Japan recently announced a new energy target for 2030, a move that sent shockwaves through the global market for liquefied natural gas (LNG).
The plan to cut LNG consumption nearly in half could spoil the plans of LNG exporters worldwide, from Qatar to the United States.
Japan’s LNG cut
The new draft 2030 plan aims to dramatically scale back on the use of fossil fuels in an effort to hit climate change targets. The plan calls for the use of LNG in power generation to fall to 20 percent of the overall mix by 2030, down from 37 percent in 2019. That is also a more substantial cut than the 27 percent share by 2030 that the government had previously laid out.
At the same time, coal use falls from 32 percent in 2019 to 19 percent in 2030, while renewables scale up from 18 to 36-38 percent and nuclear rises from 6 percent to 20-22 percent, requiring the restart of many shuttered nuclear reactors from a decade ago following the Fukushima crisis.
Some analysts say that the nuclear aspect of the 2030 plan is the most optimistic and perhaps the most difficult to achieve, given stiff resistance from the Japanese public to bringing nuclear power plants back online. “Safety regulations, public opposition and rising costs make the 20% nuclear target incredibly challenging to meet,” Alex Whitworth, head of Asia-Pacific power and renewables research at Wood Mackenzie Ltd., told Bloomberg. “Our outlook is that nuclear could only hit 9% of generation by 2030. Over-optimism on nuclear makes the plan look unrealistic and could undermine plans to reduce coal and gas share.”
At the same time, a plan to shift towards cleaner energy oddly does not prioritize a full phaseout of coal, which retains a prominent, albeit declining, position for the foreseeable future.
However, the reduction in LNG seems to have caught the most attention. As the world’s largest importer of LNG, major changes to Japan’s gas use have ripple effects across the globe.
Japan is signaling that it will not be as big of a buyer in the years ahead, which will reduce the size of the entire global market. If Japan follows through on the target it has laid out, shrinking LNG’s share of the pie from 37 percent to 20 percent, that translates into the loss of 25 million tonnes per annum (mtpa) of LNG consumption, according to BloombergNEF. Last year, Japan imported nearly 75 mtpa, and the entire global market stood at 356 mtpa.
The cut in absolute demand should raise alarm bells for LNG exporters, all of which assume steady growth in global demand. Already, a slew of projects were struggling to receive final investment decisions – at least 21 major LNG projects have been unable to receive FIDs or are otherwise behind schedule, according to a June report from Global Energy Monitor, entitled “Nervous Money.” The report says that cost overruns, questions about long-term demand, and growing concerns about the role that LNG plays in exacerbating climate change have dimmed the hopes of many projects.
In addition to clouds forming over long-term demand forecasts, the potential shift underway in Japan presents another problem for gas markets. According to Stephen Stapczynski of Bloomberg, the sharp cuts to LNG consumption in Japan “will force domestic utilities to abandon long-term LNG deals, which have been the backbone of the nation’s imports, while increasing dependence on the more turbulent spot market.”
LNG developers tend to need to sign up customers to long-term contracts – often 20 years or more – in order to obtain the financing needed to construct the project in the first place. LNG projects cost several billion dollars to build, and those deals offer a sense of financial security. The erosion of the long-term contract could prevent projects from getting off the ground in the first place.
The scrutiny over LNG is rising, and while coal is rightly targeted by governments for emissions, the dirty profile of natural gas has received less attention.
A new Reuters report finds that methane emissions in Mexico are thought to be double that of the United States, with satellite data and analysis from EDF putting methane emissions at 4.7 percent of total gas produced in the country, a catastrophically high percentage. At that rate, gas is worse for the climate than coal. The Permian basin, which has an infamous reputation for runaway methane releases due to rampant flaring and venting, is emitting 3.7 percent of its gas.
It is against this backdrop that LNG exporters are trying to expand their markets. LNG developers consistently make the case that exporting gas will play a constructive role in reducing emissions, but that argument, problematic to begin with, falls apart when methane is factored into the equation.
Japan is the most high-profile example to date, but it won’t be the last government to target LNG demand.