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Interview: Jera eyes selling US Freeport LNG volume to Europe as alternative to Japan

Tokyo — Japan's Jera, the joint venture between Tokyo Electric Power Company and Chubu Electric, eyes selling volumes from the US Freeport LNG project to Europe or other markets as an alternative, if it is not economically viable to bring the LNG to Japan, the company's president said this week.

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"At current prices, US LNG could be more expensive [for the Japanese market]. In such a case, we could consider options where we buy spot cargoes in Asia [for the domestic market] and sell US LNG to other markets," Jera President Yuji Kakimi told Platts in an interview, adding that selling into Europe or South America are options.

"The Freeport project offers us flexibility and will allow us to trade by hedging risks. We could take advantage of differences in prices between markets and move LNG accordingly," he added.

The Platts JKM for July delivery cargoes was assessed at $7.75/MMBtu Wednesday.


In comparison, US LNG could land in Asia at around $9/MMBtu, based on Wednesday's $2.815/MMBtu settlement for the NYMEX June Henry Hub gas futures contract and using Cheniere's Sabine Pass pricing as a reference.

Financial terms and details of the tolling agreement Chubu Electric signed with Freeport LNG are not clear.

Chubu Electric has a natural gas liquefaction tolling agreement with Freeport LNG in Texas. Under the supply deal, Chubu will be able to offtake 2.2 million mt/year of LNG with no destination restrictions.

Tepco has contracts for the supply of 800,000 mt/year -- two 400,000 mt/year contracts -- of lean LNG from the US Cameron LNG project, in Louisiana, for over 20 years from 2017, under deals with Japanese trading houses Mitsui & Co. and Mitsubishi Corp.

Tepco is, meanwhile, revamping its LNG receiving facilities so that they are able to accept up to 10 million mt/year of lean LNG -- which has a lower calorific value per unit than conventional LNG.

Kakimi said Jera should have geographically balanced LNG supply sources and also balanced indexations, but declined to say exactly how much volume Jera would aim to have under contracts with oil-linked or natural gas hub-linked pricing in its portfolio.

He, however, noted that Chubu Electric has said it aims to cut oil-linked contracts to 50% of the total.

"We can use this as an example," Kakimi said. "Chubu Electric has not said what the other half should consist of, but Henry Hub-linked, NBP-linked and JKM-linked, and other various benchmarks can be used," he added.

UNCERTAINTIES AHEAD

The establishment of Jera comes ahead of Japan's plan to fully deregulate the country's retail power and gas markets in 2016 and 2017, respectively.

Jera started up on April 30 with about 50 staff, and the integration between Tepco's and Chubu Electric's fuel transport and fuel trading business is expected to be completed by October.

The number of staff will be increased to around 400 people by summer next year, when a wide range of businesses -- such as existing upstream assets, fuel sale and purchase agreements and overseas power generation -- are brought together.

Between Tepco and Chubu Electric, their total LNG procurement is around 40 million mt/year and coal procurement is 19 million mt/year.

Jera hopes to reduce fuel costs by leveraging its large procurement volumes, although Kakimi said there are uncertainties over future LNG demand because of the restart of nuclear reactors, growing solar power, various plans to build coal-fired plants and liberalization of domestic energy markets.

"I think we can cover real demand with long-term contracts, but potential demand that could change because of these factors should be covered by something else such as contracts with mid-term or short-terms," he added.

Kakimi also said a tender is an effective way to procure LNG when there is ample supply in the market.

In December, the two utilities held a tender for the joint procurement of six LNG cargoes for delivery during fiscal 2015-16 (April-March).

--Eriko Amaha, eriko.amaha@platts.com
--Edited by Geetha Narayanasamy, geetha.narayanasamy@platts.com