In the rush to export LNG from the United States, several important milestones have been passed in recent weeks. The two most significant were a final investment decision on the Cameron LNG project – which becomes only the second Lower 48 project to achieve this after Cheniere’s Sabine Pass – and confirmation from the Department of Energy that it is changing the process that will be used to award export licences. Developments in the US are being keenly watched by Asian buyers, among them Chubu Electric, one of Japan’s electricity utilities.
Later this year, at the 3rd Annual Gas Asia Summit in Singapore, the General Manager of the company’s Fuels Department, Hiroki Sato, will deliver a keynote address on the impact of US shale gas on Japan’s LNG supply dynamics. In advance of the conference, Gastech News took the opportunity to ask him for his views on a range of LNG issues.
Sempra Energy’s announcement on 6th August that it had reached a final investment decision (FID) on Cameron LNG – along with its partners GDF Suez, Mitsui and Mitsubishi – was a decisive moment in the development of LNG exports from the United States.
Although numerous projects have been proposed to export shale gas to LNG markets around the world, the only project to have begun construction is Cheniere Energy’s Sabine Pass. The Cameron FID is a breakthrough that is likely to be followed by another five or six projects over the coming 12 months . For Japanese utilities, frustrated at having to pay what has been described as an “Asian premium” for their LNG, US exports – which will mostly be priced on the basis of Henry Hub – cannot begin soon enough.
“US LNG will contribute to the diversification of supply sources and strengthen supply security to Japan,” says Hiroki Sato. “Furthermore, it will also contribute to the diversification of LNG price indices, not only to Japan, but also to other Asian ‘oil-linked’ LNG markets.”
Asian hub? Sato, like some other LNG buyers, believes that eventually the arrival of LNG from the US will encourage the introduction of an Asian LNG hub price index. How quickly that will happen remains an issue of some uncertainty, but it will partly depend on how much hub-priced LNG becomes available in Asian markets. Sato estimates that by 2020 between 10 mtpa and 20 mtpa of US LNG could be delivered into Japan, which equates to some 11-23% of today’s total LNG imports. According to GIIGNL, the International Group of Liquefied Natural Gas Importers, in 2013 Japan imported 88 million tonnes of the fuel.
Even before the Fukushima nuclear accident in March 2011, LNG was taking a substantial share of Japan’s electricity generation fuel mix. The subsequent closure of all of Japan’s nuclear power stations meant that LNG demand grew rapidly, to the extent that further growth is constrained by the capacity of the nation’s import facilities.
“To meet additional LNG demand in Japan after the disaster, substantial volume is continuously diverted or re-loaded from European market to Japan,” says Sato. “As a result, the trend of unification of the world-wide market became the main stream.”
Arbitrage opportunities: Over the coming five years Sato sees this process of globalisation being enhanced by the expansion of the Panama Canal and the development of new liquefaction facilities, notably those proposed in East Africa, following large discoveries of gas off Mozambique and Tanzania. These new LNG trading options will, he believes, lead to increased arbitrage between gas markets around the world.
Part of Chubu’s strategy of diversifying LNG supplies involves building a portfolio of contract terms, with spot trading supplementing short-term, mid-term and long-term contracts. “This will also support the establishment of an LNG future exchange market in Japan or elsewhere in Asia,” says Sato. “Furthermore, the spot portion itself is able to absorb fluctuations in electricity demand.”
Joint procurement: Another aspect of diversification strategy is joint procurement with other buyers. Sato cautions that joint procurement will not automatically lead to cheaper LNG prices, but he believes it is “common sense that bigger volume will be linked to bargaining power”. The big question is how best to take advantage of greater bargaining power.
“We are convinced that Chubu Electric is the pioneer of joint procurement in the LNG industry through the tripartite sales and purchase agreements (SPAs),” he says, pointing to SPAs agreed jointly by Chubu with Kogas and Eni, and with Qatargas and Shizuoka Gas. “Now, we are proceeding discussions with the Indian gas company GAIL,” he adds.
Yet another aspect of the company’s procurement strategy is gas/LNG swaps: "
Swap improves liquidity of inventory management which would be equivalent value of the volume flexibility in the SPA,” says Sato. “Time swap, seasonal swap, gas and LNG swap utilising storage capacity are very valuable for our optimisation.”
Read the full interview with Hiroko Sato on our Gas Asia Summit website
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.