Japanese Sakhalin 2 buyers agree on price review from April 2024 retrospectively

Japanese LNG buyers of the Sakhalin 2 project have agreed with Sakhalin Energy on the price review for LNG cargoes shipped or loaded from April 2024 retrospectively, sources close to the matter said in the week beginning May 5.

Sources indicated that the agreed price levels were almost the same as those of the previous five years, or slightly higher, depending on the company. Although the prices were higher, the increases were marginal, according to one of the sources.

Sakhalin Energy didn't immediately respond to a request for comment May 9 from Platts, part of S&P Global Commodity Insights.

The prices of the Sakhalin 2 cargoes are linked to Japan Custom Cleared crude oil (JCC), with slopes of 13%-13.5%. The JCC is a monthly average of Japan's imported crude oil, released by the Ministry of Finance. In the case of a DES contract, the formula includes a constant of $0.5-1/MMBtu, market sources said.

The prices are expected to apply for LNG from April 2024 onward, for either loading or delivery. It is common for negotiations with Sakhalin Energy to take time, and sellers and buyers may not reach an agreement before the start date, market sources noted. Typically, they adjust the payments retrospectively, according to the sources.

The Sakhalin 2 project is located in proximity to Japan, with a shipping journey of about several days, and has a gross heating value of approximately 1,095 Btu/Scf. Japanese gas companies value the richness of the heating value coupled with the project's proximity.

Industry sources stated that the market for long-term contracts has stabilized after experiencing a decline over the last couple of years. The Asian LNG market sometimes sees lower slopes against Brent crude, around 11%-12%, but these contracts often include seller flexibilities concerning cargo sizes, discharging ports, and a downward quantity tolerance, according to the sources.

Japan imported 5.58 million mt from Sakhalin 2 and 70,000 mt from Yamal cargo in 2024, according to Platts data.

The JCC for March was $79.49/b, the latest data from the Ministry of Finance of Japan showed, while JKM was assessed at $11.937/MMBtu on May 9, according to Platts data.

Meanwhile, Japan's LNG importers are closely monitoring how Jera will handle the contract for a 500,000 mt Sakhalin 2 contract, which will expire in March 2026, in less than a year. The Sakhalin 2 contracts held by other Japanese buyers are also expiring one by one after 2026.

Given the political situation surrounding Russia and Ukraine, the future of Japanese LNG buyers' contracts with the Sakhalin 2 project remains unclear, market sources said.

Sakhalin Energy is 12.5% owned by Japan's Mitsui & Co. and 10% owned by Mitsubishi Corporation.

List of Sakhalin 2's LNG Supply Contracts:

Source: Japan Organization for Metals and Energy Security