The recent determination by the US Department of Energy (DoE) to grant a second LNG export project a licence to sell gas to countries with which the US does not have a Free Trade agreement (non-FTA countries) will have been welcomed by buyers around the world. Most of the large LNG-consuming countries – including Japan, Taiwan, India and China – do not have an FTA with the US. However, it is especially good news for Tokyo Electric Power Company (TEPCO), Japan’s largest electricity company, the nation’s largest LNG buyer and the world’s second-largest LNG buyer after South Korea’s Kogas.
It was TEPCO that operated the Fukushima Daiichi nuclear power station that was devastated by the Great East Japan Earthquake of March 2011 and the subsequent tsunami. The Fukushima crisis led, for various reasons, to the closure for a while of all of Japan’s nuclear power reactors; only two are running today, neither of which belong to TEPCO, and the prospects for more of them to come on stream remain a matter of considerable uncertainty.
In the two years since the accident, not only has TEPCO faced a financial crisis because of Fukushima compensation liabilities, but as the largest operator of nuclear power in Japan it has also had to import a lot more LNG, crude oil and oil products than it had previously planned.
Re-inventing TEPCO: Last November, Tokyo Electric Power Company (TEPCO) announced 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.
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 represents a significant change of direction for the company.
Leaning towards US LNG: 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 million tonnes per annum (mtpa) from the proposed Cameron LNG project in Louisiana, through Mitsui & Co. and Mitsubishi Corporation.
The two Japanese trading houses announced last month 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 agreement of “initial terms and conditions” for the Mitsui contract and “final discussions” for the Mitsubishi contract were yet another sign of how Japanese utilities are starting to put their money where their mouths are when it comes to diversifying price exposure in their contract portfolios.
What was not immediately apparent from the announcement was just how big a change the new long-term procurement strategy TEPCO has adopted represents. These new deals were “the first step” of TEPCO’s strategy to procure up to 10 mtpa of “lean LNG” over the coming decade.
LNG quality changes: 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, TEPCO expects 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 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, of course, 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. TEPCO expects to procure lean LNG at prices up to 30% lower than those it is currently paying.
Fourth in the queue: The US DoE’s decision to grant a non-FTA export licence ended a two-year hiatus in such approvals while the US studied and debated the possible long-term impact of large-scale LNG exports. The debate is not yet over – the recent appointment of a new energy secretary, Ernest Moniz, has raised questions over what he may decide to do next.
That said, it seems unlikely that Moniz will entirely overturn the carefully constructed arguments that the DoE has presented in its order for Freeport’s non-FTA licence.
TEPCO will not benefit directly from the Freeport LNG approval (though other Japanese LNG buyers – Osaka Gas and Chubu Electric – will). What it can take comfort from is that Cameron LNG is now fourth in the long queue that has formed outside the DoE for non-FTA LNG export licences.
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