Strategies for reducing LNG purchase price
Since electric utilities are the largest buyers of LNG from Japan, there is a growing consensus that instead of passing on increasing fuel costs to electricity consumers, the large LNG buying companies should work out strategies to reduce the LNG purchase price.
The LNG prices following the oil prices show a steadily increasing trend after 2010. Japan pays the highest average prices for LNG in the world, and these prices have increased, driven by Japan’s dependence on spot market purchases after the Fukushima incident in 2011.
In the scenario where nuclear power is not brought online at all, Frost & Sullivan forecasts the LNG imports to reach a high of 102 million t. At the current purchase price levels, it would be unsustainable for the Japanese economy to import such high volumes, hence the focus is on strategies to reduce LNG purchase prices.
To meet this objective, various strategies are being adopted by the Japanese government and the LNG importing companies to reduce purchase prices.
LNG importers venturing into trading business
With an increase of LNG suppliers in the global market, LNG buyers are seeking flexible terms, such as options to resell.
Large LNG buying companies such as Tokyo Gas are intending to enter into the LNG trading business, reselling LNG to buyers in Asia and also Europe. Reselling opportunities would allow participating companies to buy larger volumes and be able to get discounts on cargoes. This would help drive down LNG import costs.
Establishing partnerships with other buyers
LNG importing companies from Japan have started forming partnerships with other LNG buyers to increase their negotiating power.
Tokyo Electric Power Co. has a proposal to tie up with other Japanese and foreign companies to form a buyer’s group to jointly procure up to 40 million tpy. Government level partnerships and cooperation between buyer countries are also expected to grow.
Investment in LNG projects overseas
Japanese LNG importers are now actively investing in upstream gas and LNG projects worldwide to improve their chances of securing a sustainable supply of cheaper gas.
Projects in the US and Canada are at the top of the list, as apart from a stable investment climate, these two countries would also be in a position to sell the cheapest LNG to Japan, considering the depressed natural gas prices in this region.
The US could potentially supply Japan with up to 10 million tpy of LNG. LNG imports from the US are likely to reduce the average LNG price that Japan pays to US$ 12/million Btu by 2020.
Australia is another favoured destination for Japanese investment in LNG projects overseas. Japanese companies have invested in Australian projects with stakes varying from 0.5% up to 9%.
Japanese companies are also investing in LNG projects in Southeast Asia and Africa.
Figure 3. Japan’s average LNG prices (data collated by Frost & Sullivan from various industry sources).
Decrease purchase from spot markets
Since nuclear power is to be gradually introduced into the grid starting in Q4 2014, extra gas to substitute for nuclear power will be needed for a longer duration. LNG importers are likely to reduce dependence on spot markets and try to secure long-term contracts to obtain better rates.
Going by the demand for the base case scenario for 2017 - 2019, Japanese LNG buyers may be over-contracted, giving scope for oversupply.
This year, Japan has started releasing spot LNG prices in a move to improve the transparency of LNG purchases.
Figure 4. Contracted and spot LNG purchases: nuclear re-entry in Q4 2014 scenario (Frost & Sullivan forecast based on estimates from various industry sources).
Futures market to delink oil and gas pricesJapan intends to establish a futures market for LNG that would effectively delink the gas prices from oil prices. This would shield buyers from price upswings. A futures market would also make LNG trading global. This would reduce the price gap between various regions.
The projected strong demand for LNG, increase in LNG trade, and investments in foreign projects will create tremendous growth opportunities for Japanese engineering, equipment and service companies.
To meet the anticipating increase in demand, 10 more LNG receiving stations are expected to be commissioned, increasing Japan’s LNG receiving terminal storage capacity to approximately 20 million m3 by 2020 from the current level of around 17 million m3.
The scale of industry growth anticipated by 2020 can be gauged from the investment plans chalked out by the leading Japanese LNG fleet owners Mitsui OSK Lines (MOL), Nippon Yusen Kabushiki Kaisha (NYK Line) and Kawasaki Kisen Kaisha Ltd (“K” Line). These companies have embarked on a major fleet expansion drive. MOL is investing US$ 5 billion to almost double its LNG carrier fleet strength to 120 by 2020 from the current 66. NYK Line is planning to raise its LNG tanker fleet to 100 by 2019 from 70, and “K” Line has plans to add around 20 new LNG carriers to its fleet by 2020.
Development of Japan’s renewable energy resources has been stalled by the large monopolistic utilities. If this situation changes, driven by the 2013 electricity reformation law, the country could reduce its dependence on gas to a significant extent. However, with large utilities still preferring thermal gas plants over renewable sources, the demand for gas from the electric sector is expected to remain high.
Globally, the LNG market is expected to tighten and be supply constrained until the end of the decade. In this context, Japan has done extremely well to secure its LNG supply.
Written by Subbu Bettadapura, Frost & Sullivan
Edited by Ted Monroe
Read the article online at: https://www.lngindustry.com/liquid-natural-gas/19092014/subbu-bettadapura-provides-an-outlook-for-the-japanese-lng-industry2/