A research note published last week by the Development Bank of Japan on the impact and implications for Japanese industries as a result of the US shale gas revolution was food for thought.
Particularly, the bank’s analysis on the impact on Japanese LNG procurement coming from possible LNG imports from the US was notable.
In the report, the DBJ said that Japan might be able to cut its LNG import costs by 7-15% of by 2020 if Japanese companies were able to take a large amount of LNG from planned US export projects, with the price tied to Henry Hub gas prices.
DBJ’s report came at a time when a number of Japanese power and gas utilities have expressed their intention to seek ways to use gas benchmarks to lower their rising LNG import costs as the country busy LNG at oil price indexations, which contributed to Japan logging a record trade deficit in 2012. Japan recorded its first trade deficit in 31 years in 2011.
The research note presented possible maximum LNG imports volume from the US at Henry Hub gas prices. The report says if the Japanese companies with investments in LNG projects in the US can bring back an amount equal to all their possible offtake LNG volumes–estimated to be up to 15.2 million mt/year—and that LNG was linked to Henry Hub gas benchmarks in 2020, Japan should be able to cut its LNG import costs by 7%.
Under this scenario, Japan would be able to import LNG at an average of $14.5/MMBtu in 2020–when its total LNG import requirement is projected to reach just about 84 million mt/year–down from the average import cost of $15.5/MMBtu in December 2012, the DBJ said.
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In another scenario, Japan should be able to import LNG at an average of $13.20/MMBtu, down 15% from the December 2012 import cost, if the companies not only take the possible maximum import volumes but also renew all their expected contracts over 2016-2020 based on Henry Hub gas pricing, the DBJ said.
DBJ estimated that Japanese companies have a combined long-term contractual import volume of 18.70 million mt/year of LNG, which would be set for renewal over 2016-20, according to a DBJ official.
DBJ’s estimates take into consideration Chubu Electric and Osaka Gas’s tolling agreements to take up to 2.20 million mt/year each from the Freeport LNG project; Sumitomo and Tokyo Gas’ ongoing discussion to take a combined total of 2.3 million mt/year LNG from the Cove Point project; and Mitsubishi and Mitsui’s possible offtake of 4 million mt/year each from the Cameron project.
The study also takes into account Kansai Electric’s basic agreement to buy some 500,000 mt/year of LNG from BP Singapore’s portfolio supply sources for 15 years from fiscal 2017-18, based on Henry Hub-linked gas prices.
The Freeport, Cove Point and Cameron projects still require approval from the US Department of Energy to export LNG to Japan or other nations that do not have a free trade agreement with Washington. DOE has approved a number of applications to export LNG to countries with which the US has an FTA, but has only approved Cheniere Energy’s Sabine Pass project in Louisiana for export to non-FTA countries.
The first unknown factor is that it remains unclear how much of Japan’s proposed possible lifting of 15.2 million mt/year of US LNG would actually be available for export under government approvals, and how much of the approved volume Japanese companies would be bringing back for their own consumption.
Second, it’s unclear what will be the actual Henry Hub gas prices in 2020, especially in comparison to Japan’s average oil-index LNG prices then.
Also, it would also be very unlikely that Japanese LNG buyers would switch all of its current 18.70 million mt/year of LNG purchases set for renewal to the Henry Hub gas pricing. There are some fears among Japanese LNG buyers of seeing a possible spike in the Henry Hub gas prices, as well as questioning the validity of benchmark for LNG outside the US.
But still, for Japanese LNG buyers, LNG from the US could be a new supply source at a lower price if the Henry Hub spot gas prices stay around $3-4/MMBtu. But the Japanese LNG buyers won’t be too focused on introducing that benchmark into the pricing of LNG imports if it does not reduce its import costs.
Japan, the world’s largest buyer of LNG, imported a record 87.3 million mt in 2012, up 11.2% year on year. Its LNG imports last year cost an average of $864.07/mt ($16.60/MMBtu), up 13.4% from 2011.