Japan Embraces G7's Gas Support

Japan’s energy firms swiftly embraced the G7’s recent endorsement of natural gas investment in their official statement. However, analysts caution that depending on this fossil fuel may expose these companies to enduring difficulties.

As a resource-poor nation and the largest purchaser of liquefied natural gas (LNG) globally, Japan has committed to using gas as a transitional fuel to achieve its net-zero carbon emission targets while ensuring energy security. Nevertheless, this stance contradicts the calls from other G7 members to accelerate the reduction of all fossil fuel usage.

Climate activists argue that Japan’s insistence on continuing its reliance on gas could hinder the attainment of global climate change goals, especially since its energy companies are reaping substantial profits from their investments in this sector.

After deliberations between Japan and European nations, the G7 climate ministers eventually reached an agreement last month, acknowledging that gas investments “can be appropriate to help address potential market shortfalls” caused by Russia’s invasion of Ukraine and its subsequent disruptions to global energy markets.

Takehiro Honjo, Chairman of the Japan Gas Association, stated on Monday that the G7’s clarification of the appropriateness of natural gas investments partially mitigates the investment risk for Japanese companies intending to continue their spending on projects.

However, analysts caution that Japan’s long-term objective of reducing carbon emissions from its energy sector will diminish the value of future gas projects.

Yoko Nobuoka, Senior Analyst of Japan Power Research at Refinitiv, emphasized that “the short lead time of shale gas or LNG export projects, as well as contract flexibility, align well with what major consumers, including Japan and Europe, seek in times of uncertainty.” However, she added that Japanese companies will likely hesitate to participate in gas projects in the future, particularly those with lengthy lead times, due to the country’s long-term decarbonization ambition.

Japan’s support for gas contradicts findings that new investments in gas, primarily composed of the greenhouse gas methane and producing CO2 emissions when burned for energy, would undermine climate goals.

The International Energy Agency (IEA) has stated that no new investments in fossil fuel supply can be made if the world aims to limit global warming to 1.5 degrees Celsius (2.7 Fahrenheit).

Nonetheless, gas investments have been highly profitable for Japan’s energy companies, resulting in record profits. Similar to Japan, other G7 nations like Germany have also allocated funds to LNG infrastructure following the Ukraine invasion.

Given its reliance on Russian gas, particularly from the Sakhalin Island LNG project, Japanese energy companies are eager to diversify their gas supply sources to include Australia and the U.S.

Marubeni Corp, a trading house, believes that gas “will be utilized as a very important resource in the future,” according to Chief Executive Officer Masumi Kakinoki’s statement last week.

Tokyo Gas, the main gas supplier in Japan’s capital, with investments in LNG and other fossil fuels, also welcomed the G7’s language on gas as it intends to continue investing in gas infrastructure in Asia and U.S. shale gas upstream assets.

Japan’s largest oil refiner, Eneos Holdings, plans to invest 180 billion yen over the next three years in its oil and gas upstream segment, including additional LNG development in Asia.

However, Japan’s commitment to reducing its carbon emissions may introduce risks to these gas investments.

The G7 climate and energy ministers have also set ambitious collective targets for solar power and offshore wind capacity, aiming to accelerate the adoption of renewable energy, which could impact gas demand.

The IEA predicts that global gas consumption will plateau in this decade, and data from Japan’s finance ministry reveals a downward trajectory in gas demand in recent months.


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