Australia's Gas Reservation Scheme Clouds Its New LNG Supply Pact With Japan
Australia is Japan's largest LNG supplier at 26 million tonnes annually, but a domestic reservation scheme threatens to reduce export volumes from 2027.
JKM Asian LNG prices were $24.88 per MMBtu on Monday (2026-09-14). That level has sustained upward pressure on Japanese power costs: data published by Japan NRG on Sunday, September 7 (2026-09-07), showed TEPCO-area September baseload rising to ¥23.10 per MWh from ¥22.05, with January 2027 at ¥22.80, up from ¥22.25. Tullet Prebon data showed Kansai September baseload at ¥19.90, up from ¥19.60, over the same period, as the LNG forward curve remained elevated through the winter strip.6
On May 19 (2026-05-19), the prime ministers of Australia and Japan signed a bilateral energy cooperation agreement covering LNG supply chains and critical minerals, with Reuters reporting Australia as Japan's top LNG supplier. Four months on, JKM near $25 and Japanese winter power contracts moving higher confirm that LNG supply security remains a live concern for Tokyo.4
Japan's gas dependence is close to total. Around 98% of domestic gas consumption is met by LNG imports, and in 2025 the country took in 66.3 million tonnes, down 1.5% year-on-year but still the world's second-largest import volume after China, according to an OilPrice.com analysis. Australia supplied 26 Mt of that, followed by Malaysia at 10 Mt and Russia at 5.8 Mt through Sakhalin-II, where Mitsui and Mitsubishi hold stakes under a Japanese government sanctions exemption.2
Natural gas runs 32% of Japan's power generation, ahead of coal at 28% and nuclear at 9%. Australia's 26 Mt from Japan's 66.3 Mt total import base leaves no realistic near-term substitute; the power sector absorbs 55% to 65% of all gas consumed domestically, so any shortfall in Australian supply transmits directly to electricity costs.2
Only around 6% of Japan's LNG — primarily from Qatar and the UAE — transits the Strait of Hormuz; most supply arrives through Southeast Asian and Pacific routes, bypassing that chokepoint. The same government that signed the Australian agreement in May had released roughly 80 million barrels from its strategic petroleum reserves, equivalent to about 26 days of domestic oil demand, in response to a concurrent supply disruption linked to the Iran situation.2
But Australia's own policy choices now add complexity. In December 2025 (2025-12-22), Canberra proposed a domestic gas reservation scheme requiring LNG exporters to retain between 15% and 25% of output for the home market. Reuters reported that three east coast LNG export plants would be affected. The scheme applies only to new contracts and takes effect in 2027, but analysts said it could reduce available LNG export volumes and push international buyers toward other sources.5
For Japan, whose import structure is built on large and stable Australian volumes, that prospect creates a variable absent when the May agreement was signed. The interplay between the bilateral pact and the reservation scheme's contract terms has not been publicly resolved.4,5
The broader LNG market has tightened further since Russia's conflict with Ukraine redrew European buying patterns. Russian gas fell from 45% of EU imports in 2021 to 18% in more recent estimates, forcing European utilities to compete with Asian buyers for spot and short-term cargoes. Gazprom's Power of Siberia pipeline moved 38.8 billion cubic metres to China in 2025, exceeding its planned 38 bcm capacity, and Moscow subsequently agreed to raise annual volumes on the route to 44 bcm. European LNG demand has stayed elevated in that environment and contributed to the JKM price Japanese buyers now face.1,3
The January 2027 Japan power contract at ¥22.80 per MWh, up from ¥22.25 in early September (2026-09-07), suggests the market has not yet priced a supply squeeze. How Canberra applies the reservation rules to near-term Japanese contract renewals, and what practical weight the May bilateral carries in that process, will become clearer when implementation guidance is published ahead of the 2027 start date.6,5