Japan, Korea say Australian gas exports critical

Article by Michael Smith courtesy of the Australian Financial Review.

Tokyo | Japan and South Korea, two of Australia’s key trading partners, have sought assurances from the Labor government that it will not divert crucial gas exports needed to power their economies for domestic use amid growing concern in the region about crippling power shortages.

While Japanese and Korean companies are looking to invest heavily in Australian green energy projects, they are also closely watching Labor’s decision to extend the life of the so-called gas trigger, which means it can potentially restrict exports next year to ensure uncontracted gas is offered to Australian users first.

While sources in Tokyo and Korea said they did not believe potential restrictions would jeopardise the long-term LNG contracts their countries depend on, there have been quiet discussions with Canberra to seek assurances there would be no disruptions.

“The Japanese government has been asking the Australian government to implement any measure in such a way that it does not impact Japan’s supply of LNG from Australia, and the Japanese government will continue doing so,” a Japanese government official told The Australian Financial Review.

Japan’s Prime Minister Fumio Kishida on Wednesday announced plans to restart idle nuclear reactors and develop new plants to reduce the country’s reliance on energy imports. The switch to nuclear a decade after the Fukushima disaster was triggered by the threat of blackouts and a surge in energy prices due to the Ukraine war.

South Korea, the world’s third-biggest importer of LNG, is also looking to buy more gas to top up stockpiles. It held high-level energy talks with Australia in Seoul this week to discuss critical minerals, energy supply chains, green energy and LNG.

During the talks, senior officials from Korea’s Ministry of Trade, Industry and Energy told their Australian counterparts it was important that investments and trade in natural gas between the two countries continued.

“Australia is Korea’s second-largest supplier of LNG while Korea is a steady investor in Australia’s LNG infrastructure through the Korea Gas Corporation (KOGAS),” the ministry said in a statement.

“Amid escalating tensions from the Russia-Ukraine situation, the consensus is that natural gas investments and trade are to continue in order to bolster energy supply resilience.“

The ministry did not respond to requests for further comments or interviews. Key players in Korea’s energy sector who spoke at a conference in Melbourne last week on new energy also declined requests for interviews.

Bill Paterson, former Australian ambassador to Korea, said Australia was in a position to become a major supplier of hydrogen to Korea, but it must also be mindful of the huge investments Korean companies had made in Australia and fulfil commitments to supply the country with LNG during the transition phase.

“Supplies to Korea are likely to be pretty secure. If Australian supplies were considered to be vulnerable it raises a very fundamental issue of sovereign risk and I suspect the Australian government would need to ensure that didn’t happen,” Mr Paterson, a director of the Australia-Korea Business Council, told the Financial Review.

“The stakes are enormous. The long-term building of trusted business relationships is absolutely critical and if we were to do something to undermine that there would be enormous long-term costs.”

Mr Paterson, who met key players in the energy sector during a trade mission to Korea in June, said he expected imports of Australian coal and gas to decline significantly in the next five years as Korea transitions to a more hydrogen-fuelled economy. He said Australia would play a key role in the country’s future energy needs, both as a supplier and potential manufacturer of hydrogen.

He also said Korea was focused on securing more urgent supplies of critical minerals. “The sense of vulnerability they have because of china’s dominance of that market is enormous.”

Senex Energy, a subsidiary of Korean steelmaker Posco and Gina Rinehart’s Hancock Resources, earlier this month announced plans for a $1 billion coal seam gas expansion in Queensland.

Government and Japanese trading house sources in Tokyo said there was also a huge appetite by Japanese companies to invest in the Australian energy sector, particularly now that political risk meant China and Russia were being ruled out for new investments.

However, there was growing concern about how Japan was going to manage its energy transition, given shortages caused by the Ukraine war and record summer temperatures had exposed the country’s continued reliance on traditional fossil fuels.

Analysts said any move to limit Australian gas exports could impact some Asian investors in Queensland assets such as Korea Gas and Chinese giants Sinopec and China National Offshore Oil Corporation (CNOOC). It was unlikely to impact Japan’s biggest trading house, Mitsubishi, as its gas investments were focused on Western Australia.

“This [curtailment of uncontracted gas volumes] would be significant and the Japanese LNG buyers who have term contracts with the projects in Queensland have close communications with their counterparties. In some cases, the buyers may want to secure extra cargoes under their contractual flexibility frameworks,” Hiroshi Hashimoto, head of gas group at Japan’s Institute of Energy Economics, said.

Australia provides around two-thirds of Japan’s coal, and a third of Japan’s LNG imports. Japan is seeking to slash its reliance on fossil fuels to achieve the government’s net zero emissions target by 2050.

However, analysts said Japanese investors would not abandon Australian coal at a time when the country’s energy shortages had been amplified by the Ukraine invasion and restrictions on importing Russian gas and coal.

The bigger impact from potentially pulling the gas trigger on the Asian customers/investors in Queensland LNG – Korea Gas, Petronas, CNOOC and Sinopec – was that they would receive less LNG even though they have invested billions of dollars in these projects.

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