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Australia-Japan talks over LNG export tensions leave experts unconvinced

LNG tanker approaching Tokyo port
Demand for LNG is growing among Australia’s key trading partners as concerns grow over the country’s reputation as a reliable exporter of the fossil fuel (Photo: Issei Kato/Reuters)

Recent policy changes in Australia have alarmed the Japanese government, which relies on its southern partner for energy supplies and has warned about ‘sovereign risk’

Australia’s reputation as a reliable liquefied natural gas exporter is in jeopardy as a deteriorating investment environment, falling supply and the impact of net zero policies dent the country’s image among key customers.

A number of policy steps aimed at securing Australia’s national supply of gas and to contain emissions, which may affect LNG production, have stirred a strong response from the Japanese government, with senior officials warning of an emerging “sovereign risk” in Australia in the local press. Japan secures more than 40 per cent of its total LNG needs from its southern partner.

Earlier this year, Japan’s former ambassador to Australia, Shingo Yamagami, said that though it’d be “hard to imagine the neon lights of Tokyo ever going out”, because of his country’s reliance on Australian gas, coal and other exports, “this is exactly what would happen if Australia stopped producing [these] energy resources”.

“I think what got under the nose of the Japanese and upset them was that these changes came in fast and heavy, and maybe they were blindsided a little bit. I think the retroactive elements of the net zero policy were always going to be problematic,” says Naoise McDonagh, senior lecturer in international business at Edith Cowan University in Australia.

In October, a four-way ministerial meeting between Japanese and Australian counterparts attempted to smooth the growing cracks in the energy relationship. The Australian side promised to provide “investment certainty” and a “stable energy supply” to Japan.

A spokesperson from the Embassy of Japan in Australia tells Sustainable Views that they “warmly welcomed the reiterated commitment by Australia at the Fifth Japan-Australia Economic Ministerial Dialogue to remain a reliable supplier of both traditional and new energy sources for Japan”.

“The Embassy of Japan in Australia continues to engage in close dialogues with the Australian government in this regard,” they add.

Yet it is unclear how Australia can fulfil its promises to Japan and other export customers over the long term. Graham Bethune, a senior visiting research fellow at the Oxford Institute for Energy Studies, says Australia is “quietly quitting LNG”.

“Australia’s LNG exports have probably peaked, and Australia’s gas production has probably peaked and is most likely heading down from here,” he says.

“I think it’s going to be very, very hard, if not impossible, for the Australian government to live up to the kind of promises they’ve been making about remaining a reliable LNG exporter,” Bethune adds.

Even though Australia is among the world’s largest LNG exporters, it is being outstripped by Qatar, the US and other players with less transparent or ambitious decarbonisation requirements. At the same time, LNG demand is growing among Australia’s key trading partners.

Meanwhile, the Australian government has strengthened the Australian Domestic Gas Security Mechanism, giving it the power to divert LNG exports for domestic use on a quarterly rather than annual basis. With domestic energy networks strained, Bethune suggests this mechanism will be triggered before long, further denting the country’s export credentials.

“The ADGSM has been mostly focused on the east coast, but can be applied across Australia. We think it most probably will be,” Bethune says.

Climate targets

The LNG export concerns come as the government in Canberra consults on a Future Gas Strategy to determine the fossil fuel’s outlook in the country, as it strives to balance 2050 net zero commitments while maintaining “stable” LNG trading partnerships in the region.

When the consultation period ends on November 13, however, few easy answers will emerge. For one, years of falling investment in new gas production have meant that supply to the domestic market is declining much faster than the corresponding drop in demand.

This is contributing to deep strains on Australia’s energy network as coal-fired plants are shut down and the use of renewable energy sources ramps up. As a result, the prospect of blackouts loom over the most populous states.

“Domestically, new gas supply is needed to keep energy reliable and affordable for Australian households and businesses. Gas is the safety net in Australia’s fragile electricity system, backing up renewables as a reliable source when solar and wind can’t contribute,” says Samantha McCulloch, chief executive of Australian Energy Producers, an industry association for oil and gas companies.

In 2022, the federal government sought to mitigate spiking gas and electricity prices linked to the Ukraine war by placing a wholesale price cap for domestic gas and floating the prospect of diverting export-bound LNG for domestic use. These developments fuelled jitters among key export markets, including Japan, South Korea and Taiwan, over the reliability of Australia-sourced LNG.

Fears were compounded in May 2023 when the Australian government tightened an existing net zero “safeguard mechanism” for all industrial facilities emitting more than 100,000 tonnes of carbon dioxide annually. The updates apply retroactively to all existing LNG projects in Australia by requiring a 4.9 per cent reduction in emissions yearly, while all new facilities must be net zero from day one, slapping substantial new costs on producers.

With Australia already in danger of missing its 2030 climate targets, its stalling relationship with LNG has been welcomed in some quarters. However, the regional impact is less certain for the climate.

“If you do take away Australian LNG, my view is that you actually increase global emissions because it means that more coal runs in Asia, and coal on a full life-cycle basis is about double as emission-intensive as gas,” says Daniel Toleman, principal research analyst for global LNG at Wood Mackenzie.

“In Asia, we expect, over the next 10 years, a significant amount of coal power to be added. And so if you do want to get a 1.5C world, you have to stop those coal additions. And a large part of that story is renewables, but it needs to be renewables backed by gas,” he adds.

A service from the Financial Times