Japan and Australia Sign Energy Pact as Hormuz Closure Squeezes LNG Supply
The bilateral supply-chain deal underscores Tokyo's exposure as the Iran war blocks the route carrying 6% of its LNG imports.
Japan and Australia signed a bilateral energy cooperation agreement on Tuesday (2026-05-19) covering LNG and critical minerals, with Australia confirmed as Tokyo's top supplier of liquefied natural gas, Reuters reported. The deal landed as Japan faced the effective closure of the Strait of Hormuz, through which roughly 90% of its crude and 6% of its LNG still transit.5,2
That 6% share matters because it has no easy substitute. A gas analyst told Montel on Thursday (2026-05-21) that the crisis exposes LNG's lack of a fallback pipeline option, unlike oil, which can be diverted via alternative shipping lanes or overland routes.1
Tokyo has already released around 80 million barrels from its strategic petroleum reserves, equivalent to roughly 26 days of domestic oil demand, to stabilise fuel balances. Japan covers nearly 100% of its gasoline and about 95% of its diesel through domestic refining, so the crude buffer buys time.2 Gas is harder.
Around 98% of Japan's domestic gas demand is met by LNG imports, and the power sector absorbs 55–65% of total consumption. Natural gas accounts for about 32% of the generation mix, ahead of coal at 28% and nuclear at 9%.2 Japan imported 66.3 Mt of LNG in 2025, down 1.5% year-on-year, still the world's second-largest buyer after China.2
Australia supplied 26 Mt of that total last year. Malaysia delivered 10 Mt, and Russia shipped 5.8 Mt via Sakhalin-II, in which Mitsui and Mitsubishi hold stakes exempt from Japan's sanctions.2 The bilateral pact aims to lock in that supply chain just as Australian export volumes lose momentum.5
LSEG seaborne data show Australian LNG shipments fell 2.8% year-to-date in 2025, leaving the country trailing the US and Qatar, both of which have expanded capacity.4 The slowdown compounds the pressure on Tokyo, which cannot easily lean on spot cargoes. Platts JKM LNG front-month sat at $16.52/MMBtu as of Sunday's (2026-07-12) close, with ICE Brent crude front-month at $75.22/bbl.6
Australia faces its own fuel exposure that could undercut its reliability as an exporter. Around 15% of its oil crosses the Hormuz directly, but over 50% of its refined fuel products depend on crude passing through the strait.3 Its two remaining refineries are ageing and supply only 20% of domestic fuel demand.3
The domestic gas picture is no more comfortable. An industry report warned that 250,000 Australian jobs depend on gas from a critical east-coast basin already heading toward a supply shortfall.7
The cross-sector links are tightening. A sustained Hormuz blockade lifts Dubai crude, which pulls Brent higher, which in turn drives Platts JKM LNG front-month up through the crude-linked contract structure in Asian LNG.1 Even if Australia keeps its terminals running, Japanese buyers face rising prices on every non-Australian cargo they try to source.1
The agreement is as much a political hedge as a commercial one. It signals joint intent to secure fuel and mineral supply chains, but it adds no gas to the market this winter, and Australian output is already slipping.5,4 The unresolved risk is whether Australia can sustain export volumes while its own refined-fuel system erodes, and whether Japan's 26-day oil buffer holds if the Hormuz closure runs into peak demand.2,3 The next signal is Queensland shipping data: any dip in Ichthys plant utilisation would feed straight into spot Asian LNG premiums.1