Japan concerned Australian gas security policy change could threaten LNG trade: official

Japan is concerned that a proposed revision to Australia's gas security guidelines could undermine LNG trade practice and investments, a senior Japanese government official told S&P Global Commodity Insights Feb. 22, adding that Tokyo will formally submit a response to the Australian government on Feb. 23.

"As Japan, we steadily request the Australian government to commit on protecting long-term [LNG contracts] as well as for energy security," the official said. "We are concerned the government's short-term market intervention could possibly threaten [LNG] business practice, which has been established over many years, and investments in the future."

Tokyo's move comes as the Australian government closes its consultation on the draft guidelines for its Domestic Gas Security Mechanism Feb. 23, with proposed measures set to ensure tighter controls on the country's LNG exporters in order to secure local energy security.

Australia is by far the largest LNG supplier to Japan, accounting for 43% of the country's total LNG imports of 71.998 million mt in 2022, up 15% from a year ago, according to Japan's Ministry of Finance data.

In its proposed measures released Feb. 9, the Australian government said the objective of the ADGSM, which applies across the country, is to ensure that there is a sufficient supply of natural gas to meet the forecast needs of Australian gas consumers by controlling, if necessary, LNG exports.

This comes at a time when there are persistent concerns about a shortage of gas supply in the country's east coast market due to surging exports.

Any decision by Madeleine King, minister for resources and minister for Northern Australia, to consider activating the ADGSM would be based on forecast domestic gas supply and demand, after taking advice from the relevant department, the Australian Competition and Consumer Commission, the Australian Energy Market Operator and any other sources of information she considers relevant, the draft guidelines said.

The minister's determination would be made within 45 days of the minister's notification, the draft guidelines said, adding that permission would be required for all LNG exported in a domestic shortfall quarter, although those permissions would be tradable.

Concerned areas

Among proposed revisions to the ADGSM guidelines, Japan is particularly concerned about the 45-day prior determination of the mechanism, which the Japanese official said would leave companies with insufficient time for spot LNG procurements.

"In the event of companies finding needs to procure spot LNG as an alternative plan, we see the period of 45 days insufficient for procuring spot LNG as a counterplan," the official said.

"This would increase uncertainty over importable volumes for importers including Japanese," the official said. "Although the proposed revision notes protecting long-term contracts, long-term contracts might not be fulfilled if not enough export permissions were being issued or permits for fulfilling long-term contracts could not be obtained."

Industry sources have also said that they are concerned about the fact that the revised ADGSM guidelines do not specify which regions might experience restrictions on exports, unlike the previous policy which applied specifically to the East Coast.

The proposed changes to the ADGSM risk putting Australian LNG in a position where it may not be able to quickly adapt to changes in global markets, one Australian industry source said.

APLNG and QCLNG deliveries to China were 20% lower year on year in 2022 but deliveries to Japan doubled, Australian consulting firm EnergyQuest said in its January monthly report.

"It is no wonder that the Japanese are particularly sensitive about ADGSM, which would impair the flexibility available to meet changing global needs," it said.

According to EnergyQuest, a total of 106 cargoes were estimated to have been delivered from Australian projects in January, of which 37 went to Japan.

Early engagement

Commenting on potential intervention in the Australian gas market, Japan's INPEX encourages the Australian government "to engage early and work collaboratively with industry to support reliable, affordable and clean energy development," according to a spokesperson for the company, the operator of the Ichthys LNG project.

"We recognize all energy sources will be required to maintain reliability, supply and competitive pricing of power generation in Australia," the spokesperson said.

While noting the Ichthys LNG project plays an important role in providing energy security to Japan and Taiwan, the spokesperson said: "The Australian government understands the importance of Australian LNG in providing energy security to its friends and allies in the region."

"Approximately 70% of Ichthys LNG production volumes has been sold to customers in Japan and 20% to Taiwan -- this equates to approximately 10% of Japan's LNG imports and more than 15% of Taiwan's LNG imports," the spokesperson said, adding that INPEX does not have wholesale or domestic gas customers in Australia.

The Ichthys project, operated by INPEX, involves piping gas from the offshore Ichthys field in the Browse Basin off northwestern Australia to the onshore 8.9 million mt/year LNG plant near Darwin.