Japan’s trade investigation could lead to LNG contract renegotiations

(Bloomberg; July 20) - Japan’s probe into whether the resale restrictions in most of its liquefied natural gas contracts violate fair-trade laws may lead to the renegotiation of more than $600 billion worth of deals that run until almost the middle of the century. The world’s biggest buyer of the fuel holds contracts for at least 1.46 billion metric tons of supply between next year and 2040, according to Bloomberg New Energy Finance.

Removing contracts that either don’t bar the resale of LNG cargoes or that originate in countries which traditionally don’t restrict reselling leaves about 1 billion tons linked to contracts that may include the limitation, worth $628 billion at last year’s average price. Japan’s Fair Trade Commission is in the early stage of investigating if destination clauses impede competition laws, and it may announce a finding as early as this year. LNG suppliers use resale restrictions to prevent buyers from becoming the competition.

Contracts may be renegotiated if the restrictions are found in violation, as happened last decade in Europe, reported BMI Research. “Every contract … would have to be inspected to see if the Fair Trade Commission findings apply,” said Hiroshi Hashimoto, of the Institute of Energy Economics, Japan. The contracts are being reviewed as the bargaining power of LNG buyers strengthens amid a global glut and could quicken the shift by Japan’s buyers from importers into international sellers. “If destination clauses are found illegal, it will give Japanese buyers more bargaining power to renegotiate existing contracts for flexibility,” said Lu Wang, an analyst at Bloomberg Intelligence.

Read more: Oil and gas news briefs July 21, 2016

Japan investigating destination restrictions in LNG contracts

(Bloomberg; July 13) - Japan, the world’s largest buyer of liquefied natural gas, is investigating whether contracts that restrict buyers from reselling the super-cooled fuel impede free competition, according to people with knowledge of the matter. The investigation by Japan’s Fair Trade Commission is in an early stage and the commission has held hearings with energy companies, said the people, who asked not to be identified because the information is private.

Existing contracts may be open to renegotiation if so-called destination clauses are found to violate competition laws, similar to the process that began last decade in Europe, according to Hiroyasu Konno, a lawyer at Nishimura & Asahi. The restrictions are being reviewed as the bargaining power of buyers strengthens amid a global glut and may accelerate the shift by Japanese LNG buyers from traditional importers into international resellers. The investigation follows a European Commission decision in October 2004 that the clauses restricted competition.

“If this move does go ahead it clearly could have very significant implications as was the case” in Europe, said Nicholas Browne, an analyst with Wood Mackenzie in Singapore. It could lead “to a growth in trading and optimization of LNG cargoes,” he said. “It would also likely lead to other companies and countries trying similar moves.” About 80 percent of long-term LNG contracts involving major Japanese and South Korean buyers are estimated to include destination restriction clauses, law firm Nishimura & Asahi said in a presentation received by Japan’s Ministry of Economy, Trade and Industry.

Read more: Oil and gas news briefs July 18, 2016

Shell and Asian partners delay decision on LNG project in B.C.

(The Canadian Press; July 11) - Instability in global energy markets has caused international partners in a proposed liquefied natural gas project in Kitimat, B.C., to delay their final decision on the multibillion-dollar investment. LNG Canada CEO Andy Calitz said in a conference call July 11 that global oversupply and a drop in natural gas prices around the world, particularly in Asia, have made the project too expensive for now. “The whole global energy industry is in turmoil,” he said.

The LNG Canada project would export up to 24 million metric tons of liquefied natural gas per year and cost up to $40 billion (U.S.) to build. Shell owns a 50 percent stake, along with partners Korea Gas Corp. (15 percent), Mitsubishi (15 percent) and PetroChina (20 percent). All four companies jointly decided to put off the final decision, Calitz said. A decision had been expected by the end of this year. Representatives from each company are currently in Canada to look at a range of options for the project.

A timeline for when a final decision will be made has not been set, but LNG Canada still sees the project on B.C.’s northwest coast as a promising opportunity. “It is important for the community to understand that the project has been delayed and has not been cancelled,” Calitz said. However, global oil and gas prices will have to recover before the companies can move forward, he added.Last month, the International Energy Agency forecast a worldwide glut of LNG over the next five years, with demand weakening in Japan and South Korea while supply rises in Australia and the U.S.

Read more: Oil and gas news briefs July 14, 2016

Japanese utilities strike second deal to resell LNG in Europe

(Bloomberg; July 6) - Japan’s Jera Co., one of the world’s largest buyers of liquefied natural gas, plans to announce a second deal to resell the fuel to European customers as it seeks overseas outlets to offset possible demand declines at home. The latest agreement, which followed an accord signed in May with a unit of France’s Electricite de France, will help the company soon boost LNG sales to about 1.5 million metric tons a year, Jera Senior Executive Vice President Hiroki Sato said.

The new deal will allow Jera, a joint-venture between Tokyo Electric Power and Chubu Electric Power, to adjust the volume it sells depending on its own demand. “It’s important to develop a scheme like this amid demand uncertainties about the future of nuclear reactor restarts, and the growth of renewables and coal plants,” Sato said July 6 in Tokyo. Having flexible purchase contracts — including the option to resell LNG cargoes — allows Jera greater negotiating power for its own supply deals, he said.

Forty of Japan’s 42 operable nuclear reactors remain offline amid safety concerns following the 2011 Fukushima disaster, despite government efforts to return the fleet to operation. Electricity generated from coal is forecast to overtake that from LNG and output from renewable energy will rise by 65 percent in Japan by March 2026, according to an industry report last month.

Read more: Oil and gas news briefs July 11, 2016

Government bank in Japan helps finance Indonesia LNG expansion

(Nikkei Asian Review; July 5) - The Japan Bank for International Cooperation is providing about 120 billion yen ($1.16 billion) in financing for expansion of the Tangguh liquefied natural gas plant in Indonesia. The 7-year-old plant is owned by BP and partners from Japan and China. The bank loan is to a consortium of Japanese companies. The government-owned financial institution inked the contract June 30 with a joint-venture of partners including Mitsubishi, Inpex and a member of JX Holdings.

The project will boost annual output capacity at the plant by 50 percent to about 11 million metric tons. The $8 billion expansion is scheduled for completion in 2020. Most of the expanded LNG capacity is under contract to an Indonesian utility, with about 25 percent of the expansion (1 million tons a year) under contract for delivery to Kansai Electric Power. JBIC last lent more than 100 billion yen for a single energy project in November 2014. Other banks are leaning toward co-financing the Tangguh undertaking.

Read more: Oil and gas news briefs July 7, 2016

BP and partners approve third train at Indonesia LNG plant

(Reuters; July 1) - BP gained final investment approval for an $8 billion expansion of the Tangguh liquefied natural gas project in Indonesia on July 1, clearing the way for a third train to start operations in 2020. BP is going forward with expansion of Tangguh despite announcing it would rein back spending this year due to weak oil prices. It also approved investment in an Egyptian gas field last week. The two-train Tangguh liquefaction plant started operations in 2009.

The investment will boost annual LNG production capacity at the Tangguh project in Indonesia's West Papua province by 50 percent to 11.4 million metric tons per year. Three-quarters of the gas from the new Train 3 will be supplied to Indonesian power utility Perusahaan Listrik Negara, BP said. The rest will go to Japan's Kansai Electric Power Co. Officials at Indonesia's upstream energy regulator SKKMigas said the project would cost $8 billion, although BP declined to confirm that figure.

"We are finalizing details with potential lenders and at this point I'm not able to disclose who they are," said Christina Verchere, BP regional president Asia Pacific. In May, BP was able to trim its budget for the project to $8 billion to $10 billion, down from $12 billion. "This final investment decision … is based on commercial considerations," said Indonesian energy minister Sudirman Said. BP leads the Tangguh project with a 37.16 percent stake. Its partners include companies from China and Japan.

Read more: Oil and gas news briefs July 5, 2016

Analysts say LNG investments are all about market timing

(Houston Chronicle; June 27) - The U.S. Gulf Coast became an exporter of liquefied natural gas this year with Cheniere Energy's first shipments from Louisiana, but a glut of LNG globally is raising questions about when a "second wave" of LNG export projects will move forward. Five U.S. plants are under construction as others await regulatory approval and corporate decisions on multibillion-dollar investments. Perhaps the most brazen project is NextDecade's Rio Grande LNG project in Texas.

NextDecade proposes building what could be the nation's largest LNG export facility on 1,000 acres at the Port of Brownsville near the Mexican border. But the multiple projects in various planning stages are risky, particularly since it is unclear how long it will take for global demand to work through the supply glut. Most analysts expect LNG demand and prices to rise over the long term, but it is uncertain when that might happen. So, for companies investing billions in projects that take years to complete, timing is everything.

Luana Siegfried, an energy analyst with Raymond James, said it might take longer than many in the industry believe, pointing to slowing growth in China, weaker European demand and the potential for Japan to restart nuclear plants. Spencer Dale, BP’s chief economist, said it could take a decade for demand to catch up and prices to rise. As a result, many new projects won't be profitable at first. But, over a period of time, he said, “that big growth market in Asia is going to mean you're going to need a lot more gas.”

The biggest challenge for NextDecade is locking in long-term contracts with buyers. Without guarantees from customers at set prices over 20 years or so, the risk would be too great to secure investors. NextDecade only has non-binding agreements thus far.

Read more: Oil and gas news briefs June 30, 2016

LNG importing nations could double, Wood Mackenzie says

(Bloomberg; June 22) - The number of liquefied natural gas importers may more than double as a glut holds down prices and encourages nations to ditch crude, according to Wood Mackenzie. More than 50 countries may switch to LNG, with demand from new importers accounting for about 150 million metric tons per year (7.2 trillion cubic feet of gas) by 2025, amid an oversupply of the fuel, said Noel Tomnay, Wood Mackenzie’s vice president for gas and LNG. That’s about 61 percent of the current global market.

“You’ve got easy access to shipping and you’ve got easy access to supply, and you’re going to get, we believe, further rises in the oil price whereas LNG prices, at the spot level, are probably going to be quite flat,” Tomnay said in an interview in London. “The opportunity is going to become increasingly compelling for markets to switch to gas.” Egypt, Jordan and Pakistan last year increased the number of LNG importers to 34, helping offset the first decline in Asian purchases since 2009.

New markets are forming as countries consider switching to gas from crude after prices for the fuels diverged, with spot LNG in Japan sliding 45 percent this year as Brent oil gained 35 percent. This year, Wood Mackenzie expects five new importers of LNG: Colombia, Jamaica, Malta, the Philippines and Abu Dhabi. While some markets can easily turn to LNG, most of the new entrants, including El Salvador, Ghana and Kenya, would be switching from naphtha, diesel and fuel oil and will require investment in infrastructure such as new pipelines and power plants, Tomnay said.

Read more: Oil and gas news briefs June 27, 2016