JERA, Japan’s largest power generator and one of the world’s biggest liquefied natural gas (LNG) importers, is the latest victim of the Covid-19 driven fallout in global energy prices.
On July 8, JERA president Satoshi Onoda said that the company had recorded tens of billions of yen worth of estimated one-off losses on its gas supplies for the year ending March 31. He attributed the losses to slumping global oil prices.
Onoda added that losses included more than 10 billion yen (US$90 million) from the resale of LNG cargoes from the past financial year and the current one, with expected further losses in the next few years on supplies it is committed to under term contracts.
JERA is a 50-50 joint venture between Tokyo Electric Company (TEPCO) and Chubu Electric Power, two of Japan’s largest gas utilities. Japan, meanwhile, is the third-largest buyer worldwide of US-produced LNG.
Subsidiary JERA Global Markets has a LNG trading desk in Singapore, an emerging LNG trading hub in the region, and manages around 35 million tonnes (mt) of physical LNG supply each year.
JERA’s long-term LNG procurement deals are indexed to oil prices, but it usually resells the fuel on the spot market, resulting in losses. While oil prices are down this year from over $60 per barrel in January to just over $40 now, global LNG prices have crashed even more, well beneath most producers’ break-even points.
Prices for LNG in Asia, home to nearly two-thirds of global demand for the fuel, have been hit by a trio of nasty developments, including an historic supply overhang caused by overproduction, high inventory levels among legacy LNG importers, and demand destruction due to the Covid-19 pandemic.
Japan Korea Marker (JKM) prices for LNG spot delivery into Asia plunged beneath the $2/per million British thermal unit (MMBtu) price point in April, and haven’t recovered since at only twenty cents just above that anemic price point.
As such, the way out for LNG markets remains unclear since it entered the Covid-19 pandemic already under pressure with developments changing the way the fuel is traded, how deals are reached, how cargoes are priced, and even produced.
Oil markets, for their part, are also experiencing record demand destruction. In April, global oil market demand destruction represented around 27 million barrels per day (bpd), out of average global demand of around 99.5 million bpd.
Demand has increased markedly since April due to the easing and lifting of virus lockdowns, in addition to production cuts by OPEC+ and US producers putting support under prices.
In the short term, oil markets are still threatened by ever-rising global Covid cases and the possibility of a so-called “second wave” of the pandemic that could commence in the Northern Hemisphere with the onset of colder temperatures in September and October.
LNG markets, however, will take much longer to recover and any long-awaited market equilibrium may not be reached until the mid part of the decade or even further out.
Systemic market shake-up
JERA’s LNG woes are also causing it to seek more flexible terms in long-term procurement contracts, even as Japan faces a significant reduction in LNG usage. That will hit relations with producers already under stress from low prices.
“Long-term SPAs [sales and purchase agreements] with rigid terms are no longer suitable for a rapidly changing market,” Hitoshi Nishizawa, a senior executive officer at JERA, said at an energy conference in Japan this month.
He suggested that more volume and destination flexibility are needed to meet LNG buyers’ evolving needs, as well as a more creative approach to pricing.
To date, only JERA and a few other Japanese LNG buyers are likely succeeding in ongoing negotiations over concessions with long-term suppliers, even as demand destruction and oversupply for the fuel puts more pressure on producers and continues to give greater leverage to buyers.
Japan’s LNG imports plunged in April to a ten-year low as it and much of the world went into lockdown due to the coronavirus. The country, the world’s leading LNG importer, took in 5.13 mt of LNG in April, down 8.8% from the same period a year earlier and the lowest since May 2010, Japan’s Ministry of Finance data shows.
Japan’s LNG imports, however, are still tanking, exacerbating the market’s oversupply situation. The country imported some 4.51 mt of the fuel in May, down 18.9% from the same period a year earlier and representing the fifth monthly drop in volumes so far this year.
By the end of last year, Japan was the third-largest buyer of US LNG after South Korea (the world’s third-largest LNG importer) and Mexico, according to US Department of Energy (DOE) data. Since the US began exporting LNG from the so-called Lower-48 states in February 2016, 9.6% of its accumulated volume has been shipped to Japan.
Japan-US trade in flux
Japan’s LNG demand destruction will thus impact negatively on US-Japan trade relations. Though not nearly as large, averaging around $70 billion a year, compared to $379 billion-plus for China, Japan’s long-standing trade imbalance with the US is a major irritant in relations.
After US President Donald Trump was elected in 2016, those tensions escalated as the firebrand leader pressed his anti-trade imbalance attack against both allies and adversaries, including China, the European Union and long-time ally Japan.
By 2018, Japan started to take action, at least on the energy front, by offering cheap loans and insurance to exporters shipping US LNG cargoes to Asia and elsewhere. However, it was merely a drop in the bucket in terms of the wider bilateral trade imbalance.
Trump finally succeeded in bringing Japan to the bargaining table last October and struck two initial trade pacts. The first, the US-Japan Trade Agreement, provides for limited tariff reductions and quota expansions to improve US market access. The second, the US-Japan Digital Trade Agreement, covers rules on digital aspects of international commerce.
The agreements, commenced in January without formal action by Congress, constitute what the Trump and Shinzo Abe administrations envision as stage one of a broader forthcoming US-Japan trade deal, assuming Trump wins re-election in November.
The Covid-19 pandemic’s impact has markedly reduced Japanese exports to the US, which fell in May at their fasted pace since the global financial crisis in 2009, mostly from a reduction in auto exports. A bigger contraction is likely in the months ahead.
It remains to be seen, however, if oil and LNG imports will be part of any future trade deals between the two sides. The US will have significant motivation to negotiate, with more than 18 shale oil companies declaring bankruptcy in the second quarter.
However, that possibility will likely not materialize until after the Covid-19 pandemic has run its course.