BP, Kansai Electric deal sets Asian LNG pricing paradigm
Kansai Electric Power has signed a preliminary 15-year supply deal with UK-headquartered oil and gas major BP to buy 500,000 tonnes per annum of LNG starting April 2017, the Japanese utility said on Monday.
Kansai said in a statement that the volumes would be indexed, at least, in part to a natural gas price benchmark, although sources familiar with the deal confirmed that all of the volumes under the deal would be indexed to the US Henry Hub price benchmark.
Japan's utilities have become increasingly vocal in expressing their dissatisfaction with the status quo in long-term, oil-indexed LNG contracts in Asia.
Japanese utility Tokyo Gas and a number of the country's trading houses have already signed preliminary agreements to lift Henry Hub-indexed volumes from planned liquefaction projects in the US, as part of a move to secure lower long-term prices.
While the BP-Kansai key terms agreement has yet to be converted to a full sales and purchase accord (SPA), it is understood to be the first long-term LNG deal into northeast Asia to be indexed to Henry Hub, which includes LNG sourced from outside North America. The volumes will be sourced from BP's global portfolio and will be delivered on an ex-ship basis, according to the statement.
Osaka-based Kansai is more dependent on nuclear power than any other Japanese electricity utility, with 50% of its total generation capacity coming from nuclear before the 11 March 2011 earthquake and tsunami.
Although the company has restarted operations at two reactors at its Ohi nuclear plant, it has been forced to ramp its LNG purchases via spot and mid-term deals to meet the shortfall from its nuclear generation.
And with LNG set to play an increasingly important role in the country's future energy matrix following the release of the government's new energy policy released in September, Kansai has intensified its long-term LNG procurement drive while seeking to diversify its source of supply and pricing benchmarks.
The deal also expands BP's footprint in northeast Asia and is the second deal signed by the UK-based major this year with a Japanese utility. In February, it formalised a SPA with Chubu Electric Power for 8m tonnes over a 16-year period and started delivering LNG under the contract in April. The deal was also understood to be partially indexed to a gas price benchmark.
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