Japan LNG buyers in strong position to dictate price: Report

The race among liquefied natural gas producers to capture market share in Asia will help Japanese utilities strengthen their bargaining power in future price talks for long-term purchase contracts, gas and power analysts said as reported by Dow Jones.

With a series of projects to build LNG production plants being pushed forward at a fast pace, Asia's LNG supply growth will outstrip that of demand for the medium-term, putting downward pressure on contract prices with Japanese power and gas utilities, oil and power analyst Toshinori Ito at UBS Warburg said Thursday.

According to recent outlook reports compiled by the Institute of Energy Economics Japan, LNG supply to Asia will rise to 180 million metric tons a year in 2010 from 87.64 million tons in the end of 2001.

Despite the massive supply growth forecast, the institute projects Asia's demand will grow, but at a slower pace than supply over the same period, reaching 107 million to 135 million tons in 2010, showing a supply surplus of 45 million to 73 million tons.

Last year, Indonesia's "low-priced" 15-year LNG sales deal to China's Fujian province sent a shock wave through Japanese utilities, said Ito.

"That was one driving force that stimulated Japanese buyers to call for a price cut for their future supply contracts," he said.

Indonesia has signed a 15-year contract to supply 2.6 million tons of LNG a year to Fujian from the Tangguh gas field at $2.90 per million British thermal units, industry sources say.

The latest statistics compiled by BP PLC show Japan's LNG import prices for 2002 averaged $4.27/MMBtu, on a cost, insurance and freight basis.

"The $2.90/MMBtu deal was very shocking" compared with the $4.27 import price average for Japan, said Akihiro Takase of the corporate communication department at Tokyo Gas Co., Japan's largest gas utility.

May 12, Tokyo Gas signed a 24-year supply contract with Russia's Sakhalin Energy Investment Co. The deal marks the first time a Japanese gas utility will import LNG from Russia on a long-term basis.

Under the contract starting in April 2007, Tokyo Gas will receive a maximum of 1.1 million metric tons of LNG a year between 2007 and 2030 on a free-on-board basis.

Importing from Sakhalin will allow Tokyo Gas to take advantage of Japan's close proximity to Russia and help reduce logistic costs, compared with other sources from Southeast Asia and North America, Takase said.

At present, Tokyo Gas has a 15-year contract to import 324,000 tons a year of LNG from Alaska, expiring March 2004. But the company has yet to determine whether it will renew the existing deal.

"We want a more competitive LNG contract price, as the price competition will intensify in the domestic gas market," which the government is further deregulating over the next couple of years, Takase added.

Looking ahead, Tokyo Gas' LNG contract with Australia's North West Shelf consortium will expire in March 2009. The gas utility currently buys 790,000 tons a year from the consortium under the 20-year contract.

The North West Shelf is an equal six-way joint venture comprising Woodside Petroleum Ltd. , BHP Billiton. , Royal Dutch/Shell Group. , ChevronTexaco Inc. , BP and Japan Australia LNG.

Seeking More "Flexible" Supply Contracts

Tokyo Gas' agreement with the Russian LNG firm is expected to force other Japanese power utilities and gas suppliers to cut procurement costs for LNG over the next several years, said Hirofumi Kawachi, an oil and power market analyst at Mizuho Investors Securities Co.

Japan's second largest gas utility, Osaka Gas Co., is seeking producers for a medium- to long-term LNG supply contract with more flexible terms and conditions at lower costs.

The move came as Osaka Gas plans by 2010 to build a 1.6 million kilowatt gas- fired thermal power plant in Senboku, Osaka, where its LNG import tank terminal is located.

"To supply electricity from the new power plant to the domestic market at a competitive price, we need to import competitive-priced LNG," said Shinji Ohno of the corporate communication division at Osaka Gas.

In addition to lower LNG prices, Ohno points the future LNG supply deals should have less strict terms and conditions like "take or pay" and "destination clause."

Under the take-or-pay clause, a buyer has financial responsibility for all the LNG it agreed to take from a supplier. The destination clause forces a buyer to deliver LNG cargo to one agreed receiving port. (*)