Japanese firms asking for lower LNG price: Report
Wednesday, June 4 2003 - 02:12 AM WIB
Tokyo Electric and Tokyo Gas, which supply Japan's capital with power and gas, said they are asking suppliers from Russia to Australia to match reductions obtained by China last year. The utilities need to cut costs as they reduce the price they charge customers by 10 percent or more to compete.
Japan's government, seeking to avoid a fourth recession since 1991, is trying to lower energy costs for factories and businesses by allowing more competition in the country's 15 trillion yen ($126 billion) power market. Tokyo residents pay 50 percent more for their electricity than people in London.
"It's a very difficult time for us because next year our markets will be further liberalized," said Junichi Namiki, a senior manager at Tokyo Gas who negotiated lower prices last year with Malaysia's Petroliam Nasional Bhd. and this year with Royal Dutch/Shell Group's Sakhalin unit in Russia's Far East. ?We need better LNG prices.''
China won a 25 percent discount to current Japanese LNG prices when it signed its first contracts with suppliers from Australia's North West Shelf project and a BP Plc-led project in Indonesia. The suppliers reduced bids to get a share of what may become Asia's largest LNG market.
"Natural gas prices are steadily falling and the trend is likely to continue," Kunio Anzai, chairman of Tokyo Gas Co., told the World Gas Conference in Tokyo yesterday.
Benchmark
Japanese and Korean utilities, which buy three-fourths of the world's annual LNG output, have since used the China price as their benchmark for subsequent LNG-purchase talks.
"We'll try our best to lower prices for our LNG supplies so that we can reduce overall costs,'' said Tetsu Hashimoto, head of LNG buying at Tokyo Electric, which consumes almost a third of Japan's LNG imports. ?There are opportunities to negotiate for lower prices in some of our existing contracts."
Tokyo Electric's profit slumped 62 percent in the six months ended March 31 because fuel costs rose after it was forced to cut nuclear output and use more expensive oil-fired plants instead. Tokyo Electric had to shut all its nuclear reactors for safety checks after admitting last year that its employees falsified safety documents for a decade.
Tokyo Electric and Tokyo Gas gained a 5 percent price cut in dollar terms when they renewed this year a 20-year supply contract with Petroliam Nasional, or Petronas, for a further 15 years. The reduction was the largest since Japan started importing LNG from Alaska in 1969. They also negotiated a reduction from Shell's planned Sakhalin plant.
Negotiations
"With contract renegotiations coming up, they will definitely use prices cited in the recent China LNG deals and Sakhalin to pressure North West Shelf and Brunei to lower prices," said Jimmy Straughan, vice commissioner of LNG marketing with BP Indonesia until last week. Straughan has moved to a new post with BP in Houston.
Japan bought 55 million tons of LNG worth 1.5 trillion yen last year, or almost three-fifths of global output. Domestic power stations consume three-quarters of all LNG imported by Japan because gas is cheaper and cleaner-burning than oil.
Japan allowed power users such as department stores and factories that use more than 2,000 kilowatts of power a year to choose their supplier. By April 2004, competition may be extended to businesses that use 500 to 2,000 kilowatts a year such as supermarkets and light industry, according to a report by the trade ministry's electricity committee.
Price Cuts
Tokyo Gas said last year it may cut the price at which it sells gas by as much as 10 percent in the next five years to ensure its fuel remains competitive with electricity generated by Tokyo Electric, it main energy rival.
"There is a humongous amount of pressure on any utility in Japan to reduce costs,'' said Joseph Jacobelli, a Hong Kong-based analyst of Asian utilities at Merrill Lynch & Co. "There's lot of scope to cut costs further. Japan, combined with Korea, is basically the LNG market. They have a big say in prices."
Still, the Japanese buyers' recent negotiations for new LNG contracts have failed to gain the price cuts won by China.
"We tried our best to get prices close to China's" for LNG from Shell's Sakhalin project, said Tokyo Gas's Namiki. ?Unfortunately, we couldn't match China's prices," he said.
That's partly because Japanese buyers are willing to pay a premium to gain more flexibility in their contracts, ensuring additional supplies when demand jumps, such as during last winter when colder-than-normal weather and nuclear outages caused gas demand to soar.
Dependence
Japan, which imports all its oil and gas, also wants to cut its dependence on fuels from the Middle East, the source of more than four-fifths of its oil last year.
"Reliability and security of supplies are of prime importance during negotiations of long-term contracts," said Tokyo Electric's Hashimoto, who signed a 22-year contract for Shell's Sakhalin LNG in May. "Flexibility of the Sakhalin contract is very attractive. It's difficult to put a price-tag on flexibility."
Japan's price cuts may also have been smaller because the contracts were for deliveries when there's less competition among suppliers. New LNG projects in Indonesia, Australia, Russia and the Middle East mean that prices may continue to decline as more of Japan's supply contracts come up for renewal towards the end of the decade.
"We've got several long-term contracts in Japan, whose prices are still relevant," said John McArthur, senior general manager at North West Shelf Australia LNG Pty. "Even with the pressure of deregulation, power companies are some of the highest earning companies in the world. They still make a lot of money."
As more suppliers enter the market, future contracts are likely to show the increased competition in lower prices.
"LNG prices should reflect the oversupply situation in the market,'' said Hashimoto. ``I strongly believe substantial price reductions will occur in the future." (*)