Japan's METI weighs new framework to supplement sudden drop in LNG stocks

Tokyo — Japan's Ministry of Economy, Trade and Industry is considering introducing a new framework to supplement a sudden drop in LNG stocks, following the recent incident of reduced LNG inventories, which had tightened the LNG power supply and demand balance.

The plan of introducing the new LNG framework was presented Feb. 15 during the petroleum and natural gas subcommittee at METI's advisory committee for natural resources and energy.

"The recent incident of tightening the power supply and demand has made us strongly realize once again the importance of LNG as an adjusting electricity source, as well as how important it is to secure LNG stably in order to ensure stable electricity supply," Ryo Minami, METI's director-general of oil, gas and mineral resources, told the subcommittee.

"As [METI's] Agency for Natural Resources and Energy, we will rigorously verify factors behind the recent incident, and we intend to take necessary measures to prevent recurrence of a similar incident," Minami said.

New Framework

METI's consideration of the new framework for LNG stocks comes as it has recognized the need to fill the gap between two weeks of LNG stocks currently maintained by utilities and the one month needed for a newly purchased cargo to be delivered.

This will help meet the possible shortfall in LNG stocks when there is a sudden spike in power demand over a short period of time.

"There are up to two weeks' worth of [LNG] stocks at each tank but it would take more than a month to receive a spot cargo after purchase," Takeshi Soda, METI's director of oil and gas division, told the subcommittee.

"We need to address this issue of the gap between two weeks and one month," said Soda, adding that its action would come after the electricity and gas industry department's scrutiny of the recent power shortage.

LNG stocks held by Japanese utilities hit a seasonal high of about 1.9 million mt around Dec. 9 last year, after increasing from the second half of November, before dropping to a Jan. 11 low of 1.16 million mt, according to a survey released Jan. 19 by METI.

Stocks then rebounded to 1.43 million mt on Jan. 17 as the country recovered from its recent cold spell, according to METI data.

The rebound in LNG stocks likely shows that Japanese utilities have overcome the worst of the gas shortages that led to record high power prices in recent weeks, and the modest demand outlook for the rest of winter means that additional buying interest will be limited.

No IEA gas storage guideline

The IEA recommends its member countries hold emergency oil stocks equivalent to at least 90 days of net oil imports, as part of its oil market security guidelines, but it has no equivalent guidelines for natural gas stockpiles.

Instead, its annual Global Gas Security Review has typically focused on the role of LNG market flexibility as a metric for gas market security, including market factors like LNG supply availability, seller and buyer behavior and destination flexibility.

In the context of Japan, according to the IEA's 2019 Gas Security Review, the sudden increase in LNG demand following the Great East Japan Earthquake in 2011 was largely met by spot markets and shorter-term contracts, with long-term contracts falling to less than 80% of the total in 2014 but normalizing to around 85% in following years.

As a result, the post 2011 demand shock put more emphasis on contract and price flexibility and the emergence of a secondary market where portfolio players could deliver more spot market cargoes to offset the rigidity of LNG value chain, according to the IEA.

There were even concerns that Japan was signing up for too much contracted LNG.

But this shift toward market mechanisms and flexible supply failed to provide gas security to countries like Japan and China amid this winter's gas shortages. It remains unclear if think-tanks and governmental bodies will resort to evaluating traditional stockpiling methods in periods of peak demand.