends have consequences for global LNG exporters and the industry writ large. First, many exporters continue to justify new liquefaction investments under the false impression that Japan needs more volumes. In fact, the opposite is true: Japanese companies may increasingly compete for potential customers in prospective markets, adding to supply rather than pulling cargoes off the water. This double counting risk may fuel unnecessary investments in new supply capacity.

Second, an increase of LNG sales by Japanese utilities coincides with a flood of new LNG supply entering the market. The world is set to add record amounts of new export capacity in 2026. As demand from Japan and other key markets wanes, prices are widely expected to fall over the remainder of the decade. LNG marketers, which increasingly include Japanese utilities, could see sales margins drop and potentially turn negative. This has happened to Japanese resellers during past periods of oversupply, demonstrating the financial risk involved with LNG trading.

Japanese utilities marketing LNG abroad may face a unique set of challenges amidst a looming global glut. A large majority of Japan’s older 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. Companies aiming to resell contracted cargoes in spot markets could, therefore, be exposed to financial risks if spot prices fall below oil-linked contract formulas. Diversifying contracts to alternative price indices — e.g., U.S. Henry Hub natural gas prices — may reduce oil indexation risk but could expose Japanese utilities to a host of other factors.

This report details the recent evolution of Japan’s LNG market and its key actors. Section I provides an overview of the country’s supply and demand for LNG, as well as the contracting activity of major utilities and their expansion into emerging Asia. Section II details ongoing trends in Japan’s domestic market that are causing utilities to pursue growth opportunities abroad. Section III explains how utilities might deal with over-contracted supplies of destination flexible LNG. Section IV provides case studies on Japan’s major gas and power utilities, their contracting positions, and their expansion into foreign markets, particularly in South and Southeast Asia. Section V analyzes the potential implications of Japan’s increasing focus on LNG trading.