Japan Calls On US to Boost LNG Supply // UK Approves 25% Windfall Tax On O&G // The US Needs More Refineries

Japan Calls On US to Boost LNG Supply

On Tuesday, Japan called on America and Australia to ramp up production and deliveries of LNG. Japan is the second-largest importer of LNG in the world.

“I will once again firmly request the United States, a major global LNG producer, and Australia, the largest LNG supplier to Japan, to step up production and ensure a stable supply of the fuel as the global LNG market is tightening in the wake of Russia’s invasion of Ukraine,” Japan’s Industry Minister Koichi Hagiuda told the press.

"Japan will need to buy more non-Russian LNG until 2025 and seek to buy cargoes Chinese players are re-selling, according to Hiroshi Hashimoto, head of the gas group at the Institute of Energy Economics, Japan (IEEJ)," reports Oilprice.com.

In the long run, Japan will need long-term supply contracts from Australia, the U.S., and Qatar for LNG.

Japan is a resource-poor island heavily dependent on others for its energy. The Japanese grid is already groaning under the strain of the energy crisis.

UK Approves 25% Windfall Tax On O&G

The British parliament has approved a 25% windfall tax on oil and gas producers that will net the government $6 billion to be put towards consumers' skyrocketing energy bills.

The bill now has to make it through the House of Lords. The bill has changed since its original writing to make offsetting oilfield decommissioning and the costs of electrifying producing fields viable for energy firms.

"Oil and gas giants operating in the British North Sea have warned that the windfall tax will undermine efforts to attract investment to the UK and slow oil and gas production growth in the North Sea," reports Oilprice.com.

The tax is meant to ease energy costs for consumers during the energy crisis, though it will not be extended to electricity companies.

If the UK adopts the tax, it won't be alone. According to Oilprice.com, "Hungary has also implemented a windfall tax, and even Russia’s Gazprom is not immune. Last week, Russia’s lower house of parliament approved tax code amendments that would levy a $20-billion windfall tax on Gazprom from September to November this year."

The US Needs More Refineries

To bring down gas prices, America needs more refineries. Easier said than done.

The last time America built a large oil refinery was in 1977. More recently, crude distillation plants shuttered around the world while the construction of new ones ground to a halt during Covid. "The closures were especially acute in the US, where old facilities suffered irreparable damage from breakdowns and hurricanes while others were converted to produce renewable diesel," reports Bloomberg. "Over the past three years, the nation’s refiners have shut—or announced plans to shut—about 2 million barrels of capacity a day, wiping out enough gasoline production to fuel an estimated 30 million cars."

But with gas prices so high and profit margins so fat, shouldn't the industry be able to recoup capital invested in building new refineries fairly quickly? The Biden administration, on a Zoom call with a refining executive, suggested it could take as little as a year to break even on such an investment.

Bloomberg reports that "to longtimers in US refining, the idea that companies would invest billions of dollars in a new refinery based on a few months of high profits was almost laughable...Designing and constructing the labyrinth of pipelines, tanks, and distillation columns would easily cost $10 billion and take as long as a decade."

How should the industry square such suggestions for long-term investments like refinery construction with threats of windfall taxes and out-and-out termination of their industry within a decade?

Yet some expansions of refining capability are already underway from Exxon and Valero. According to Bloomberg, these will just barely make up for the loss of a single refinery. "Meanwhile, the sharp, pandemic-driven decline in fuel demand led to the announced shutdown or repurposing of at least six refineries, including LyondellBasell Industries NV’s Houston facility, which is capable of making 3.7 million gallons of gasoline a day and is set to close by next year."

For his part, Chevron CEO Mark Wirth does not believe there will ever be another refinery built in America. “You’re looking at committing capital 10 years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying, ‘We don’t want these products,’ ” he said.

None of this bodes well for Biden. Bloomberg reminds us, "No US president has been reelected with gasoline prices above $4 a gallon, and the price at the pump is almost $4.70 this summer."

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Conversation Starters

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• An update on Germany's situation:

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