Japan’s Tepco plans for LNG buyers’ cartel

January 18, 2014 - 12:00:00 am
TOKYO: In the first concrete moves towards forming a buyers’ group for liquefied natural gas (LNG), Tokyo Electric Power Co is proposing to rope in domestic and foreign firms to jointly procure up to 40 million tonnes a year of the fuel to cut costs.

The Japanese utility’s plan comes as importers in Asia, the biggest market for the superchilled fuel, are stepping up efforts to leverage their buying power to reduce what they say are inflated prices because of the practice of linking the price of gas to oil.

Officials from India, China, South Korea, Japan and Taiwan which import about 70 percent of the world’s LNG have held talks last year but no firm steps had materialised. LNG producers are resisting the idea of joint purchases, fearing that an end to long-term supply contracts with individual buyers will hurt them. 

Tokyo Electric’s LNG proposal is outlined in a business revival plan that was approved by the government this week to cut costs at the utility, which is facing compensation demands and cleanup costs of tens of billions of dollars after the  meltdowns at its Fukushima Daiichi nuclear plant north of Tokyo.

The utility, known as Tepco, said it will start talks this year with other LNG buyers about setting up a joint purchasing company to negotiate with suppliers, aiming to achieving cost savings for itself of as much as 650bn yen ($6.24 billion)a year.

The venture would also invest in gas projects directly to secure LNG supplies, Tepco said.

“Natural gas accounts for 70 percent of Tepco’s fuel costs, so it is essential to drastically lower gas prices and reduce the fuel bill,” the utility said in the revival plan.  Tepco will seek partnership with both Japanese and overseas companies, spokesman Yusuke Kunikage said by phone on Friday. The purchases would cover both spot and contractual volumes, he said.

Shipments of LNG to Japan, the world’s biggest buyer of the fuel, which takes in about a third of global production, have soared after the Fukushima disaster in March 2011 led to the gradual shutdown of all of the country’s nuclear units.

Calling for lower prices has been a constant refrain of buyers in recent years and Asian consumers have been exploring ways to buy supplies in partnership to cut costs.  

Sellers, though, have rejected the demands, with big oil majors like Chevron Corp and Exxon Mobil Corp  insisting that multi-year supply contracts in their current form are necessary to ensure they can take on the risk of developing projects that take years to build and cost billions of dollars.

Joint purchases may also be difficult given the practice of restricting destinations in clauses on supply contracts.

Cooperation among Japanese buyers could also fall foul of domestic anti-competition rules, said Tom O’Sullivan, founder of independent energy consultancy Mathyos Japan.

“Combining the purchasing power for over 50 percent of a single commodity by Japanese electric power companies, even a commodity such as LNG that is now strategic to Japan’s national interests, strikes me as a move that might deserve scrutiny by the Japanese Fair Trade Commission or the World Trade Organization,” O’Sullivan said.

LNG is expensive  in Asia and prices are now more than four times the cost of natural gas in the United States, where a boom in shale oil and gas is taking place.