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The emerging energy axis takes shape

Liquified natural gas from Australia is central to Japanese plans to reinforce its energy security

AUSTRALIA's upstream gas remains a priority for Japanese investment as the Asian-Pacific nation takes steps to become a major LNG trading hub. This is true despite a drop in demand in Japan, and the supply glut is only making the case stronger. In recent years Japanese utilities have taken stakes in LNG-export facilities in Australia, a move that has given them access to a diverse portfolio of assets and contracts. Together, Japanese companies have contracted to buy over 42m tonnes a year of LNG.

Japanese group Inpex has pioneered the largest project-financed LNG export project in history. Ichthys, with France's Total as partner, will become a central supply point for Australian LNG into Japan.

As well as development projects, Japanese trading houses are active in Australian exploration. Mimi, a joint venture between Japanese firms Mitsubishi and Mitsui, holds exploration licences offshore Western Australia and signalled its faith in the sector in June when it said it would spend $1.9bn with local firm Woodside to develop the Greater Enfield offshore oilfield.

In its Strategy for LNG Market Development, published at the G7 Energy Ministerial in early May 2016, the Japanese Ministry of Economy, Trade and Industry identified the need to "expand international cooperation" with LNG producers such as Australia, Qatar, Russia, and the US as well as collaborating with major consumers. This is part of Japan's plan to "play an initiator role in creating a global LNG market".

The Oxford Institute of Energy Studies believes such a strategy will lead to two major developments: "the largest shake-up of the Japanese gas and LNG market since its creation in the 1970s" and "a declaration that traditional crude oil-linked pricing has reached the end of the road, and will be followed by a new era of market-based pricing".

Australian gas has a central role to play in this strategy, providing access to plentiful, high-quality gas and condensate supplies.

While the initial cost of this has been higher than expected - projects such as Gorgon have blown out their budgets - the commissioning dates of several new Australian LNG projects could provide a boost to Japan's hub development plans. Whether by coincidence or design, this is because excess cargoes coming out of Australia are being used by trading houses to drive a nascent physical and financial LNG trading hub.

As Inpex pushes ahead with a second terminal at Ichthys and others invest in Australia for strategic reasons, Japan is also looking ahead a decade, when demand for imported gas in northeast Asia should rebound and growth in southeast Asia is expected to pick up. Japan aims to strengthen its energy security and deepen trade ties with Australia that transcend the current market malaise in global commodity markets. At the same time, it is focused on increasing production capacity through projects such as Ichthys, giving it a pivotal role in the region.

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