Japan to step up supply diversification as G7 commits to cut Russian energy reliance

Japan intends to step up its diversification of energy supply sources following the G7 leaders' commitment to reduce reliance on Russian energy, a Japanese government source said March 14, but will stick with its existing energy projects in Russia for now.

"Following the G7 leaders' joint statement to reduce Russian energy reliance, we are considering ways to achieve this," the source said, adding that Japan's focus is to secure alternative LNG, for example from the US and the Middle East, in the medium term.

Japan also intends to work on renewables and nuclear power as means to further diversify its energy sources, but plans to maintain its presence in key Russian energy projects such as the Sakhalin 1 and 2, the source said.

The G7 -- the UK, US, Canada, Japan, Germany, France and Italy -- pledged March 11 to continue to cut their reliance on Russian energy, "while ensuring that we do so in an orderly fashion and in ways that provide time for the world to secure alternative and sustainable supplies," the leaders said in a joint statement.

The G7 statement came after the US has already said it would ban all Russian energy imports while the UK is set to phase out Russian oil imports by the end of the year and reduce Russian gas supplies.

LNG implications

"The G7's recent comments regarding their intention to unwind from Russian energy products are unlikely to mean a significant reduction in Russian LNG supply to Japan in the near-term," said Jeff Moore, manager of LNG Analytics Asia at S&P Global Commodity Insights.

"Japan's long-term commitments to Sakhalin 2 represent a significant complication in Japan's ability to reduce dependence on Russian LNG," Moore said.

"They could try to resell these volumes elsewhere in the region, but would likely only do so if they had commitments for other supplies to replace them, such as from the US or Qatar, with both countries bringing on new liquefaction capacity that will be looking for downstream buyers," he added.

More than half of the 9.6 million mt/year LNG production capacity at the Sakhalin 2 project is committed to Japanese offtakers, and Sakhalin 2 LNG accounts for almost all of Japan's LNG imports from Russia.

Russia accounted for 9% of Japan's total LNG imports of 74.32 million mt in 2021 and 4% of total crude oil imports of 2.48 million b/d, according to Ministry of Finance data.

Market concerns

Japan is not overly concerned about replacing Russian crude, which accounts for a relatively small portion of its import basket, should it become difficult to lift the barrels, according to industry sources.

Japanese importers of Russian LNG, however, are concerned about potential disruptions of Russian LNG supply as some of these importers are also facing prolonged supply concerns from other key suppliers such as Malaysia, according to market sources.

While Japanese importers of Russian LNG see their term supply as essential elements of their import portfolios, some buyers are reluctant to take any spot cargoes from Russia despite current relatively low LNG inventory levels in Japan, market sources said.

"We will be distressed if we do not have Sakhalin supplies so we simply hope to take [cargoes] as long as we can settle payments," said a source with a Japanese importer.

Another Japanese importer also said it would be difficult to take Russian spot LNG cargoes currently, even if the cargoes are slightly cheaper.

Since hitting a record high on March 7 at $84.762/MMBtu, S&P Global has assessed the Platts JKM Asian LNG benchmark lower for four consecutive business days. Platts JKM was assessed at $28.603/MMBtu on March 11 for April delivery.

This is still significantly higher compared to the assessment on March 11 in 2019, 2020, and 2021, at $5.65/MMBtu, $3.4/MMBtu, and $6.418/MMBtu respectively.