According to Oil &Gas Journal, Japan had about 1.4 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2006. Despite limited natural gas resources, Japan is an important natural gas consumer and imports virtually all of its natural gas from other countries. Lacking international pipeline connections, all of Japan’s imports come in the form of liquefied natural gas (LNG). Japan began importing LNG from Alaska in 1969, making it one of the first countries to pioneer LNG trade. Today, Japan is the largest importer of LNG in the world.

As with the oil industry, Inpex and the companies created from the former Japan National Oil Company are the primary actors in Japan’s upstream natural gas sector. Besides Inpex, various other Japanese companies are involved in natural gas exploration and production efforts, primarily overseas. Because Japan is the world’s largest LNG buyer, the country has a robust LNG infrastructure, most of which is owned and operated by local power generation companies. Osaka Gas, Tokyo Gas, and Toho Gas are Japan’s largest retail natural gas companies, with a combined share of about 75 percent of the retail market. Although Japan is a large natural gas consumer, it has a limited natural gas pipeline transmission system. This is partly due to geographical constraints posed by the country’s mountainous terrain, but it is also the result of previous regulations that limited investment in the sector. Reforms enacted in 1995 and 1999 have helped to open the sector to greater competition, and a number of new private companies have entered the industry since the reforms.

Japan’s natural gas production is limited, totaling 104 billion cubic feet (Bcf) in 2004. On the other hand, Japan consumed 2,950 Bcf of natural gas in 2004, making it a large net importer of natural gas. Most of Japan’s natural gas fields are associated, meaning that they are co-located with the country’s oil fields. Japan’s largest natural gas field is Yufutsu, which produces approximated 40 million cubic feet per day (Mmcf/d). The Iwafune-Oki field, operated by Japex and Mitsubishi, produces around 6 Mmcf/d.

The East China Sea is believed to hold substantial natural gas reserves and is one possible site of future offshore development by Japan. However, development of hydrocarbon reserves in the region has been hindered by disagreements between Japan and China over the demarcation of their maritime boundary. Japan has objected to China’s exploration and production activities in the Chunxiao natural gas field, which is three miles west of the median line, but which Japan contends may be tapping natural gas reserves which extend past the median line. The Japanese government granted a drilling concession in July 2005 to Teikoku Oil for an area just east of the median line. The Japanese and Chinese governments have participated in several rounds of bilateral negotiations aimed at resolving the impasse, although so far no specific agreements have emerged from these talks.

To help mitigate the country’s shortfall of domestic natural gas resources, Japanese companies have actively sought participation in natural gas exploration and LNG projects overseas. One of the largest initiatives is Inpex’s $6-billion Ichthys project in offshore Western Australia. In 1998, Inpex acquired a 100 percent stake in the WA-285-P field in the offshore Ichthys natural gas-bearing structure. The company has since put forward plans for the project to eventually produce 6 million tons per year (Mmt/y) of LNG (292 Bcf/y), all of which would be exported to Japan. In August 2006, Inpex announced that it had transferred a 24 percent participating interest in the project to Total, while Inpex would remain the Ichthys project operator (see the Australia Country Analysis Brief for more information).

Another high profile LNG project in which Japanese companies have a stake is the Sakhalin-II project in Russia. The project is being developed by Sakhalin Energy, with Shell as the operator (55 percent controlling stake) and Japanese companies Mitsui (25 percent) and Mitsubishi (20 percent) holding participating stakes (see the Sakhalin Energy website for more information about the company). In September 2006, the Russian Natural Resources Ministry froze a key environmental permit for Sakhalin-II, which has effectively curtailed operations. The project is slated to begin LNG production in 2008, although it is unclear if this will be delayed as a result of the current environmental problems. Russian officials have proclaimed their discontent with the project’s rising costs, which the Shell-led consortium estimates will reach $22 billion, almost double the 2001 estimate of $12 billion. At its peak, Sakhalin-II is expected to produce 9.6 Mmt/y (468 Bcf/y) of LNG, of which eight Japanese companies have already signed contracts to buy 4.7 Mmt/y (230 Bcf/y) (see the Sakhalin Island Analysis Brief for more information).

Japanese companies have also invested in several natural gas projects in Indonesia. In October 2006, Inpex announced that it had found substantial natural gas reserves in the Masela Block in the Timor Sea, in which Inpex holds a 100 percent stake. The company did not offer a specific reserve estimate, but Inpex will reportedly submit a $4.2 billion project proposal to the Indonesian government. The project will aim to ship 3-5 Mmt/y (150-250 Bcf/y) of LNG to Japan and elsewhere by 2015. Inpex is currently involved in two other LNG-producing projects in Indonesia, one on Kalimantan Island and another on the island of New Guinea (see the Indonesia Country Analysis Brief for more information).

As noted earlier, Japan is the largest LNG importer in the world. In 2005, the country had net imports of 2,858 Bcf (58.6 Mmt) of LNG. Japan has 23 LNG import terminals with a total throughput capacity of more than 60 Mmt/y (2,925 Bcf/y). Most LNG terminals are located around the island nation’s main population centers of Tokyo, Osaka, and Nagoya. Many of Japan’s LNG facilities are owned by local power generation companies that operate natural gas-fired power stations, often in partnership with natural gas distribution companies. These same companies own much of Japan’s LNG tanker fleet.

Japanese regulations permit individual utilities and natural gas distribution companies to sign LNG supply contracts with foreign sources. The largest LNG supply agreements are held by Tokyo Gas, Osaka Gas, Toho Gas, and TEPCO, primarily with countries in Southeast Asia and the Middle East. Many of Japan's existing LNG contracts date from the 1970s and 1980s, when terms were less flexible and tied to prices for crude oil. With these contracts coming up for renewal, Japanese firms have been insisting on terms more favorable to the buyer, including volume variances and a weakening in the pricing link to crude oil. Many of these agreements are set to expire over the next decade, and it remains uncertain whether or not Japanese companies will be able to renew the contracts on favorable terms. Some industry analysts posit that this is driving Japanese firms’ interest in acquiring equity stakes in foreign LNG projects, in an effort to guarantee future supply.