Freeport LNG Development LP, trying to capitalize on the U.S. advantage in producing natural gas, agreed to process LNG at its proposed plant in southeast Texas for two of Japan’s largest utilities.
Osaka Gas Co. (9532) and Chubu Electric Power Co. (9502) announced 20- year contracts to have Freeport liquefy about 4.4 million metric tons of natural gas in 2017 from the project’s first phase. Two additional phases of the project, which requires U.S. approval, would bring its total capacity to 13.2 million tons a year, and Houston-based Freeport expects to reach additional agreements this year, according to company statements.
Japan is increasing LNG imports after the Fukushima nuclear disaster forced the shutdown of atomic power plants and increased its reliance on gas-fired generators. Asian companies including Korea Gas Corp. (036460) and GAIL India Ltd. (GAIL) have tied up purchases of LNG from North America after U.S. gas prices slumped to a 10-year low following a surge in shale-gas output using a technology known as fracking.
“Japan was criticized for not securing supplies from the U.S. in the first round,” Tony Regan, a consultant with Tri-Zen International Ltd. in Singapore, said by phone today. “For the Japanese, it’s a bit of a catch up.”
Japan paid about 70,944 yen ($906) for a metric ton of LNG in June, or about $18.64 per million British thermal units, according to data from Japan’s Ministry of Finance. That’s up about 17 percent from a year ago and compares with a U.S. benchmark of about $3.25 per million Btu in New York.
Freeport will receive a fee to liquefy gas that the Japanese utilities buy and ship on their own, according to the agreement known as tolling. Chubu plans to buy stakes in U.S. gas fields, Hiroki Sato, general manager for fuels, said at press conference today.
The deal with Freeport is designed to reduce LNG prices in Japan, which are generally linked to the cost of oil, Kei Takeuchi, associate director for LNG trading at Osaka Gas, said at the press conference.
“We believe this contract can change the pricing practice and diversify the benchmark prices for LNG supplies from other sources,” he said.
Mitsubishi Corp. (8058) and Mitsui & Co. (8031), Japan’s two biggest trading companies, agreed in April to help San Diego-based Sempra Energy (SRE:US) develop a $6 billion natural-gas export facility in Louisiana. The deal grants each of the Tokyo-based companies a third of the 1.7 billion cubic feet a day that the project is expected to generate.
Sumitomo Corp. (8053), Japan’s third-largest trading house, and Tokyo Gas Co. (9531) agreed to buy 2.3 million metric tons of LNG annually for 20 years from Dominion Resources Inc. (D:US)’s planned Cove Point terminal, which is expected to start operating from Maryland in 2017.
Freeport expects to make a final decision on its Texas project in the second half of 2012, according to its statement.
“Having liquefaction-tolling agreements with Osaka Gas and Chubu Electric provides the strong end-user credit support necessary to fully finance the initial train of the liquefaction project,” Michael S. Smith, Freeport’s chief executive officer, said in the statement.
Freeport said it needs approvals from the Federal Energy Regulatory Commission and the Department of Energy before it begins construction.
The U.S. Energy Department granted Cheniere Energy Inc. (LNG:US) a permit last year to export from its terminal in Sabine Pass, Louisiana, to countries that aren’t free-trade partners, a group that includes Japan. Korea Gas, GAIL, BG Group Plc and Gas Natural SDG SA have agreed to buy a combined 16 million tons a year from the terminal, according to Cheniere.
The Energy Department has since suspended other applications and commissioned a study of the impact of exports on domestic energy use, output and prices before deciding on additional permit requests.
“Freeport may or may not get the export license, and the moratorium on LNG exports is not going to be reviewed before the U.S. presidential elections,” Regan said. “It may be difficult.”
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