While it has yet to be seen whether Japan’s increased efforts to pursue shifting its pricing basis for its LNG imports to other benchmarks will actually reduce its import costs, it is still certain that 2012 will be recorded as a landmark year for the country began to publicly pursue an alternative to the long-held oil index basis for LNG purchases.
After decades of maintaining the oil price indexation for almost all of its long-term LNG imports, going back all the way to its initial LNG imports in 1969, Japanese power and gas utilities have been able to make a switch in some contracts to a natural gas benchmark.
For example, there’s Kansai Electric’s recent agreement. The Osaka-based power utility on Nov. 19 signed a “key terms agreement” to buy some 500,000 mt/year of LNG from BP Singapore for 15 years beginning in fiscal 2017-18. The basis for the deal? The US Henry Hub natural gas price.
The agreement, once concluded, would become Kansai and Japan’s first ever long-term LNG import contract to be fully linked to gas prices. BP Singapore would supply 500,000 mt/year of LNG to Kansai Electric from its portfolio supply sources, including Egypt and Trinidad & Tobago.
Indeed, this deal represents 7% of Kansai Electric’s estimated annual record LNG consumption volume of 7.27 million mt for fiscal 2012-13, which runs from April to March. But it is still just a fragment of Japan’s record LNG imports of 72.94 million mt between January-October 2012, a figure that was up 13% from the corresponding period a year earlier.
However, local industry analysts and sources say that Kansai Electric’s recent agreement is only the tip of the iceberg for a number of similar deals they expect to follow in coming months.
Kansai Electric’s recent agreement is a first step in Japan, where local power and gas utilities have been stepping up efforts to lower the cost of LNG imports by importing LNG at prices linked to gas benchmarks, such as Henry Hub. LNG imports from the Middle East that are linked to crude oil prices are far more expensive than natural gas from the US, where Henry Hub prices fell to 10-year lows earlier this year and are currently at a fraction of oil-linked LNG prices.
The country recorded its first annual trade deficit in 31 years in 2011, and the fact that it imported a record 78.5 million mt/year of LNG at relatively high prices, in part to make up for lost nuclear output post-Fukushima, is seen as a cause of that.
Japan’s LNG demand has soared since the March 2011 Fukushima nuclear disaster and Japan has been seeking additional supplies from major exporters such as Qatar. But Qatar has insisted on retaining oil-linked contracts for its LNG.
There were other steps away from oil-related LNG pricing before the Kansai deal. In July, Japan’s Chubu Electric and Osaka Gas signed a natural gas liquefaction tolling agreement with the proposed Freeport project in Texas to secure 2.20 million mt/year of capacity each to liquefy natural gas from the project’s first train. The companies said then that they were looking to import Freeport LNG at Henry Hub-linked gas prices, which would have marked the first instance of those two companies using the Henry Hub prices as the main benchmark for their LNG imports.
The utilities expect to start importing Freeport LNG as early as late 2017 once the project secures approval from the US Department of Energy to export LNG to Japan. That uncertainty about DOE approval is why it’s safe to declare the Kansai deal the first firm Henry Hub-based contract.
(US companies can export LNG without a license to any country that has signed a free trade agreement with the US. There are only a handful of countries with LNG import capability that have signed such a deal, including two in Asia: South Korea and Singapore, which is nearing the opening of its first LNG import facility. The DOE has only approved exports to non-free trade countries for one other company, Cheniere Energy.)
The widened spread between world oil prices and Henry Hub natural gas prices has prompted Japanese companies to try to import LNG from the US at Henry Hub prices. But it’s not as if the Japanese are suddenly going to see their LNG prices move away from levels that are near $15/MMBtu, basis the JKM price, and instead move toward a Henry Hub price that is near $3.50/Mcf. A premium well above the Henry Hub price would need to be added for suppliers to agree to a Henry Hub-based deal into Japan. But even with that premium, such a deal would still allow Japanese buyers to be tied to what looks like a far less volatile US natural gas market instead of the ups and downs of world oil prices.
The DOE has approved a number of applications to export LNG to countries with which the US has a free trade agreement, but has only approved Cheniere Energy’s Sabine Pass project in Louisiana for export to non-FTA countries, including Japan.
Given the restrictions on US LNG exports and the size of the commitments that Japanese companies have made with US suppliers, Japan’s possible LNG imports from North America, including Canada (which has several LNG projects on the drawing board), would not exceed more than 15 million mt/year, according to Japanese government estimates.
That amount could account for roughly 20% of the current import volumes, which would be a significant jump from decreasing supplies from the US existing LNG export terminal in Kenai, Alaska. Japan imported 233,650 mt of LNG from the US over January-October 2012, down 14% from a year ago, and that figure is otherwise headed to zero, with themothballing of the existing LNG export terminal in Kenai, Alaska (which still sends the occasional cargo to Japan).