Tokyo Electric Power Co. (TEPCO) is about to strike its first-ever long-term contract for liquefied natural gas (LNG) supply indexed to the Henry Hub, the Japanese utility said last week. TEPCO has been in talks with Mitsui & Co. Ltd. and Mitsubishi Corp. to acquire LNG from Sempra Energy’s Cameron LNG terminal in Louisiana.

“…[W]e will be purchasing an annual amount of approximately 800,000 tons and an optional amount (under discussion) of LNG starting from 2017 for the period of about 20 years,” TEPCO said. “The natural gas-linked price (Henry Hub-linked price) is planned to be applied to the price index for the first time in a TEPCO long-term LNG contract.”

Mitsui and Mitsubishi have been in talks with Cameron LNG about a tolling agreement at the LNG facility that would rely on U.S. shale gas for supply, TEPCO said. “Once the final sales contract is concluded between TEPCO, Mitsui & Co. Ltd. and Mitsubishi Corp., it will significantly contribute to our stable procurement of LNG,” TEPCO said.

Japan and other Asian consumers of LNG have traditionally bought the fuel under long-term contracts with prices indexed to those of oil. However, buyers have been growing increasingly dissatisfied with the high prices they’ve been paying for supply when natural gas is cheap in North America (see NGI, Oct. 15, 2012). The pushback to oil-indexed pricing has been seen as a threat to at least some North American projects that would export LNG to Asia (see NGI, Nov. 5, 2012).

Last December Total Gas & Power North America Inc. agreed to buy LNG at Cheniere Energy’s Sabine Pass Liquefaction LLC project in Louisiana at a Henry Hub-indexed price (see NGI, Dec. 24, 2012). The project is backed by investors from China and Singapore.

TEPCO has pursued LNG to fuel gas-fired power plants following the March 2011 meltdown at its Fukushima Daiichi nuclear power plant (see NGI, Sept. 24, 2012. TEPCO last November developed a plan to procure “a significant amount of lean LNG,” including supplies from the United States, which are expected to comprise about half of the total procured, which is expected to be 10 million tons/year.

“In addition to approximately 800,000 tons (annual) of lean LNG to be purchased from the Cameron Project, approximately 1.2 million tons (annual) will be committed through purchases from multiple sources, which will be a total of 2 million tons (annual) of lean LNG to be secured. We consider this as the first step towards achieving the target of 10 million tons (annual) of lean LNG,” TEPCO said.

The utility said it would be reviewing the operation of its LNG receiving terminals and making modifications “in order to achieve more flexible and stable operations of lean LNG procurement” while diversifying LNG supply sources. TEPCO defines “lean LNG” as that with a “lower calorific value” than conventional LNG.

Last December, San Diego-based Sempra Energy filed with FERC for approval to construct liquefaction and export facilities at its Cameron import terminal in Hackberry, LA. Cameron is one of only three of numerous export projects that have made a formal certificate filing at the Federal Energy Regulatory Commission.

Japan has been an LNG customer of the United States for decades, taking cargoes exported from the country’s only export terminal on Alaska’s Kenai Peninsula (see NGI, Aug. 27, 2012).

The window of opportunity for exporting LNG from North America is closing, making the slate of proposed North American export projects increasingly risky and less lucrative; however, there still is room for North American gas in the Asia-Pacific market, according to the Canadian Energy Research Institute (CERI).

In a study, “Global LNG: Now, Never, Or Later?” CERI examined forecasts for Asia-Pacific gas demand and global supply and found that most of the major liquefaction projects intended to serve the market would come online after 2015 and that supplies would surpass demand around 2020; however, after this demand would continue to rise, making room for more supply.

“Asian demand is expected to meet supply, and thus there is room for North American suppliers in an Asian market if the U.S. does not proceed with all planned projects,” the study said. “Rapid LNG growth in Australia has driven up construction costs, and it may make sense for North American companies to develop LNG projects in a staggered manner post-2020.”

On the market side, regions where demand growth is expected to be the most robust — China and India — do not offer prices as high as those available in South Korea and Japan, the study said. “Cost overruns in Australia [LNG projects] denote that newer conventional gas projects must access island LNG importing countries to obtain reasonable rates of return,” the study said. However, “Canada and the United states are competitive for both island and mainland Asian countries.”

The study also noted an erosion of the custom of linking LNG contracts to oil prices. “Most famously is [Cheniere Energy’s] Sabine Pass [LNG] with their Henry Hub-linked formula. This could set a precedent that means North American companies are not taking advantage of the oil-linked premiums as continental gas prices are depressed. This will have implications on future gas pricing and return on investments for producers.”

While global price convergence is not anticipated, a growing spot market may continue to drive contracting alternatives due to increased supply flexibility, the study said, adding that the emerging spot market is a threat to projects that require long-term oil-linked contracts to be profitable.

“Asia is expected to generate substantial natural gas demand and while some demand may be met by pipeline infrastructure there will still be a requirement for substantial LNG imports. As contracts come up for renewal, there is an opportunity for an expanding spot market but there are many reasons that buyers may wish to remain in long-term contracts.”

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