Japan Faces Indonesian Gas Cuts

In 2006, Japan purchased 62.2 million tons of LNG from abroad, up 7.2 percent, or 4.2 million tons, from 2005, to supply 96.4 percent of its LNG needs. Indonesia was the largest supplier to Japan in 2006, exporting 13.99 million tons, followed by Australia, Malaysia, Qatar, Brunei and the United Arab Emirates, which shipped 12.16 million tons, 12.02 million tons, 7.48 million tons, 6.50 million tons, and 5.31 million tons.

But Japan is increasingly alarmed by the global rush, as well as soaring prices, for natural gas – an environmentally friendlier fuel than oil. Global imports of LNG jumped 10.8 percent to 158.8 million tons in 2006.
The rush for natural gas is led by China and India. China, the world’s fastest-growing major economy, started LNG imports in 2006, purchasing the fuel from Australia. The level of imports, which will begin or increase from Indonesia, Iran and other countries as well as Australia, are expected to total between 45 million tons and 60 million tons in 2020, making it one of the world’s largest LNG importers. India is also sharply boosting LNG imports to feed its high-flying economy, importing 6.2 million tons of LNG in 2006, up 37.2 percent from 2005.

In 2006, Indonesia supplied nearly 14 million tons of LNG to Japan, or about 22.5 percent of Japan’s total imports. Most of Indonesia’s long-term LNG supply contracts with East Asian countries, including Japan, start expiring from 2010. Indonesia has threatened to make a draconian cut in its Japan-bound LNG exports to boost the availability of fuel for domestic industries amid decreasing natural gas, as well as oil, production at home.

Indonesia has said that although it will extend its LNG export contract with Japan after the current one expires in 2010-2011, the export volume will be drastically cut. “Indonesia will surely extend the contract on its LNG exports to Japan for 10 years,” Iin Arifin, vice president of state-owned oil and gas company PT Pertamina, was quoted as saying last October by Asia Pulse. He said Indonesia will export a total of 25 million tons of LNG for 10 years under the extended contract.

Japanese energy companies and Indonesia are now said to be nearing the final stage of negotiations on new contracts. However, the planned cut in Indonesian LNG exports is expected to have only a limited impact on Japan, at least in terms of securing volume, as Japanese electric power and gas companies have been increasing imports from other suppliers, especially Australia and Qatar, in recent years in anticipation of the Indonesian move.

Japan’s reliance on Indonesia for LNG imports declined to about 22.5 percent in 2006 from nearly 40 percent a decade ago and will certainly drop further. But if a country that is geographically proximal to Japan like Indonesia drops out of the ranks of major suppliers, Japan’s energy security could suffer in the long term.

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