Last updated: February 7, 2013 5:31 pm

Japan’s Tepco signs gas deal with US

Japan’s largest gas consumer has signed a deal to buy liquefied natural gas from the US, as the shale revolution that has transformed the North American energy industry begins to shake up other regions.

Tokyo Electric Power, Japan’s largest utility, has agreed a supply contract starting in 2017 with Cameron LNG, a proposed export project in Louisiana backed by Sempra Energy of the US, Mitsui and Mitsubishi of Japan, and GDF Suez of France.

The deal, which is still subject to approval from regulators in Washington, would make Tepco one of Japan’s first buyers of LNG from US states (apart from Alaska), where production has risen rapidly as a result of advances in technology that have made it possible to extract gas from shale rocks at commercially attractive rates.

It reflects expectations that US restrictions on natural gas exports will soon be eased, for individual projects such as Cameron and possibly for sales to Japan in general.

The rise in North American gas production has driven the US benchmark price down to about $3.40 per million British thermal units: less than a quarter of the price at which LNG cargoes are selling in Asia.

The rush of companies seeking to export gas from the US has created a buyers’ market for LNG, in which companies such as Tepco are able to sign contracts on more favourable terms than were available a few years ago.

In a shift in pricing strategy, Tepco said it would for the first time link the price of gas in its contract to the US Henry Hub benchmark, rather than a formula linked to the price of oil.

It joins other Japanese gas importers including Kansai Electric Power, Tokyo Gas and Osaka Gas that are also trying to move away from oil-linked prices in a bid to reduce their costs.

Over the past 10 years, the price of internationally-traded Brent crude has roughly quadrupled, while Henry Hub gas has fallen by about a third.

Under the 1938 Natural Gas Act, exporters need a special licence from the Department of Energy, which is easier to get for sales to countries that have a free-trade agreement with the US, such as South Korea, than for countries that do not, such as Japan.

There are 17 US projects that have applied for permission to export LNG to countries without a free-trade agreement, but so far only one has been awarded, to Cheniere Energy’s Sabine Pass project in Louisiana.

Curbs on LNG exports are supported by some US manufacturers, including Dow Chemical and Alcoa, on the grounds that cheap energy is a competitive advantage for American industry that could be lost if gas prices are bid up to Asian levels.

Prospects for more approvals increased in December, however, after a study commissioned by the energy department concluded that the US economy would benefit from unrestricted exports in spite of the modest increase in gas prices that would probably result.

The energy department said it planned to start looking at permit applications on a case-by-case basis, “in the general order in which the department received them”.

Even opponents of unrestricted gas exports generally concede that a few projects could be allowed to go ahead, and Cameron, which filed its application for export to non-free trade countries in December 2011, is towards the head of the queue in fifth place.

There have also been moves in Congress to revise the law so that permits for LNG exports to Japan and other allies such as Nato countries would be easier to obtain.

Japan has the potential to become a huge customer, owing to the crippling of its nuclear industry by the 2011 meltdown at Fukushima Daiichi atomic power station, owned by Tepco.

Nuclear power accounted for 30 per cent of Japan’s electricity before the accident, but now most of its surviving reactors are shut amid safety concerns, and natural gas has become the go-to alternative for electric utilities.

A jump in imports since the accident has led to financial losses for power companies and persistent trade deficits for Japan, making politicians and business leaders keen to tap the benefits of the US shale boom. Today Japan imports most of its LNG from countries such as Australia, Indonesia and Qatar.

On Thursday, Tepco said it had agreed a 20-year deal with Mitsui, the Japanese trading house, and was close to an agreement with a second, Mitsubishi, to buy 800,000 tons of LNG a year from Cameron.

The deal is part of a plan by Tepco to secure 2m tonnes of US LNG a year, an initiative it says could reduce its gas procurement costs by 30 per cent.

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