Japan’s largest electricity utility Tokyo Electric Power Company (TEPCO) has taken another step forward in its strategy of sourcing lean LNG by signing a sales and purchase agreement (SPA) with BP for up to 1.2 mtpa over 17 years, starting in 2017.
The agreement is unusual in several ways. Firstly, it is TEPCO’s first long-term portfolio contract – the LNG will come from BP’s diverse portfolio of LNG sources, which includes the Freeport LNG export project in the United States. BP has a liquefaction tolling agreement for 4.4 mtpa of LNG production capacity at the Freeport plant, which plans to make a final investment decision later this year.
Secondly, the contract is BP’s first long-term contract with TEPCO in which BP is the sole supplier. Thirdly, and perhaps most importantly for TEPCO, the agreement provides for Henry Hub pricing indexation, along with the supply of LNG with low calorific content – making it consistent with TEPCO’s strategy to diversify both its pricing indexation and its supply sources.
The SPA, signed with BP Singapore, takes the amount of lean LNG contracted by TEPCO to around 2 mtpa.
New business strategy: Following the disaster at Japan’s Fukushima Daiichi nuclear power plant, of which TEPCO was the owner and operator, the company announced in November 2012 a wide-ranging new business strategy that amounted to a re-invention of the company in response to the challenges it was facing. Among the measures in its “Intensive Reform Implementation Action Plan” were three action plans aimed at reducing fuel costs by procuring cheaper LNG, by converting low-efficiency power plants to high-efficiency LNG-fired power plants, and by investing in overseas projects and fuel businesses.
TEPCO has a strategy of sourcing half of its LNG needs, around 10 mtpa, in the form of lean LNG by around 2023.
A specific proposal was: “Formulation of an action plan for the drastic expansion of the usage of ‘lean LNG’, such as North American shale gas, up to around half of the procurement amount.” In the first week of February 2013, TEPCO published a document setting out some of the detail of this new lean LNG procurement strategy. It represented a significant change of direction for the company.
At the same time TEPCO announced that it was negotiating its first long-term LNG contracts linked to the US Henry Hub gas-price index. The company said it planned to purchase two lots of 0.4 mtpa from the proposed Cameron LNG project in Louisiana, through Mitsui & Co. and Mitsubishi Corporation.
The two Japanese trading houses announced in May 2013 that they had signed 20-year tolling capacity and joint-venture agreements to support the development, financing and construction of the project with its owner, Sempra Energy. The project has just received its final export licence for non-Free Trade Agreement countries from the US Department of Energy.
LNG is not as fungible a commodity as it appears to be. The increasing globalisation of LNG trade has highlighted the mismatches that can occur between LNG quality and the differing importation specifications that regional natural gas markets have evolved.
As the world’s largest importer of LNG, and one of the oldest, Japan has a gas market founded on the rich (high calorific value) LNG produced by its traditional suppliers: Indonesia, Malaysia and Brunei. Moreover, the equipment used by Japanese city gas consumers is adjusted for a narrow gas quality range so as to run with the highest possible thermal efficiency.
Today, however, there is a distinct trend for average LNG quality to become leaner, in other words to have a lower calorific value. One factor has been the rise of production in Qatar, whose newer liquefaction trains are equipped to extract LPG and ethane, which are then sold separately.
Factors in the future will be the rise of coal-seam gas (CSG) supply in Australia, and the expected growth in LNG exports from the US and Canada. Most of the proposed LNG export projects in the US, for example, expect to source their gas from the transmission grid, meaning that it will have been processed to meet the lean gas quality standards that prevail there.
In the strategy presentation it published in February 2013, TEPCO said it expected world LNG production to change from a mix in which rich LNG predominates to a fairly even balance of rich and lean LNG, within a decade or so.
This presents the company with an issue it felt the need to address. While the company has experience of importing lean LNG, and doing what is required to make it useable in the Japanese market, it is not equipped to handle large volumes. In fiscal 2011, for example, lean LNG accounted for only 1.2 mtpa of the company’s total 23 mtpa of consumption.
Investment programme: Thus the strategy to procure up to 10 mtpa – around half of TEPCO’s needs – of lean LNG over the coming decade. To make it possible to receive such large volumes of lean LNG, the company will need to implement a major programme to adapt its importation operations, which will mean substantial investment in modifying its receiving terminals and power stations.
It will also extend the company’s range of options when it comes to further diversifying its LNG price exposure away from the oil-price linkage that currently predominates in its long-term contract portfolio.
By Alex Forbes
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