Japan's gas market deregulation reverberates widely
JXTG Group has thrown down the gauntlet to Tokyo Gas in a battle for the domestic retail market
The stakes are high—Japan's retail energy market is worth around $82.8bn. Although it's early days because the gas market was only deregulated in April 2017, most observers expect the current multitude of suppliers—about 200—to shrink to a handful of single-source giants selling electricity as well as gas.
As Japan's largest natural gas utility, Tokyo Gas has a lot to defend. The 133-year-old group is the primary provider in nine main cities including Tokyo, with 11,600 residential, commercial and industrial customers. In 2017, gas sales accounted for 56.4% of all group sales and more than 65% of profits.
But JXTG has a lot to aim for. Its domestic gas sales are a fraction of those of Tokyo Gas, but the group says it's leveraging deregulation to embark on a "Leap Forward" that's intended to convert it into "one of the most prominent comprehensive energy companies in Asia". Already a dominant influence in terms of refining, with capacity of 1.93m barrels a day, JXTG is also the country's largest privately-owned producer of oil and gas at 120,000 b/d, as the Oxford Institute of Energy Studies (OIES) points out in a February report. In both refining and upstream, JXTG is way ahead of nearest rival Idemitsu with, respectively, 500,000 b/d and 43,000 b/d.
Other competitors to Tokyo Gas' dominance are emerging, such as Nippon Gas, which is aiming for 1m retail gas customers by April 2020.
Given the low single-digit inroads made so far by new entrants in the electricity market, which was deregulated in 2016, Tokyo Gas's dominance seems reasonably assured in the short term. As S&P Global Platts wrote in a report in January, "the deregulation of Japan's electricity and gas markets is slowly but surely progressing".
Because Japan accounts for more than a third of all liquefied natural gas imports worldwide, deregulation of the domestic retail market is having international repercussions. As S&P Global Platts notes, because local monopoly suppliers can no longer pass on fuel costs to the consumer (as they've done for years), they'll have to pay less for imported gas in order to preserve margins. "This will likely change the behaviour of LNG importers as they will be exposed to price risk," says the report.
Also, adds S&P Global Platts, Japanese utilities are expected to have more than enough LNG in the coming years. That's because Japanese firms have over-committed to long-term contracts and may even be trying to sell LNG. Already, many gas utilities have indicated they will swap out or resell cargoes booked from LNG projects in the US, where they have offtake or tolling contracts. "Most of these agreements have no destination restrictions and thus give the flexibility buyers need to cope with fluctuations in demand in their own downstream markets," S&P Global Platts explains.
$82.8bn—Japan's retail energy market value
The steady return of nuclear power following the Fukushima disaster is also contributing to Japan's LNG stockpiles. On the assumption that 16 nuclear reactors will be operating by late 2022, S&P Global Platts estimates that gas utilities had, by 2017, contracted to buy 7.8m tonnes that they won't need. By 2019, that could have nearly tripled to 21.5m tonnes, before declining sharply to 1.5m tonnes by 2023.
But, clearly, that still leaves a lot of unwanted LNG in the meantime. In an oversupplied and deregulated market, observers predict this will lead to much more flexible supply and procurement models.
The giants are already jockeying for sources of supply. As the OIES study notes, downstream operators like JXTG will leverage their "relative ease of access to high-growth markets in Asia-Pacific (such as those in Vietnam, Thailand, the Philippines and Australia) through tie-ups with NOCs that seek downstream know-how and experience".
Right on cue, JXTG subsidiary Nippon Oil & Energy has taken a 10% stake in a Petronas LNG liquefaction train in Bintulu, Sarawak, with a production capacity of 3.6m tonnes a year. Similarly, Tokyo Gas has joined Mitsui to acquire a 30% equity interest in a group of natural gas distribution companies for industrial estates in Thailand, the first such investment by a Japanese company. In 2017, Tokyo Gas bought stakes in gas-distribution groups in Vietnam and Indonesia.
The deregulation of Japan's domestic gas market will reverberate right through Asia for years to come.