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20-Year Contracts May Cease in LNG Trade, Mitsubishi Exec Says

Given current global wholesale energy price volatility, Japan is avoiding traditional 20-year contracts for liquefied natural gas (LNG) imports, and that likely will set the model for the rest of the world since Japan is such a dominant importer of the fuel, according to Tom Giles, COO for Mitsubishi's U.S.-based Sound Energy Solutions (SES).

SES is planning to build an LNG receiving terminal in the Port of Long Beach, CA. Giles made the statement in response to a question about the expected contracts at the SES terminal during a discussion at an energy conference Tuesday in Santa Monica, CA. He said that he does not expect to sign any contracts until SES has a permit to construct its terminal, and that won't happen until next year. Second, he said the contracts might be more medium-term -- in the range of five, seven or 10 years since these are the new increments the Japanese are looking for in LNG supply contracts.

"Japan is not going to do 20-year contracts anymore," Giles told attendees at the Law Seminars International conference, "Energy Strategies for Cities and Counties." Japan wants what he called "mid- to short-term" contracts, because they couldn't afford to pay the prices over there, so the market has changed. Everyone who is buying LNG is going to be buying it on shorter contracts."

Giles' Japanese-based company, Mitsubishi, imports more than half of the LNG coming into Japan's 29 receiving terminals. The nation is totally dependent on LNG for its natural gas supplies, he said.

In response to a question, Giles said the LNG receiving terminal is not going to be an "open access" facility dealing only with spot market supplies. "ConocoPhillips is half owner, and they have a lot of natural gas [particularly in Australia], but we haven't worked out those details yet. It is a lot easier to buy and sell gas when you have permits [to build a terminal]."

There will not be any contracts -- short- or long-term -- before there are permits to build a facility, said David Huard, a Los Angeles-based energy attorney who moderated the LNG panel discussion at the meeting Tuesday. "The natural gas market in California is a 30-day market; it is not a five-year, or a 50-year, whereas the financing of a facility is a 25-year deal."

Acknowledging that California is moving back to emphasizing long-term contracts for its major utilities, Giles said nevertheless he didn't think the shift would happen quickly. "People are building up these trading floors, and we started walking in to talk to them about long-term contracts and their eyes began to glaze over," Giles said.

"Today, a long-term contract with SoCalGas is 12 months," said Huard, theorizing that the local utilities want to play LNG supplies against interstate pipeline supplies from other areas, so signing long-term contracts for any of those supplies "sort of defeats those strategies."

Originally, when it was the sole sponsor of the proposed Long Beach terminal, SES was going to self-finance the facility, but in response to another question, Giles said that is no longer the case now that Mitsubishi has taken on ConocoPhillips as a 50-50 partner. With its huge investment in the upstream supplies and the liquefaction facilities at the source, plus shipping, ConocoPhillips isn't interested in investing in a downstream facility, too, he said.

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