Australia has apparently fallen out of favour with Japan over concerns about the Albanese Government’s safeguard mechanism policies, which requires new gas fields – even those developed to supply existing LNG plants – to have net zero emissions right from the get go.

The Australian Financial Review quoted Japan’s Institute of Energy Economics chief executive Tatsuya Terazawa as saying that we are no longer the preferred candidate to make up any shortfall from reduced LNG supply from Russia.

He noted that it would be expensive for Japanese investors in Australian gas projects to pay for carbon credits or carbon storage to meet net zero targets and that the Federal Government should provide “support”.

It certainly hasn’t helped matters that Australia has refused Japan’s request for Santos’ Barosssa gas project to be exempt from the safeguard mechanism.

To no longer be seen as a trusted supplier of LNG may be a blow given that Japan sources more than 40% of its gas from Australia, but is it really such a big deal?

Getting smacked with the naughty hammer

So just what are some of the negative impacts from such a decision – if there indeed was one?

Well for starters, turning off favoured status will likely mean more limited access to Japanese capital for large liquefied natural gas plant or gas field developments.

This could make securing funding for such developments more challenging given that Japan is no stranger to providing favourable terms in order to secure supply.

Japan could also choose not to purchase spot cargoes from Australia, picking supplies from Alaska or other sources instead, which might shave some of the record profits enjoyed by Australian LNG exporters.

More broadly, it could impact on the normally cordial relations between the two countries, though this isn’t too likely given the number of common interests we share with each other – and Japanese preference for other Australian commodities.

Do we have to be big in Japan?

None of these are positive for Australia, but there are some mitigating points.

It is worth remembering that Australia’s LNG sector has always relied on long-term contracts – often in return for financing to get them of the ground – and spot cargoes are a bonus at best that can be diverted to other customers in Asia.

Just to put things into perspective, Japan has long-term supply contracts for more than 24 million tonnes of Australian LNG that expire by 2039 with another 8 million tonnes expiring by 2029.

While there is certainly some risk that these contracts might not be renewed, there are a few considerations to take into account.

Firstly, Japan needs its energy and while other sources of LNG might come into play, the prospect of consistent LNG cargoes at a somewhat lower cost might prove to be too attractive.

Secondly, other customers might be keen to pick up cargoes that Japan rejects for the same reasons.

And thirdly, there is always the possibility that said cargoes might not be available for renewal anyway given that decline in gas field production over time and the likely restrictions on developing new fields.

The last point also brings hydrogen into focus.

Japan is keen on hydrogen, to the point that its industries are willing to support the much panned Hydrogen Energy Supply Chain (HESC) project in Victoria’s Latrobe Valley.

That raises the possibility that even without natural gas (in the form of LNG) in the mix, Japanese investment in Australia will continue… just in a different energy commodity entirely.