Japan, the world’s leading liquefied natural gas (LNG) importer, is facing its latest challenge in obtaining vital gas supplies from Russia after Western reinsurers said they would cancel marine war insurance for ships sailing in Russian waters from Jan. 1.
Having joined other G7 countries in putting sweeping sanctions on Moscow for sending tens of thousands of troops into Ukraine, Japan has been cutting its reliance on Russian oil and coal, but it continues to buy Russian LNG amid increased prices in a tight global market as Europe boosts imports.
Which Companies Are Affected?
Japan’s Sompo Japan Insurance, Tokio Marine & Nichido Fire Insurance, and Mitsui Sumitomo Insurance told shipowners last week that starting Jan. 1 they would stop providing insurance coverage for ship damage caused by the war in Russian waters, because reinsurers were halting coverage.
Without the war insurance, shippers such as Nippon Yusen (9101.T) and Mitsui OSK Lines (9104.T) might have to suspend operations in Russian waters, including loading LNG from the Sakhalin-2 complex in Russia’s Far East, industry sources said. Japan obtains 9% of its imported LNG from Sakhalin-2, which is owned by Gazprom (GAZP.MM) and Japanese trading houses.
Loss of supply from Sakhalin-2 could cause Japanese power and gas utilities such as JERA and Tokyo Gas Co Ltd (9531.T) to scramble for alternatives.
The country has already faced numerous challenges in obtaining gas supplies since Russia invaded Ukraine in February. It has had to convince G7 partners to give it leeway so it could continue importing Russian LNG, and after the Russian government came to the decision in June to seize control of Sakhalin-2, Japanese trading houses had to agree to remain as shareholders of the new Russian operator.
What Actions Have Been Taken?
To prevent supply disruption, the three Japanese insurers are in talks with various reinsurers to continue offering war coverage.
In a rare joint letter, Agency for Natural Resources and Energy and Japan’s Financial Services Agency have also requested insurers to shoulder additional risks to continue offering marine war insurance for shippers shipping LNG from the Sakhalin-2.
“The top priority now is to secure marine war insurance,” a senior official at the industry ministry said.
It is still unclear whether the insurers can acquire sufficient reinsurance, especially at a time when most Western counterparts have gone on holiday.
What Are The Other Options?
Shipowners may continue operations without the war coverage by taking on the risks, since voyages between Sakhalin Island and Japan are short, taking just a few days, and since the LNG export facility is situated far from the battlefields of Ukraine and Russia.
However, they are at risk of losing their tankers to seizure in Russia for some unexpected reason. Each LNG tanker goes for 20 billion to 30 billion yen ($150 million to $220 million).
Other parties, such as the government and Japanese utilities, the buyers of the Sakhalin fuel, might have to share the risk, industry sources said, although sources in the government and among buyers said they were not yet discussing such a move.
“Insurers and shipping companies are trying to resolve the issues and we are closely watching the situation,” a source at a utility said.
Another alternative would be to apply a sovereign liability guarantee, like the one that covered shipments of Iranian oil to Japan in 2012, after Western insurers stopped offering cover due to sanctions on Iran.
Legislation that approved that guarantee was for Iranian oil imports only, so new law would be required for guarantees covering shipments from Russia, the ministry official said.
What Is The Risk For Japan’s Gas And Power Supplies?
The clock is ticking, but any immediate risk of fuel and power shortages seems minimal, even if some LNG cargoes are delayed in early January, a different source at a power utility said. The reason was that stocks accumulated ahead of the peak winter demand season were larger than usual, that source said.
LNG inventories at Japan’s top power utilities were 2.41 million tonnes on Dec. 25, exceeding the five-year average of 1.84 million tonnes for the same time of year, industry ministry data showed.
Also, Japan has developed a new mechanism to enable the industry ministry to help divert supplies of LNG in the event of an emergency so gas and power companies do not run low.
If supply from Sakhalin-2 is interrupted, buyers can implement the upward quantity tolerance clause usually found in long-term contracts, enabling them to ask for 5% to 10% additional volumes from suppliers elsewhere.
A source at an urban gas provider said his company could also acquire alternative supply from the spot market if it could accept the higher price there.
Japanese buyers spend $15.78 per million British thermal units (mmBtu) for Russian LNG last month, lower than the average price of imported LNG of $17.86 and an average spot-cargo price for delivery to Japan of $18.40, according to the Japan Organization for Metals and Energy Security.
The average LNG price for February delivery to northeast Asia is about $31 per mmBtu.
Japan utilizes LNG for 39% of its electricity generation.