Tuesday, December 2, 2014

Japan might import LNG more than they need

Japanese LNG buyers may have over-committed to gas under long-term contracts if nuclear reactors restart soon, and US tolling deals are not a one-way bet.Japan could find itself at the receiving end of a series of unneeded LNG cargoes as the restart of nuclear plants might happen faster than the buyers had foreseen, according to the CEO of the Institute of Energy Economics Japan, Masakazu Toyoda.

In an interview with Platts he explained that the potential restart of 60% of Japan's nuclear capacity - a total of 48 reactors - plus an improved run rate of 20-25%, would displace up to 20 million mt/year of LNG demand in the country."If nuclear reactors restart, the volume of gas [required] would go down," Toyoda said, adding that at current levels, 20 million mt/year would account for between 15% and 20% of total Japanese LNG demand.

henry hub jkm price difference

With approvals to restart Sendai 1 and 2 reactors granted by the local government, Toyoda said he was optimistic that the units could be operational as early as January 2015. He added that other plants would follow."No one knows how quickly the nuclear restarts can be realized... we have a good model now though, so I hope things will move quickly," he said."In the next 2-3 years, the conventional gas market will shrink in Japan, so they [the buyers] will have more gas than they need," Toyoda explained.

A recent report from Eclipse, an analysis division of Platts, shows that Japan is expected to need US LNG to meet its winter peak demand but is well supplied for the summer and shoulder seasons, which could lead to a build in stocks.In addition to US volumes, Platts calculations show that between 2015 and 2017, Japanese utilities have contracted to buy nearly 20 million mt/year of Australian LNG, almost doubling the current offtake.

Under the terms of these more traditional contracts, prices are indexed to the Japanese Customs Cleared crude oil price, with the gas subject to take-or-pay and nondiversion clauses.In contrast, the 17 million mt/year of LNG contracted from US projects under the tolling model by Japanese utilities and traders have no destination or take-or-pay clauses.

This enables offtakers to either resell or exercise the option not to lift, provided the buyer is prepared to forfeit the $3-3.50/MMBtu tolling fee, viewed as a sunk cost."If they [Japanese buyers and traders] have surplus, they are willing to sell," Toyoda said. "Buyers are moving to become traders and if it is profitable, why not?"

Japan Lng Import

Hunt for buyers

With crude oil prices under pressure and the LNG market expected to reach a more balanced position between 2015 and 2017, the question is who will buy any potential oversupply and at what price."If the price of LNG comes down, demand will go up," Toyoda said."They [the Japanese buyers and traders] think to resell to other Asian countries where demand is increasing. Many countries would like to switch from coal to gas, but the problem remains the Asian premium price. This cannot be entirely eliminated because we have to add $6/MMBtu at least to the Henry Hub price [to account for tolling and transportation]; but the present price is still too high and it should be minimized," he said, meaning that the price gap between the regions should be narrower.

Front month Henry Hub prices for December are around $4.20/MMBtu.An addition of $6/MMBtu would give a landed price into Japan of around $10.20/MMBtu against term contracts of around $16/MMBtu based on current oil prices.Japanese companies are also looking to Europe to place US LNG. Should more LNG make its way to Europe - where local participants also have contracts for US LNG - regional prices were likely to fall, according to an analysis from Eclipse.

Japan Lng Price

Crude oil recently touching four-year lows has put pressure on term contract prices, and the question is whether the 115% Henry Hub plus $3-3.50/MMBtu tolling model remains attractive or even economically viable, all the year round.US LNG may become a seasonal offtake option for Japanese utilities, who might exercise their option not to lift volumes during certain seasons.At a tolling cost of $3/MMBtu, offtakers of US LNG would need to pay $10.5 million to load a standard-sized cargo of 3.5 million MMBtu.

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