Japan’s recent deal to import US LNG at Henry Hub benchmark prices appears largely symbolic, but is important for the sector as it could represent the beginning of a larger trend away from oil-linked LNG prices for the world’s largest LNG importer.
“They [the deal's negotiators] were very surprised they were able to pull it off,” a source familiar with the negotiations recently told Breaking Energy.
Japan’s Tepco recently announced a preliminary deal to import roughly 800,000 tons of LNG per year from the Cameron Project at prices linked to the Henry Hub benchmark price.
“As a result of discussing the purchase of LNG from the U.S. Cameron Project with the seller, Mitsui & Co., Ltd., we have agreed on the initial terms and conditions of the transaction. We are also in the final discussion with Mitsubishi Corporation to reach a basic agreement on the purchase of LNG from the project. We will continue discussions with Mitsui & Co., Ltd. and Mitsubishi Corporation towards the conclusion of the final sales and purchase contract,” the company said in a statement.
This would be the fist time the HH benchmark would be applied to the price index of a Tepco long-term LNG contract, which makes the announcement significant despite the relatively small volumes being negotiated.
Major LNG Importer Importing More
Japan imported 83.2 million metric tonnes of LNG during its most-recently ended fiscal year and TEPCO – the country’s largest importer – accounted for about one quarter of that total. The need to replace lost nuclear power with gas for electricity generation in the wake of the disastrous 2011 tsunami and Fukushima crisis caused an LNG import spike, led by Tepco, Fukushima’s operator.
The Cameron deal would only account for a small fraction of the company’s total imports, but purchasing the gas through a contract indexed to the US benchmark price could mean significant cost savings. Virtually all Japanese LNG import contracts are linked to a basket of crude oil and oil products known as the Japanese Crude Cocktail, which averaged about $113 per barrel in 2012.
Though closely correlated historically, US natural gas prices have diverged significantly from global oil prices in recent years, which has sparked the drive to export US gas to higher value markets in Europe and Asia where oil price linkage largely persists.
However, commodity price dynamics in 2017 – when the Tepco deal is scheduled to begin – remain an open question. Citi estimated the delivered breakeven LNG cost to Asia from the Cheniere US export project would be $10.10 per million Btu at a $4.00/MMBtu HH price, according to a March 2012 research note. The delivered breakeven would be $12.90/MMBtu at a $6.00 HH price, which is equivalent to a procured JCC price of $85 per barrel.
Global oil prices and US natural gas prices would need to dramatically change course – decreased oil prices and increased US gas – for the current gas export arbitrage window to close, but risks remain. The global oil and gas business has been characterized by wildly swinging business cycles throughout its history – only a few years ago the US was bracing for natural gas shortages and constructing billions of dollars worth of import infrastructure. Extreme commodity price volatility has been the norm, supply/demand fundamentals can quickly change and technology, along with geopolitics, are ever-present wild cards.