Japan adopts alternatives to Russian gas

In Japan, ship insurers announced that they were cancelling coverage for war risks in Russia, Ukraine and Belarus. The announcement comes after reinsurers withdrew from the region in the face of significant losses.
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Japan receives 9% of its imported LNG from Sakhalin-2, which is owned by Gazprom and Japanese trading houses, and without this cover future imports would certainly be halted.

The loss of supply from Sakhalin-2 could threaten Japan’s energy security .But also push Japanese electricity and gas utilities such as JERA and Tokyo Gas Co Ltd to look for alternatives. Notably through the signing of several LNG supply agreements from Oman.

Several insurers are already suspending their insurance coverage

Japan’s Tokio Marine & Nichido Fire Insurance, Sompo Japan Insurance and Mitsui Sumitomo Insurance are suspending marine war insurance coverage as of January 1. It is an insurance for damages caused to ships by war in Russian waters.

As a result, shippers such as Mitsui OSK Lines and Nippon Yusen may have to interrupt their operations in Russian waters. Including LNG loading from the Sakhalin-2 complex in the Russian Far East.

Diversifying supplies could help Japan emancipate itself from the Russian Sakhalin-2 oil project. He accounts for 9% of Japan’s total LNG imports, or 74.3 million tons per year.

Indeed, 60% of the 10 million tons of gas extracted in Sakhalin goes to Japan. This covers nearly 10% of the country’s needs. The Archipelago imports 97.8% of its LNG, 60% of which is used to generate electricity. And 30% are used for city gas.

However, as a result of its actions in Ukraine, Russia is exposed to heavy sanctions in which Japan participates. In addition, the Russian government decided in June to take control of Sakhalin-2, pushing Shell out.

Japan does not want to give up Sakhalin-2 for security reasons, but a new direction is needed…

In order to avoid a supply disruption, the three Japanese insurers are negotiating with different reinsurers to keep the war coverage.

The Japanese government is asking insurers to take on additional risks. In particular, to continue to provide maritime war insurance to LNG shippers in Russian waters.

The Financial Services Agency and the Natural Resources and Energy Agency made the request in a joint letter to the country’s general insurance association. Tokyo wants to ensure that Japan will continue to import LNG from the Sakhalin-2 project in Russia.

In addition, other options may also emerge. Shipowners can continue their operations without war cover by assuming the risks. The trips between Sakhalin Island and Japan are short, taking only a few days. In addition, the LNG export facility is located far from the battlefields of Russia and Ukraine.

However, they are at risk of losing their tankers due to a seizure in Russia for some unpredictable reason. Each LNG tanker costs between 20 and 30 billion yen ($150 to $220 million).

The Japanese government and utilities, the buyers of the Sakhalin fuel, may have to share the risk.

Finally, shipowners could use a sovereign liability guarantee. Already used for Iranian oil shipments to Japan in 2012. The legislation that authorized this guarantee was only for Iranian oil imports. Thus, a new law should legislate shipments from Russia.

Japan adopts alternatives to Russian gas

Several alternatives are available to Japan, including the signing of LNG supply agreements with Oman. But also the creation of a new mechanism for the Ministry of Industry to help redirect LNG supplies.

For example, JERA, Mitsui & Co and Itochu Corp have signed an LNG supply agreement with Oman LNG for a total of 2.35 million tons per year. Oman has given a supply allocation of 800,000 tons per year to JERA and Itochu. While Mitsui will take 750,000 tons per year.

The contract offers great flexibility. But it should also help Japan to better address uncertainties in domestic LNG supply and demand.

In addition, other Japanese companies are also in talks with Oman LNG about forward contracts .If successful, they could increase Japanese LNG imports from Oman to over 3 million tons per year.

Finally, Japan’s leading oil and gas explorer Inpex Corp announced a 20-year agreement with the American company Venture Global LNG. The plan is to import 1 million tons per year from the company’s Louisiana project, which is scheduled to begin construction in 2023.

In addition, buyers can exercise the quantity tolerance clause. Generally present in long-term contracts, they allow you to request 5 to 10% additional volumes from other suppliers.

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