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INTERVIEW: JERA isn't jumping at fixed-price LNG contracts as volatility spurs deal-making

Highlights

'We are also an energy player," executive says

Japanese utility talking indexation, energy transition

Japan's JERA, the world's biggest LNG buyer, prefers short-term supplies, for now, versus new large long-term fixed contracts that Chinese end-users have recently been signing with US suppliers, an executive told S&P Global Platts in an interview on Oct. 22.

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Citing the same factors that spurred the blitz in commercial activity -- price and demand volatility -- Sunao Nakamura, a senior managing executive officer and chief of optimization at JERA, said the company was in no rush to dramatically change its procurement strategy.

With US supplies already accounting for roughly 10% of Japan's total LNG imports today, JERA has always considered expanding its relationship with Gulf Coast exporters, Nakamura said. At the same time, he said, market swings require JERA to be cautious, even as it recognizes the benefits of cheaper input costs for feedgas and destination-flexibility of contracts.

"Fixed price would be a risk for us, and we need to be cautious to introduce that type of pricing," Nakamura said on an installment of the Platts Capitol Crude podcast that will air Oct. 25.

He added, "It's more difficult to predict our future demand in the Japanese power market. It is our tendency to shift to a short-term rather than having a longer term contract to secure the stable supply to Japanese power market. I'm now observing that the LNG spot market is growing. We have to have a better capability to utilize the marketplace, rather than sticking to a large long-term contract."

The Platts JKM spot Asian LNG price hit a record high of $56.33/MMBtu on Oct. 6, while the TTF day-ahead contract in Europe reached a high of $39.50/MMBtu on Oct. 5. While prices have moderated since then, they remain at high levels. On Oct. 21, JKM for December was assessed at $34.34/MMBtu, while Platts assessed TTF for December at $29.942/MMBtu.

The gyrations have impacted supply and demand, inventories, market liquidity and trading activity. They have also lifted the hopes of some developers of new North American liquefaction facilities that are counting on the lure of long-term contracts with fixed fees to finance their projects.

Chinese interest

A few days after the record highs, Cheniere Energy said a subsidiary of China's ENN Natural Gas had signed a 13-year deal to buy 900,000 mt/year of LNG from the US exporter. Following that announcement, it was disclosed that Venture Global LNG had signed two 20-year deals calling for China's Sinopec to buy a total of 4 million mt/year of supply from Venture Global's proposed Plaquemines LNG facility near New Orleans, and also signed a three-year deal calling for Unipec, Sinopec's trading arm, to buy 1 million mt/year of supply from Venture Global's Calcasieu Pass terminal, which is under construction in southwest Louisiana.

JERA currently has a 20-year liquefaction tolling agreement covering approximately 2.32 million mt/year of supply from Freeport LNG in Texas. It has a 25% stake in an entity that includes the facility. JERA also has bought LNG previously from Sabine Pass in Louisiana through Cheniere's marketing unit.

Nakamura acknowledged the renewed interest in fixed-price US LNG from Asian buyers due to the relatively stable Henry Hub, though he also noted the wave of cargo cancellations during the summer of 2020 at the height of the demand destruction caused by the coronavirus pandemic.

"I suspect many new LNG projects are suffering in marketing due to the trend of decarbonation," he said.

Any decisions by developers to defer investment in new LNG projects or delay construction would lead to an extended time of tightness of supply, Nakamura said. That, in turn, could create more price volatility.

Energy transition

During the interview, Nakamura also addressed indexation, the energy transition and how JERA views its role in the marketplace.

He said securing more JKM-linked volumes was an option, though it would depend on whether the company decides to expand its LNG trading business. Nakamura said JERA did not suffer any big losses during the price swings earlier in October.

Global efforts to reduce carbon emissions, Nakamura said, means JERA needs to be more flexible in the type of fuels it procures.

That transition also means it is worthwhile for JERA to reflect on whether it wants to be a pure utility, a trader, or be recognized as having an integrated supply chain.

"We are now facing that type of question, not only with external parties but internally as well," Nakamura said. "My personal view is we are a utility company in Japan. But we are also an energy player."