Long-Term Deals Help Japan Secure Ample Gas Amid Global Shortfall

“Even facing soaring LNG prices, we are able to pretty much maintain stability,” said Takeshi Soda, director of the petroleum and natural gas division at Japan’s Ministry of Economy, Trade and Industry.

Demand for long-term contracts is gaining additional momentum this year after the volume of signed long-term LNG contracts hit a five-year high in 2021, according to energy consulting firm Wood Mackenzie. Major buyers in Japan are negotiating with sellers on deals with terms of a decade or more, industry officials said.

Mr. Soda said buyers are interested in deals with the U.S. It overtook Australia and Qatar in the first half of this year to become the world’s largest exporter of LNG, which is natural gas supercooled into liquid form and carried by ship.

Long-term LNG contracts have two significant risks. In Japan’s case, they are typically indexed to oil prices, so when oil prices are high and LNG is plentiful, buyers locked into the contracts pay more than they would on the spot market, where fuels are traded for immediate delivery. This has happened at times over the past decade.

Another risk is the push in many nations, including Japan, for carbon neutrality. It is uncertain how much fossil fuel countries will be burning 10 or more years from now, when long-term contracts being negotiated today would still be in force. The European Commission has said long-term gas contracts shouldn’t create barriers for renewable energy and shouldn’t run beyond 2049.

“This crisis has shown that fossil fuels, which rely on volatile nations for production, can never guarantee energy security,” said Jonathan Sims, a power analyst at Carbon Tracker, a U.K.-based research group. While it makes sense to use LNG for a few years while renewable energy is developed, he said, “new 10- to 20-year contracts—it’s not the time for that.”

Nonetheless, Europe’s fear of several coming winters without enough fuel is driving countries to rethink the value of long-term deals. Europe has cut consumption and stored up gas ahead of this winter, but a cold spell or damaged pipeline could lead to rationing and a deeper economic downturn.

In the U.S., New England is facing an electricity crunch this winter because it competes with Europe for supplies of natural gas carried by ship.

Spot prices have soared to their highest levels ever in Europe after Russia halted most of its pipeline gas supplies to the continent.

Although Japan buys some gas from Russia, it protected itself by making contract deals with a variety of suppliers including Australia, Malaysia and the U.S. It procures more than 80% of its LNG via long-term contracts, according to the ministry’s Mr. Soda and Wood Mackenzie.

Under current market conditions, the contracts’ indexing to oil prices is also a boon because oil—while more expensive than it was two years ago—hasn’t risen as rapidly as spot LNG prices. Japan paid an average import price of around $20 per million British thermal units of LNG in August, according to its finance ministry, whereas it would have paid $50 to $60 on the northeast Asian spot market.

Contrast that with Europe, which procured just 40% of its LNG via long-term contracts in 2021, according to Wood Mackenzie. Meanwhile, some developing nations in Asia that had hoped to build power generation using LNG have had to retreat because they can’t afford it.

Six years ago, Jera Co., which handles about 40% of Japan’s annual imports of LNG, said it was planning to slash its reliance on long-term contracts. Ample spot-market supplies, as well as uncertainty about Japan’s future electricity sales and energy mix, made long-term deals less appealing.

By 2019, Japan was sometimes paying about twice as much for LNG as it would have on the spot market, according to Japan Oil, Gas and Metals National Corp. At the time, the trend was expected to continue with the U.S. shipping more shale gas. In 2020, spot and short-term contracts made up 40% of global LNG trade volume, up from around 5% in 2000, according to the International Group of Liquefied Natural Gas Importers.

The problem was that LNG exporters were finding it difficult to start new multibillion-dollar projects without guaranteed buyers. Even three years ago, analysts were warning of a supply crunch.

Now it has arrived, and in the wake of Russia’s invasion of Ukraine, buyers are once again putting a priority on security. Jera spokesman Hiroyuki Usami said the company would continue to “ensure stable supply of fuel based on long-term contracts.”

In the U.S., several large LNG export projects—including a $10 billion build-out of an existing terminal in Sabine Pass, Texas, led by Qatar’s state energy company and

Exxon Mobil Corp.

—are set to start operations beginning around 2024.

“The only way to encourage stable supply growth is through financing with long-term deals,” said Fred Hutchison, the chief executive of LNG Allies, a group focused on advancing the interests of the U.S. LNG industry.

He said the stress on the spot market a few years ago led to a lull in investment decisions.

On a trip to Europe, “I had to tell them that we honestly don’t have additional capacity that’s available to help this winter or next winter and probably the winter after that,” Mr. Hutchison said. “It was disheartening, but the reality is that we missed a few years.”

Write to River Davis at [email protected]

“Even facing soaring LNG prices, we are able to pretty much maintain stability,” said Takeshi Soda, director of the petroleum and natural gas division at Japan’s Ministry of Economy, Trade and Industry.

Demand for long-term contracts is gaining additional momentum this year after the volume of signed long-term LNG contracts hit a five-year high in 2021, according to energy consulting firm Wood Mackenzie. Major buyers in Japan are negotiating with sellers on deals with terms of a decade or more, industry officials said.

Mr. Soda said buyers are interested in deals with the U.S. It overtook Australia and Qatar in the first half of this year to become the world’s largest exporter of LNG, which is natural gas supercooled into liquid form and carried by ship.

Long-term LNG contracts have two significant risks. In Japan’s case, they are typically indexed to oil prices, so when oil prices are high and LNG is plentiful, buyers locked into the contracts pay more than they would on the spot market, where fuels are traded for immediate delivery. This has happened at times over the past decade.

Another risk is the push in many nations, including Japan, for carbon neutrality. It is uncertain how much fossil fuel countries will be burning 10 or more years from now, when long-term contracts being negotiated today would still be in force. The European Commission has said long-term gas contracts shouldn’t create barriers for renewable energy and shouldn’t run beyond 2049.

“This crisis has shown that fossil fuels, which rely on volatile nations for production, can never guarantee energy security,” said Jonathan Sims, a power analyst at Carbon Tracker, a U.K.-based research group. While it makes sense to use LNG for a few years while renewable energy is developed, he said, “new 10- to 20-year contracts—it’s not the time for that.”

Nonetheless, Europe’s fear of several coming winters without enough fuel is driving countries to rethink the value of long-term deals. Europe has cut consumption and stored up gas ahead of this winter, but a cold spell or damaged pipeline could lead to rationing and a deeper economic downturn.

In the U.S., New England is facing an electricity crunch this winter because it competes with Europe for supplies of natural gas carried by ship.

Spot prices have soared to their highest levels ever in Europe after Russia halted most of its pipeline gas supplies to the continent.

Although Japan buys some gas from Russia, it protected itself by making contract deals with a variety of suppliers including Australia, Malaysia and the U.S. It procures more than 80% of its LNG via long-term contracts, according to the ministry’s Mr. Soda and Wood Mackenzie.

Under current market conditions, the contracts’ indexing to oil prices is also a boon because oil—while more expensive than it was two years ago—hasn’t risen as rapidly as spot LNG prices. Japan paid an average import price of around $20 per million British thermal units of LNG in August, according to its finance ministry, whereas it would have paid $50 to $60 on the northeast Asian spot market.

Contrast that with Europe, which procured just 40% of its LNG via long-term contracts in 2021, according to Wood Mackenzie. Meanwhile, some developing nations in Asia that had hoped to build power generation using LNG have had to retreat because they can’t afford it.

Six years ago, Jera Co., which handles about 40% of Japan’s annual imports of LNG, said it was planning to slash its reliance on long-term contracts. Ample spot-market supplies, as well as uncertainty about Japan’s future electricity sales and energy mix, made long-term deals less appealing.

By 2019, Japan was sometimes paying about twice as much for LNG as it would have on the spot market, according to Japan Oil, Gas and Metals National Corp. At the time, the trend was expected to continue with the U.S. shipping more shale gas. In 2020, spot and short-term contracts made up 40% of global LNG trade volume, up from around 5% in 2000, according to the International Group of Liquefied Natural Gas Importers.

The problem was that LNG exporters were finding it difficult to start new multibillion-dollar projects without guaranteed buyers. Even three years ago, analysts were warning of a supply crunch.

Now it has arrived, and in the wake of Russia’s invasion of Ukraine, buyers are once again putting a priority on security. Jera spokesman Hiroyuki Usami said the company would continue to “ensure stable supply of fuel based on long-term contracts.”

In the U.S., several large LNG export projects—including a $10 billion build-out of an existing terminal in Sabine Pass, Texas, led by Qatar’s state energy company and

Exxon Mobil Corp.

—are set to start operations beginning around 2024.

“The only way to encourage stable supply growth is through financing with long-term deals,” said Fred Hutchison, the chief executive of LNG Allies, a group focused on advancing the interests of the U.S. LNG industry.

He said the stress on the spot market a few years ago led to a lull in investment decisions.

On a trip to Europe, “I had to tell them that we honestly don’t have additional capacity that’s available to help this winter or next winter and probably the winter after that,” Mr. Hutchison said. “It was disheartening, but the reality is that we missed a few years.”

Write to River Davis at [email protected]