22-05-02 Tokyo Electric Power Co (Tepco) and Tokyo Gas said they won the biggest-ever cut in prices of LNG from Malaysia as Asian producers strive to retain long-term customers amid a glut of the fuel.
Tokyo Electric and Tokyo Gas won LNG price cuts of about 5 % when they renewed 20-year contracts with Petroliam Nasional (Petronas) for 15 years starting April 2003, said Shigeru Muraki, general manager of gas resources for Tokyo Gas.

The price cuts combined with smaller reductions earlier this year are the first since Japan started importing LNG in 1969, and may trigger similar cuts in Korea, Taiwan and China. Japan takes almost three-fifths of global output from producers such as ExxonMobil, Shell Group and BP that have invested billions in new plants.
“The year 2003 will be the turning point for natural gas prices,” Muraki said. “By 2010, some (contract prices) will be 10 % lower than the current level.”
Japan’s power companies use about three quarters of the nation’s LNG imports that totalled 53.69 mm tons last year at a cost of $ 11.2 bn ($ 1 = RM 3.80). Japan’s utilities are demanding price cuts for LNG as more Japanese manufacturers shift production to China, reducing electricity demand in Japan. That’s as producers in Indonesia, Malaysia, Australia and West Asia battle to keep rivals from poaching their customers.

BP, Europe’s biggest oil company by market value, hopes to be China’s first LNG supplier starting in 2006. BP wants the sales contract to justify a $ 2 bn LNG project at its 50 % owned Tangguh gas fields in the eastern Indonesian province of Papua that would produce 7 mm tpy.
Australia’s North West Shelf LNG venture -- that includes Woodside Petroleum, BP and Shell -- and Qatar’s Ras Laffan LNG, or RasGas, are also separately bidding to supply China’s Guangdong receiving terminal with $ 600 mm a year of gas. ExxonMobil owns 26.5 % of RasGas. China is likely to choose two suppliers after June and set a new benchmark for Asian LNG prices.
“A significant reduction inpricing may take place in this deal,” said Muraki. “That pricing will have an impact on other existing LNG projects because many contracts have the option to review prices once in four to five years.”

Malaysia, Asia’s second-largest source of LNG after Indonesia, has a surplus of the fuel. The country’s third LNG plant being built by Malaysia LNG, a unit of Petronas, has secured buyers, all Japanese, for just over two-fifths of its 6.8 mm tpy of output that will start up in 2004. Shell owns 17.5 % of Malaysia’s first LNG project, 15 % of the second and 10 % of the third at Bintulu in Sarawak.
Expansions elsewhere in West Asia and Asia coupled with yet another new LNG project -- Phillips Petroleum’s Bayu-Undan project in the Timor Sea starting in 2006 -- mean Japanese buyers haven’t had a better time to negotiate lower prices. They also want more flexible terms to replace traditional 20-year contracts with rigid pricing formulas.

The price cut negotiated by Tepco and Tokyo Gas with Malaysia involved7.4 mm tpy of gas. Almost a fifth of the new contract has terms set for only one year, whereas almost all of the previous contract which expires March next year had fixed terms for 20 years.
“We are very likely to see drastic change in LNG pricing sooner than later,” said Tetsu Hashimoto, general manager of Tepco’s fuels department, which buys more than a quarter of Japan’s LNG imports. Asian LNG suppliers can produce 10 % more gas than the region’s demand, he said.
The price cuts come at the right time for Tepco and other Japanese power companies. Japan’s total electricity use fell for the first time in 15 years in the fiscal year ended March 31. Demand fell 1.7 % to 824 bn kWh of electricity last fiscal year and may fall again this year, forcing power companies to cut costs and spending on new projects.

Declining demand and increased competition among local producers prompted Osaka Gas, Japan’s second-largest gas supplier, to abandon last month its third LNG import terminal that was to cost $ 6 bn.
“Japan’s natural gas demand will rise only by the end of this decade,” said Muraki at Tokyo Gas. “Until then, producers will have to search for new markets such as China and India.”