TOKYO – As Iran held the Persian Gulf under blockade in March, Japan was bracing for impact: 93% of the country’s oil came through the Strait of Hormuz. Just under two weeks into the war, which began with U.S. and Israeli strikes on Iran, Prime Minister Sanae Takaichi announced the country’s largest ever release from its strategic reserves.
It was a “sort of a deja vu moment,” said Yee Kuang Heng, an international security professor at the University of Tokyo. A seismic island with scant fossil fuel resources, Japan has been struck by a series of energy crises since World War II, shaping its energy policy around an ever-elusive goal of security. In the afternoon before she announced the emergency oil release, Takaichi had been attending a memorial to the Fukushima disaster that knocked out the country’s nuclear supply in 2011.
No one knew how long this latest disruption would last or how painful it could get. In a skyscraper overlooking bullet trains entering Tokyo Station, Taishi Sugiyama, a Japanese energy researcher with three decades’ experience, said: “The system seems to be very fragile now.”
But for Japan’s behemoth liquefied natural gas (LNG) buyers, the prognosis was quite different. In the years of vulnerability after Fukushima, Japan’s LNG industry built a globally powerful trading empire in collaboration with the radical commercial freedom of the United States. Despite producing no LNG of its own, Japan is now the world’s fourth-largest seller.
When the M/V Diamond Gas Sakura left Cameron, La., on Feb. 24, energy markets were in a period of relative calm. The seven-week journey to Nagoya, Japan, where it would unload enough LNG to power the city for a week, should have been uneventful.
But four days later, the U.S. and Israel killed Iran’s supreme leader, and Iran responded by firing missiles at oil and gas tankers in the Strait of Hormuz, cutting off the world from 20% of its LNG. Still making its way through the Caribbean, the Diamond Gas Sakura’s cargo was suddenly a lot more valuable.
Having paid around $7 per unit for the fuel in the U.S., Japanese industrial giant Mitsubishi took the opportunity to flip it to buyers in Taiwan and Singapore, where gas prices were now more than twice as high. For the ship’s whole cargo, the arbitrage was worth up to $50 million. “Not to sound too cynical,” said Sam Reynolds, an LNG researcher at the Institute for Energy Economics and Financial Analysis, “But war, unfortunately, means there is money to be made.”
Just 10 years ago, this sale would have been impossible. But in the wake of the Fukushima disaster in the early 2010s, Japan saw an opportunity to strike a major change in the global market.
While Japan’s utility companies were scrambling to replace their nuclear plants with natural gas, in the U.S., a huge fracking-enabled surge in fossil fuel production had left America with more natural gas than it knew what to do with. The problem was getting it from where it was produced to where it was needed: other than a small facility in Alaska that was winding down production, the U.S. had no LNG export terminals.
In all previous fossil fuel booms — from Australia to Qatar to Russia — oil and gas had been drilled, piped and exported by tightly integrated government-owned companies or international giants with government licenses. These companies’ huge scale gave them great power over how their product was sold: Not wanting sales competition from their customers, LNG contracts forced buyers to deliver cargoes to specified locations, stopping them from selling on the product to other customers.
In the U.S. shale boom, all that was about to change. “There is one unique factor in the U.S.,” said Steven Miles, a fellow at the Baker Institute Center for Energy Studies. In America, the government didn’t own the fossil fuels: private landowners did.
When the shale revolution began in the 2000s, thousands of independent oil and gas producers sprung up to strike deals with these millions of homeowners and farmers — from Texas to West Virginia — drilling the gas from beneath their feet and selling it on open markets. It was a ruthless, mostly unprofitable business mired in cycles of booms and busts. The job of building terminals to export the gas as LNG would come down to entrepreneurs.
The first, a former restaurateur called Charif Souki, “was just a business guy,” Miles said. “He didn’t own the upstream. He didn’t own any pipelines. None of it.” The new breed of LNG exporters he represented would simply be service providers. Their sales contracts — the first of which was written by Miles — ensured that they never even owned the gas they sold, only connected it from the open market to the LNG buyers at their ports. “And they didn’t give a darn what happened” to it after it left, Miles said.
For Japan’s energy industry, which has pumped billions of dollars into financing these export terminals and buying their LNG since 2012, that freedom offered a new path towards an ever-important goal of energy security. Being able to deliver U.S. LNG to anywhere in the world meant Japanese importers could buy more of the fuel than they needed, and sell the excess to Asian neighbors. If world events knocked out a particular area’s supply, Japan could tap into its buffer — or profit from the inevitable price spike. And once American exporters gave buyers the right to resell their fuel, Japan used it to put pressure on others to do the same.
The shift “blew the market apart,” Miles said, and allowed Japan to transition from being a dependent LNG buyer, to a powerful trader. By 2024, 40% of Japanese LNG cargoes were resales like the Diamond Gas Sakura’s, meaning Japan now sells more LNG per year than any country but Qatar, Australia and the U.S., despite drilling almost no natural gas itself.
Japan did not buy into American LNG exports only for financial opportunity. The potential for U.S. LNG exports created fear, too.
“It is important to consider, from the viewpoint of energy security,” Japanese policymakers wrote in the country’s 2014 strategic energy plan, “that the U.S. energy independency due to the ‘shale revolution’” may weaken the global superpower’s interests in the Middle East, causing instability in the region.
The scenario they feared most of was one in which Iran would place a blockade on the Strait of Hormuz. In 2015, Defense Minister Gen Nakatani told the House of Representatives a blockade would threaten Japan’s “existence.” While the prescience of that warning was largely missed by the country’s oil industry — which was even more dependent on supplies from the Persian Gulf by the end of last year — the LNG industry’s U.S. investments have brought down Japan’s gas dependence on the strait to just 6%, far less than it sells to other countries. But in what many tout as the success of a well-executed, decade-long strategy to guarantee the security of Japanese LNG supply, some analysts see contradictions, and no lasting way out from the almost perennial state of energy insecurity Japan has experienced since World War II.
As the country continues to sign deals for more U.S. LNG extending into the second half of this century, LNG analyst Reynolds sees a new risk: too much supply, not too little.
“If you are playing a more active role trading LNG, you have to ensure that there is going to be demand for it,” he said.
But as the countries Japan relies on to buy its excess LNG feel the pinch of higher prices from the Iranian blockade, some are already buying less. Vietnam, Thailand, Cambodia and the Philippines have all announced intentions to decrease LNG imports, lured by cheaper Chinese-made renewable sources. “So these markets that you thought were going to be growth areas are not really panning out,” Reynolds said.
Hiroshi Hashimoto, an energy security adviser at the Japanese government’s Institute for Energy Economics, denied the “elusive notion of oversupply,” saying “this is a misleading argument that discourages investment activities in energy production” and has a “very bad impact.”
But Reynolds says those investments could be made in renewables instead: “The fundamental approach that Japan has taken for energy security has been to diversify fossil fuel supplies as much as possible, rather than generating domestically sourced renewable energy on the island.”
At a conference in Tokyo the day of Takaiachi’s emergency oil release, energy academic Tomas Kåberger echoed the idea. Japan was “resource poor” when fossil fuels were the world’s lowest-cost sources of energy, he said. But now, “when solar and wind electricity are the cheapest sources of energy, Japan is no longer an energy-poor country. Japan has immense resources of renewable energy and can make itself independent and a stronger nation by developing these potentials.”
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