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Osaka Gas plans more investment in US gas assets to complement LNG position

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Osaka Gas plans more investment in US gas assets to complement LNG position

The Japanese utility company Osaka Gas Co. Ltd. plans to increase its investments in the upstream U.S. oil and gas sector to leverage its trading position, particularly in regard to U.S. LNG exports, an executive with the company said July 5.

Takeshi Shinohara, senior vice president of Osaka Gas USA Corp., said a recent investment in the Haynesville Shale play in eastern Texas is likely to be followed by other investments in U.S. unconventional exploration and production assets. "We will mainly be looking at onshore unconventional assets," Shinohara said in an interview.

In its most recent deal, announced June 29, subsidiary OG East Texas LLC will acquire from Sabine Oil & Gas a 35% working interest in gas producing properties primarily in Harrison and Panola counties that are prospective for the Haynesville and Cotton Valley formations. Since the start of 2018, daily production from the Sabine assets has doubled, and it stands at about 95 MMcfe/d (33.3 MMcfe/d net to Osaka Gas), with the majority of the production growth coming from three new Haynesville wells drilled by Sabine.

As of Jan. 1, the effective date of the deal, Sabine had produced 45 MMcfe/d (15.8 MMcfe/d net to Osaka Gas) from about 450 wells on approximately 100,000 net acres (35,000 acres net to Osaka Gas).

The Sabine Oil & Gas deal reflects Osaka Gas' future acquisition strategy, Shinohara said. As a result of the acquisition, Osaka Gas will gain exposure to physical gas assets in a play near the LNG export terminal under construction in Freeport, Texas, where Osaka Gas has an off-take agreement. There are a number of pipeline options to connect gas production from the upstream asset to the Freeport facility, he said.

'Natural hedging effect'

Ownership in U.S. upstream assets provides Osaka Gas with "a natural hedge effect," helping to offset the impact of gas price fluctuations. If natural gas prices in the U.S. increase substantially, Osaka Gas will benefit, even though LNG shipped from Freeport could become a little more expensive, Shinohara said. Because the U.S. gas market is transparent, the upstream segment presents a unique investment opportunity for international energy companies, such as Osaka Gas, that want to trade off their physical assets, he said.

Although its core business line is as a gas local distribution company, over the past approximately three decades Osaka Gas has expanded both geographically and across business lines to become a global player in diverse energy products including gas, LPG, LNG and electricity. Beginning in the 1990s, the company began acquiring upstream assets in Southeast Asia. "We have the vision that the upstream business is one of our next core businesses," Shinohara said. The company views the U.S. as one of its key areas for upstream expansion, he said.

Osaka Gas' interest in the U.S. gas upstream goes back several years, with mixed results. In 2013, the company reported an extraordinary loss from an oil and gas project in the Pearsall Shale of South Texas, where it holds a 35% nonoperating working interest. On Dec. 20, 2013, it reported a ¥29 billion ($285 million) loss due to the project in its income forecast for fiscal year 2013-2014.

At the time, Osaka Gas attributed the loss to difficulties in extracting economically sufficient volumes of oil and gas and a poor outlook for improvement in productivity of the project.

Focus on power generation

More recently, Osaka Gas has focused its investment efforts in North America on power generation projects. The company owns interest in about 5,000 MW of generation in Wisconsin, Minnesota, New Jersey, California, New York, Texas, Maryland, Pennsylvania and Ontario. The ownership interests range from 8% to 50%.

The company, along with BP Energy Co., Jera Energy America LLC, Toshiba Corp. and SK E&S LNG LLC, holds under take-or-pay tolling agreements about 13.4 million metric tonnes per year, or about 1.8 Bcf/d, of from the first three trains of the Freeport LNG project.

Jim Magill is a reporter for S&P Global Platts, which like S&P Global Market Intelligence is owned by S&P Global Inc.