Australia could lose long-term LNG supply contracts with Japan under recent government policy changes over the past several months that appear to undermine the country’s natural gas industry.
Under the Australian Domestic Gas SafeGuard Mechanism (ADSGM) passed earlier this year, the government is allowed to divert liquified natural gas feedstock to meet domestic demand, and effective July 1, requires new LNG facilities to be carbon-neutral.
“Australia and Japan have worked together at the highest level to develop and support LNG, but now changing policies, new constraints and burdens are put in place,” Japan’s Institute of Energy Economics chief executive Tatsuya Terazawa told media this month in Tokyo.
Japanese companies are reportedly negotiating with Qatar for long-term supplies from its North Field expansion, and possibly exploring supplies from the United Arab Emirates.
Japan has historically relied on Australia for more than 40% of its LNG. Australian exports to Japan increased to 31.23 million tons (Mt) in 2022, up from 27.42 Mt in 2021, according to Kpler data.
According to the International Group of LNG Importers (GIIGNL), more than 12 Mt of Japan’s long term supply contracts with Australia are due to expire by 2030.
“The ADGSM is in effect and the Australian Government is currently able to divert LNG feedstock to meet domestic demand,” EnergyQuest CEO Rick Wilson told NGI. “A decision on whether to use these powers is made on a quarterly basis and the powers have not been used at this point.
“The ADGSM application of a net-zero requirement under the safeguard mechanism to projects that are already under construction will increase risk premiums attributed to investment in Australian LNG and reduce future investment,” Wilson added.
Supply and Investment
At the end of June, the Australian Competition and Consumer Commission (ACCC) reported the country’s East Coast market had enough contracted supply to meet average demand through 2024, “but the outlook for winter this year and next is finely balanced, and the southern states will be reliant on Queensland’s surplus gas.” The ACCC makes periodic reports on Australia’s domestic natural gas supply scenarios.
ACCC forecasted the amount of surplus gas available for the East Coast market could range between 27 petajoules (PJ) to 90 PJ depending on the volume of uncontracted LNG natural gas exporters sell to the spot market.
The Australian Energy Market Operator previously warned this year of rising risks of possible cargo diversions on the East Coast as Australia experiences more peak demand weather events that boost reliance on natural gas-fired power generation.
The government is also now requiring existing facilities to reduce net emissions by 4.9% annually through 2030. New facilities, including gas fields, are requested to have net-zero emissions from the start of operations.
“Interventions in LNG export markets have only created more uncertainty for Australia’s valued trade partners and investors,” said Samantha McCulloch, CEO of the Australian Petroleum Production & Exploration Association (APPEA), in a statement earlier this month. “While the U.S. and Qatar ramp up their gas production and exports to meet growing demand – including in our region – barriers are being placed in front of new production in Australia.”
Wilson pointed out that there are multiple causes of Australia’s East Coast gas shortage. Contributing factors include declining reserves in the Gippsland Basin, historically a major source of supply; government moratoriums on development in some states, and an overall lack of private-sector investment in exploration over the past decade.
Project Uncertainty
“The new tax on carbon emissions seems to have soured some of the relations between Japan and Australia because now upcoming Australian projects (in which Japanese companies have a stake) need to be carbon-neutral before they can begin operations.,” Kpler analyst Ryhana Rasidi told NGI.
The new tax would further delay some projects that were already years into construction, Rasidi added, making it difficult for Japan to rely on Australia for new LNG supplies.
The change in the law was effectively made on short-term notice in the grand scheme of LNG project development, Rasidi explained, “so Japanese investors are understandably frustrated if the Australian government isn’t willing to be lenient on the LNG projects that otherwise would have been nearing completion without the new tax.”
The Ichthys LNG terminal in northwest Australia is led by Japanese company Inpex Corp. The facility provides about 10% of Japan’s LNG imports.
Inpex Corp. CEO Takayuki Ueda told officials at a March parliamentary event in Canberra that Japan may look elsewhere to source its LNG when the Australian government proposed diverting LNG exports to meet East Coast shortages.
Last month, Japanese economy and trade minister Yasutoshi Nishimura met with the Australian climate change minister, Chris Bowen, to request more “flexible measures,” particularly for LNG projects under development to ensure a stable supply of LNG.
Another Japanese company, Jera Co. Inc. holds a 12.5% stake in the Santos-operated $5.8 billion Barossa project, located offshore Australia’s Northern Territory.
Barossa has already achieved a final investment decision and plans to capture emissions and deliver gas for storage in the Timor Sea. Barossa is linked to the Darwin LNG export facility by pipeline, with plans to start up around 2025. Carbon capture and storage (CCS) is slated to follow around 2027.
JERA requested an exemption for Barossa, but the federal government rejected the exemption request under the ADGSM. According to recent news media reports, the project may now be postponed or canceled.
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