Japanese LNG buyers shun spot Russia-origin cargoes; term commitments continue

Japanese importers are continuing to receive long-term Russia origin LNG cargoes while avoiding purchasing additional spot Russia-origin LNG due to higher spot prices compared with long-term cargoes and the risk associated with buying them in the spot market.

Multiple Japanese importers have told S&P Global Commodity Insights that they are continuing to import Russia origin LNG cargoes via their long-term cargo commitments. However, most of these importers said they are currently not willing to purchase spot LNG cargoes of Russia origin.

"In addition to the potential sanctions risk, there is also a reputational risk," a Japanese importer said. "Not just us but most Japanese importers can't buy a spot LNG cargo from Russia now, even if it is at a deep discount to the JKM."

A Japanese power utility source based in western Japan said: "The volume that we receive on our long-term contract from Sakhalin is very important, especially at the current spot level, so we want to continue receiving cargoes, as long as we can financially settle them.

"Long-term contracts are done open credit, so no impact of banks not issuing [letters of credit]", the source said. "However, Japanese importers are unlikely to buy spot Russian LNG cargoes."

According to data from Ministry of Finance Japan, Japan imported 779,838 mt of LNG in January, or approximately 12 LNG cargoes, from Russia at a total of Yen 63,54 billion. Of these 12 cargoes imported into Japan from Sakhalin 2, approximately 10 long-term cargoes were imported in a range of mid-$7/MMBtu to high $13/MMBtu, while one spot LNG cargo for mid-January delivery was imported at higher than $36/MMBtu on a DES basis.

On March 18, Platts cFlow trade-flow analytics software showed 12 standard size LNG carriers discharging in various Japanese ports for February delivery.

Most Japanese importers said the priority was to have sufficient LNG for power generation and city gas demand, and that long-term contracts remain a key part of procurement.

"We are tied up with what to do in the prompt, so we haven't thought about alternative sources for our long-term requirements," one importer said.

Low inventories

Another Japanese importer located in the western half of the country said: "In the case that we do buy Russia origin spot LNG cargoes, there is the risk of not being able to re-sell at market level bilaterally, if we decide we no longer need that cargo. This adds another layer of uncertainty, which we don't want."

Following a harsh winter over December to February, Japanese importers are facing low inventories. Most Japanese importers told S&P Global Commodity Insights that they have the capacity to purchase LNG cargoes if the JKM were lower.

Japanese LNG inventories for power generation rose 17% week on week to 1.72 million mt as of March 13, the Ministry of Energy, Trade and Industry said March 16. However, this is low compared with historical March levers. While METI doesn't have directly comparable data for the same week of 2021, LNG inventories for power generation stood at 2.41 million mt at the end of March 2021, while the four-year average for end-March is 2.19 million mt, according to METI data.

"In the case of emergency, the worst thing that can happen to us is that we can't get physical delivery," a source at a Japanese city gas utility said. "If this happens, the simple solution is to purchase spot, but in an environment where JKM is going up even for May delivery, this will lead to huge financial losses for the scale of our company. I think swapping long-term contract delivery with other importers is the more realistic option."

S&P Global Commodity Insights assessed Platts JKM May delivery at $35.378/MMBtu DES on March 18. This is significantly higher than the assessment for March 18 in 2019, 2020 and 2021, when it was $5.258/MMBtu, $3.538/MMBtu and $6.694/MMBtu, respectively.