Energy companies based in Japan and India further increased their interests in the United States with the signing of tolling agreements for natural gas liquefaction services at Dominion’s proposed Cove Point liquefaction facility in Lusby, MD.
Pacific Summit Energy LLC (PSE), a U.S. affiliate of Japanese trading company Sumitomo Corp.; and GAIL Global (USA) LNG LLC, a U.S. affiliate of GAIL (India) Ltd., have each contracted for half of the marketed capacity at the terminal (see Daily GPI, April 2a). Additionally, Sumitomo has agreements to serve Tokyo Gas Co. and Kansai Electric Power Co. Inc. GAIL is the largest natural gas processing and distribution company in India.
Sumitomo holds assets and is involved in three shale gas/tight oil operations in the Unites States, and also, through PSE, operates a gas trading business in the United States. Once the Cove Point facility is operational, it will enable Sumitomo to be involved in all gas-related business segments across the value chain from shale gas upstream development, natural gas aggregation, transportation and liquefaction, to LNG export, the companies said.
Tokyo Gas is seeking to diversify supplies of energy and other commodities, including LNG drawing on unconventional gas sources. The company sees expanding its overseas LNG value chain as a means of reducing commodity costs. LNG prices under the Sumitomo contract will be based upon a Henry Hub index, making it the first definitive long-term gas hub linked contract for Tokyo Gas, which has said it will seek to lower costs by diversifying its supply sources.
Tokyo Gas has joined Tokyo Electric Power Co. (TEPCO) in linking the price of LNG to prices at the Henry Hub. Last February TEPCO struck its first-ever Henry-linked LNG contract (see Daily GPI, Feb. 8).
“Japan and India are important allies and trading partners of the United States that are in need of secure sources of natural gas, and Sumitomo and GAIL are high-quality companies working to meet those needs,” said Dominion CEO Thomas F. Farrell. “We believe the agreements we have signed serve very important economic goals for all three nations.”
The contracts come amid increasing discontent among Asian customers at the high prices they must pay for LNG when prices are linked to those of oil, as has been customary in Asian markets (see Daily GPI, Oct. 11, 2012). Japan plans to launch a futures contract for LNG by Spring 2015 (see Daily GPI, April 2b) and has been lobbying the U.S. government to expedite the approval of LNG exports to non-free trade agreement (FTA) nations (see Daily GPI, March 19; Feb. 27).
“Asian buyers — in particular, the north-Asian utilities — have always paid a premium to ensure fuel supply certainty and security. As such, they have also committed to invest equity directly in LNG projects — as evident from various Australian LNG projects in operation or under development,” Fitch Ratings said in a newly published note on Australian LNG projects.
Meanwhile, Asian interests continue to expand their energy holdings in North America. Last month, Japan Petroleum Exploration (Japex) announced an agreement to take a 10% stake in the Western Canada natural gas development and production project and associated pipeline and liquefied natural gas (LNG) export projects of Progress Energy Canada Ltd. (see Daily GPI, March 5).
“LNG continues to serve as an attractive energy source to companies and governments in Europe and Asia. For instance, in Japan, natural gas can cost in upwards of $20 per MMBtu,” wrote U.S. Rep. Charles Boustany (R-LA) in The Hill‘s Congress Blog on Tuesday. “Compare that to $3-4 per MMBtu here in the United States. Unlike other commodities like oil or gold, there is no central pricing system with natural gas. Therefore, the international price of the commodity continues to fluctuate depending on the market one shops.”
While North American LNG liquefaction and export capacity is in planning/development, Fitch said improvement in the U.S. economy, and a consequent increase in domestic gas demand, could serve to narrow the arbitrage opportunity of shipping liquefied gas to Asia. “The availability of U.S. exports to meet demand across non-FTA Asian countries may also be limited due to geopolitical considerations,” the ratings agency said.
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