Tokyo Gas uses Tangguh, NWS LNG prices as benchmark: Bloomberg

Tokyo Gas Co., the world's No. 3 buyer of liquefied natural gas, wants Royal Dutch/Shell Group's Russian unit to sell gas at lower-than-current rates after China gained a 25 percent cut in its first LNG contracts.

Tokyo Gas will start negotiations next month with a Shell-led project in Russia's eastern Sakhalin islands to buy as much as 1 million metric tons of LNG a year, starting as early as 2007. The company said it will use China's contracts with Australia and Indonesia last year as a basis for negotiation.

China won the largest price cuts in the industry's more than 30-year history for supply of gas to its southern province of Guangdong. Japan's buyers, who imported their first LNG from Alaska in 1969 and consume almost three-fifths of global output, now pay almost a quarter more than China agreed to pay.

``We'll certainly use the China contract in our negotiations for Sakhalin gas,'' said Shigeru Muraki, general manager of Tokyo Gas, in an interview after a two-day energy conference in Tokyo. ``The Guangdong price is an advantage for Japanese buyers.''

Japan's power and gas companies bought 1.5 trillion yen ($12.5 billion) of LNG last year and want more of the fuel that's cleaner-burning and cheaper than oil. That makes them key potential customers to unlock as much as $30 billion of investment planned for Shell's Sakhalin 2 project and rival developments in the islands led by Exxon Mobil Corp. and BP Plc.

Shell and its rivals are under pressure to sign up customers because they will compete with a string of new LNG projects in the Asia-Pacific region, including BP's Tangguh project in Indonesia and Petroliam Nasional Bhd.'s Tiga project in Malaysia that may produce a glut of the fuel as early as 2005.

First Customer

The Shell-led Sakhalin project would require construction of two more production platforms, oil and gas pipelines and gas liquefying plants. Two production lines would produce a combined 9.6 million metric tons of LNG a year. The plant would be the first in Russia, according to the partners.

Tokyo Gas may become Russia's first LNG customer and help advance Shell's $8.5 billion project.

Tokyo Gas, Japan's largest gas distributor, currently buys LNG from projects in Malaysia where Shell has investments. It also buys from Brunei, Indonesia, Qatar, Australia and Alaska in the U.S.

China's contract, signed after it introduced Asia's first open bidding, surprised Japan's energy industry because of the extent of the cut.

``I call it the Guangdong LNG shock,'' said Katsuhiko Suetsugu, secretary general of the Asia Pacific Energy Forum. He estimates that Guangdong price was fixed at about $3 per million British thermal unit while Japanese buyers pay about $4.

Rachmat Sudibyo, head of Indonesia's Oil & Gas Regulatory Body, said last year Indonesia will sell gas to China's Fujian province at about $2.40 per million British thermal unit which is the same price offered for the Guangdong contract, he said.

Japan's LNG price may drop more than 10 percent in the coming years as the Guangdong price is established as a new benchmark for the industry, Muraki said. (*)