IEEJ: May 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (86)

April 27, 2012

Japanese Companies Stepping up Efforts to Secure U.S. LNG Exports
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Japanese companies have accelerated efforts to secure U.S. LNG exports originating fromshale gas. On April 17, Mitsui & Co. and Mitsubishi Corp. stated that they have broadly agreed tosecure 4 million tonnes in LNG exports each, including those possibly to Japan, from Sempra
Energy Inc. which is planning to export LNG from the Cameron LNG receiving terminal inLouisiana. On April 27, Tokyo Gas Co. and Sumitomo Corp. stated that they have reached broadagreement with Dominion Cove Point LNG L.P. to liquefy natural gas into LNG at an annual volumeof 2.3 million tonnes at the Cove Point LNG Terminal in Maryland and launched negotiations on
their final agreement.
The Cameron LNG project calls for starting construction in the second half of 2013 toconvert an LNG import terminal into an export terminal and for launching LNG production andexport in late 2016. The project envisages three 4-million-tonne gas liquefaction trains with a total
annual capacity of 12 million tonnes in LNG. The three trains include two with a total capacity of 8
million tonnes for exports including those possibly to Japan. Gas for liquefaction there will be
procured from the market. The parties reportedly plan to consider using gas from the Marcellus andEagle Ford shale gas fields where Mitsui has participated in production and acquired interests.
The Cove Point project also calls for converting the present LNG import terminal into anexport terminal to export 5 million tonnes per year from 2017. The project participants areconsidering procuring gas from such sources as the Marcellus shale gas field where Sumitomo has
also acquired an interest. LNG from U.S. shale gas may thus be imported into Japan.
On both projects, various negotiations and construction will be required before final
agreements are reached. In order to enable U.S. LNG to be exported to Japan, project participants
will also have to negotiate with the U.S. government to acquire licenses for LNG exports tocountries that have no free trade agreements with the United States. However, the recent progress indeals for LNG exports to Japan represents a great step forward for Japan’s stable LNG procurementand supply.
Before these actions by Japanese companies, South Korea’s KOGAS and India’s Gail took
the initiative in securing U.S. LNG exports by taking part in the Sabine Pass LNG project. In Japan,
there had been concern that Japanese firms would lag behind in exploring U.S. LNG exports. But the1IEEJ: May 2012 All Right Reserved
recent moves indicate that Japanese companies are catching up with the forerunners.
These moves are important because there are growing expectations on LNG in Japan aswell as challenges regarding stable LNG supply, including how to address the Asian premium onLNG prices. The current LNG price in Japan is more than eight times as high as the current U.S. gas
price which has slipped below $2 per million British thermal unit. Energy experts in Japan havewidely recognized that the wide price gap, though attributable partly to market structure differences,
has become a serious problem that cannot be ignored.
What are the implications of the recent series of actions by Japanese firms in this sense?
First, these deals could directly impact LNG procurement prices. A KOGAS agreement for theSabine Pass LNG project indicates that U.S. LNG imports into Japan would be highly competitive,
even with transportation costs taken into account, under the presumption of present gas price levels
including around $2/MBtu in the United States and more than $16/MBtu in Japan (Asia). But wemust pay attention with regard to this presumption. There is no guarantee that LNG imports from theUnited States will remain price competitive if and when U.S. prices rise with Japanese prices fallingon crude oil price drops.
The second important implication is that Japan could start LNG imports based on a pricing
approach that would be different from the existing Asian approach linked to crude oil import prices.
At present, however, pricing approaches for the two deals involving Japanese firms are still
uncertain, depending on future negotiations. If the participants in these deals adopt the Sabine Pass
LNG pricing approach, which differs from the existing Japanese traditional approach, they may planon making a breakthrough in discussions on LNG pricing approaches. It is also significant that thediversification of pricing approaches is expected to help risk diversification in terms of price.
The third implication is that LNG imports from the United States under a new pricing
approach could contribute to enhancing Japan’s bargaining power in negotiations with other LNGsuppliers. The other LNG suppliers include not only the existing gas exporters to Japan but also
future exporters subject to new LNG import projects. Since the existing LNG import contracts forJapan as the largest LNG importer in the world are so significant in Japan’s total LNG import
volume, Japan’s bargaining power at negotiations on these existing contracts may greatly impact its
overall LNG procurement prices and conditions. Future LNG suppliers for Japan include Australia
that plans to expand LNG production capacity and Russia that is conscious of enhancing efforts inthe Asia-Pacific market. LNG imports from the United States under a new pricing approach may besignificant for Japan in considering future relations with these countries.
While Japanese companies have begun to step up efforts to import LNG from the UnitedStates, future developments over a long time before actual imports begin are uncertain. In thisrespect, we may have to closely watch changes in both the Japanese and U.S. energy situations.
Nevertheless, the recent developments surely represent a significant step.
2

IEEJ: May 2012 All Right Reserved

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

3