Why Japanese LNG investment in Southeast Asia is soaring

A consortium of Thai, Vietnamese and Japanese energy companies recently announced that they will begin developing the Block B gas field, 330 kilometers off the coast of Vietnam, a project that has been in development for many years but is only now showing signs of real progress to book. Japanese banks are providing $832 million in financing, roughly half of which will come from the Japan Bank for International Cooperation, a state-owned bank that regularly supports strategic overseas projects. The total value, including upstream development, pipeline construction and onshore power plants, will be in the billions of dollars.

JBIC is already absorbs heat from environmental groups noting that Japan, historically a major source of financing for coal power in Southeast Asia, had pledged to help reduce emissions in the region. For example, Japan is closely involved in initiatives such as the Just Energy Transition Partnerships in Indonesia and Vietnam. $832 million to finance the development of a major natural gas field could be seen as contrary to the spirit of these efforts.

Japanese banks would likely counter that the pledge would only end coal financing. Other fossil fuels, such as liquefied natural gas, were never part of the commitment. And, from their perspective, for good reason. The argument goes that even as Vietnam and other emerging markets focus on clean energy, they will still need reliable and predictable sources of electricity generation (such as natural gas or coal) in the short term to ensure grid stability.

Burning natural gas emits less carbon than coal, so if fossil fuels are to be part of the energy mix for the time being, gas should replace coal during the transition period, while more renewable capacity is added. It is not surprising that major Japanese gas companies such as Tokyo Gas are proponents of this approach.

And they are backing this up with significant commitments in the region. In addition to the Block B project, which involves subsidiaries of Japanese conglomerate Mitsui, Tokyo Gas is currently developing a 1,500 MW LNG power plant in northern Vietnam. second such project in the country. Tokyo Gas too prepare for co-development a liquefied natural gas terminal in the Philippines, a deal still pending government approval.

There are a number of reasons why Japanese companies are pushing LNG in Southeast Asia. One of them is that there is probably some truth to the claim that emerging markets need a less carbon-intensive but still reliable transition fuel in the medium term. Fossil fuels will not disappear tomorrow and much of Southeast Asia’s existing coal capacity will continue to operate for a variety of reasons over the next ten to twenty years, even as investment in renewables increases. Replacing coal with a less carbon-intensive transition fuel is one possible way to reduce emissions.

Another reason is that Japan has historically been a major importer and consumer of natural gas. As a result, the country has a vast LNG ecosystem that includes major industrial and energy companies whose business operations largely revolve around natural gas. Many of these companies are now focusing on Southeast Asia as Japan’s use of natural gas declines. In the financial year ending in March 2017, Tokyo Gas had almost 10.3 million customers. By 2023, the customer base had shrunk to 8.7 million.

As domestic demand declines, Tokyo Gas and other companies that are part of this ecosystem will have to look further afield for opportunities, especially abroad in fast-growing economies with rising energy demand, such as Vietnam and the Philippines. Japanese banks will undoubtedly continue to support expansion into Southeast Asian LNG as these projects, like Vietnam’s Block B gas field, create demand for high-quality Japanese goods and services.

The transition to cleaner energy is an imperfect and ongoing process. It probably won’t happen quickly or in a predictable, linear way. Natural gas, and even coal, will probably stick around longer than we’d like. And given the political economy of LNG in Japan and Southeast Asia, and the real need for stable and predictable generation sources as renewables and supporting grid infrastructure mature, gas may be one of the least bad options for the short to medium term.