Japan is the first in the world to create a liquefied gas reserve

Japan, the world’s largest importer of liquefied natural gas, held the first tender to create a strategic LNG reserve. Now, a large trader with state participation, JERA, will supply one tanker per month in winter at the disposal of the state, which will be able to urgently use this gas in case of interruptions. However, this volume is less than 1.3% of Japan’s monthly consumption. Although major LNG importers, including the EU, actively considered the creation of a strategic LNG reserve after the events of 2022, these plans were never implemented in practice due to technological and financial difficulties.

Japan has appointed trader JERA as the first gas supplier for the so-called Strategic Buffer LNG (SBL), which should become an analogue of the strategic oil reserve. The head of the country’s Ministry of Economy, Trade and Industry, Yasutoshi Nishimura, summed up the results of the tender on November 24. According to them, JERA will supply one tanker per month this winter to the ministry, which can, if necessary, direct this gas to urgent needs in the event of supply disruptions. The commercial conditions under which the trader will provide these services are not specified. JERA is Japan’s largest LNG trader with a portfolio of more than 40 million tons per year, and is a joint venture between state-owned TEPCO and Chubu Electric.

Japan imports the most LNG in the world, the volume in 2022 amounted to 72 million tons. The country first announced its intention to create a strategic LNG reserve in December 2022, amid a sharp rise in gas prices due to the conflict in Ukraine and the cessation of Russian pipeline gas supplies to Europe, which is why EU countries began to buy LNG from the market. Initially, it was assumed that purchases for the reserve would amount to one tanker per month and would be financed from a special fund. On average, a tanker will carry 70 thousand tons of LNG, and in November Japan, according to Reuters estimates, will import about 5.4 million tons, that is, the reserve will cover less than 1.3% of monthly consumption. This is unlikely to be enough to stop a serious supply disruption or even just in case of a severe cold snap.

Large LNG importers, primarily the EU, have long been talking at the political level about creating a strategic LNG reserve, but this is technologically difficult and financially expensive. Gas is, in principle, more difficult to store than oil, and LNG also gradually evaporates, which leads to significant losses even when using specialized large storage facilities in ports, not to mention storage in tankers. In addition, during long-term storage, the shell of tanks (it is made of an alloy of steel and nickel) begins to react with gas, which can lead to damage to gas equipment during subsequent combustion.

In practice, one batch of LNG is usually not stored for more than two to three months, and if longer storage is required, the fuel is regasified and pumped into underground storage facilities.

Such operations are costly, divert working capital and carry financial risks for the trader, so they need to be hedged (which means new expenses). When it comes to large volumes, the burden of creating reserves in Asian countries is usually shifted to state-owned companies – KOGAS in South Korea, CPC in Taiwan and CNOOC in China. Japan became the first country that, in practice and on a permanent basis, decided to transfer part of these costs to the budget. The EU does not have a strategic gas reserve, although in 2022 a number of countries used state loans or even budget funds to fill storage facilities before the winter.

Yuri Barsukov