Japan’s TEPCO plans to jointly buy LNG, increase imports

16 January 2014 16:58 Source:ICIS

Tokyo Electric Power (TEPCO) plans to purchase as much as 35-40 million tonnes per annum (mtpa) of LNG over the next 10 years to close the gap created by the loss of nuclear power generation, the company said in its revised strategy plan released on 15 January.

This could double TEPCO’s LNG imports. The company imported 25.72m tonnes of LNG in 2013, which included around 16.6mtpa from its current long-term contracts with the remainder made up of mid-, short- and spot LNG. It has also hold contracts to purchase a further 6.25mtpa of long-term LNG from projects currently under construction in Australasia.

The business plan reaffirmed TEPCO’s commitment to jointly procure additional LNG with other Japanese utility buyers in order to increase its bargaining power with suppliers.

TEPCO, Japan’s largest electricity utility, also wants to negotiate more flexible conditions with the suppliers, potentially securing better terms on destination restriction clauses, which are embedded in most long-term LNG contracts, the plan said.

The Japanese utility plans to form a procurement company for this purpose before March 2015, and attract other utilities to participate in the venture. Of the total volumes purchased by the venture, TEPCO plans to allocate 20mtpa for its own use.

The company aims to save yen (Y) 650bn ($6.2bn) over the course of next 10 years through joint LNG procurement.

TEPCO reiterated that it will consider securing up to 10mtpa of lean LNG from several suppliers, including those involved in the US Gulf, the report said. The 10mtpa of lean LNG would be part of the overall 20mtpa that the company seeks to procure over the next 10 years.

The company did not provide additional details about how it will go about with the formation of the company, nor did it reveal potential sources of additional LNG supply.

While TEPCO also did not provide the names of other utility buyers that could participate in the venture, these are likely to include other regional gas and electricity utilities such as Tokyo Gas, Kansai Electric and Chubu Electric.

The company also plans to reduce its LNG procurement costs by about 20% by utilising several price benchmarks, including European and US natural gas hubs, according to the report. Such indexation mechanisms are likely to US NYMEX Henry Hub or the UK’s NBP price reference points. The company currently procures most of its long-term volumes on the basis of crude indexation, particularly using the Japanese Crude Cocktail.

“If TEPCO reverts to using hub-linked prices, there is no guarantee in reduction of costs, as suppliers will likely introduce mechanisms that could probably result in identical prices, particularly if such indexation is introduced prior to the commencement of US shale gas exports,” one industry source told ICIS.

Upgrades to gas-fired power generation

In line with its plans to increase LNG use for power generation, TEPCO is currently replacing gas turbines to a new 1.248GW No. 7 gas-fired unit at the Kasihma plant to improve facility’s efficiency, the report said. The company will also replace 10GW of outdated thermal power generation capacity by more efficient gas-fired or coal-fired units at Kashima No. 7 and Chiba No. 3. The move could also result in installation of new gas-fired power generation capacity.

Nuclear restarts in the plans

TEPCO also confirmed that it plants to restart its two of the seven reactors – No.6 and No.7 units – at Kashiwazaki-Kariwa nuclear plant in Niigata prefecture as early as July. All of the reactors are now idling over safety concerns.

However, the plans for restart are contingent upon gaining approval from local government authorities. While the plan for restart has gained approval from the federal government, it is staunchly opposed by the local authorities, which means there are no guarantees that the company will be allowed to restart the facility.

TEPCO’s plans have caused strong criticism from Niigata governor Hirohiko Izumida who dismissed the plan on 16 January, and raised concerns over safety issues at the facility.

The original 10-year business plan released in April 2012 made assumptions that TEPCO could restart some of its nuclear reactors as early as spring 2013, but that failed to materialise on the back of the government policy. The revision also includes larger-then-expected compensation figures for the damage caused by three nuclear reactors at the Fukushima-Daichi nuclear power plant in March 2011.

By Roman Kazmin