Japan has now embarked on a strategic policy for LNG procurement amid some significant new overseas upstream investments as the nation aims to secure its long-term LNG supply and overhaul its domestic delivery infrastructure.
In 2012, Japanese trading houses, utilities and energy companies will be prominent in more multi-billion dollar deals to secure access to new projects in North America, Russia and elsewhere, analysts forecast.
Gone are the days when Japanese LNG players were content with a 1.5 percent stake in a liquefaction project as a foundation customer.
Reflection
Last year’s March earthquake and tsunami disaster caused several months of reflection and that has now turned into determination to have main-player roles in future projects.
Japanese banks are also prioritising Japanese investments in overseas LNG ventures while at the same time helping finance the corporate restructuring of some utilities and LNG import facilities.
With LNG now at the centre of the country’s quest to boost gas-fired power capacity to replace nuclear power from Fukushima and other shutdown nuclear facilities, there are also efforts underway to improve LNG infrastructure through new regasification facilities and expansions at existing import terminals.
On the upstream investment front, Japanese companies have chosen North American shale as the means of securing new long-term LNG offtake at reasonable prices as significant project partners.
Three major deals have secured a Japanese presence in as many as three LNG projects in North America which should be delivering cargoes by 2020.
Transactions
The companies which took part in these transactions included leading LNG developer Inpex, and trading houses and LNG players, Itochu Corp. and Mitsubishi Corp.
Itochu demonstrated the new Japanese approach when at the end of November 2011 it agreed to pay $1 billion for a 25 percent stake in a US natural gas explorer with 10,000 wells - from which Itochu is guaranteed 1 million tonnes per annum of North American LNG.
The $7Bln deal to take over Tulsa, Oklahoma-based Samson Investments was masterminded by US buy-out firm Kohlberg, Kravis Roberts & Co.
Itochu will receive 25 percent of Samson whose assets include natural gas and shale wells, located from the Canadian border, through the Midwest to Texas.
Itochu said it would have the rights to offtake natural gas produced from Samson's assets, amounting to about 1 MTPA, “which Itochu intends to use ultimately to support a potential future LNG export business to Asia.”
High-profile
Analysts said it was an audacious move by Itochu to team up with such a high-profile buyout firm as KKR – and to emerge with an LNG plan.
The Japanese company could see its natural gas assets liquefied and shipped to Japan from one of the LNG projects being developed on the US Gulf coast or across the border in Canada.
“Samson has a strong track record of drilling and operational success and a unique portfolio of assets,” Itochu said.
Itochu stated that after the Samson deal it planned to increase its equity share in oil and gas operations from 34,000 barrels of oil equivalent per day to more than 70,000 bpd by 2015.
“This investment is a key step in achieving this target. It will also allow Itochu to diversify its oil and gas investment activities to unconventional projects and grow its natural gas and LNG trading activities,” it stated.
Resolve
In a further deal demonstrating Japanese resolve, Inpex and Japan’s leading LNG engineering company JGC Corp., agreed to take a joint 40 percent stake in shale-gas resources in Canada owned by Calgary-based Nexen Inc., with the intention of developing a liquefaction project.
The total value of that purchase of is $700 million, with 50 percent upfront and a 50 percent capital carry. Closing is expected in the first quarter of 2012.
Inpex and JGC will have much more to invest in the project, as they are essentially buying into the Canadian west coast LNG export province for Asia-Pacific buyers.
The assets they have an interest in are potentially huge. Nexen’s holdings are in the Horn River, Cordova and Liard shale-gas basins.
JGC is one of the world's most experienced builders of LNG liquefaction plants, having been involved in engineering and construction contracts in major LNG producing nations.
Alternatives
Analysts said this suggested the Japanese companies could be pursuing their own liquefaction plant on the coast of British Columbia, rather than delivering gas to a third-party plant, as other players intend to do.
A third Japanese-led shale-to-LNG project is likely to emerge from a deal done in mid-2011 when a group of Japanese utilities acquired stakes in Penn West Energy's shale-gas project in Cordova, northeastern British Columbia, by way of shares in a subsidiary of Mitsubishi.
Chubu Electric, Tokyo Gas and Osaka Gas each agreed to take a stake in Cordoba Gas Resources, a 100 percent-owned subsidiary of Mitsubishi which in turn owns 50 percent of PWE's project.
Mitsubishi also agreed to allow Korea Gas Corp. into the Cordova venture, along with state-run Japan Oil, Gas and Metals National Corp. (Jogmec).
The various shareholdings now make it a fifty-fifty partnership with Canada’s PWE holding half the shares and the other half distributed between Mitsubishi (30 percent) and Kogas, Chubu, Togas, Osaka Gas and Jogmec.
Backing
Mitsubishi is leading the discussions among the partners on how to proceed.
Strong financial backing of $1 billion has already been pledged for the Cordova project from Bank of Tokyo-Mitsubishi and underwritten by Japan Bank for International Cooperation.
Two of the Cordova upstream investors, Mitsubishi and Kogas, are already part of a Royal Dutch Shell-led plan to construct an LNG export plant north of Vancouver. China National Petroleum Co. is also part of this venture.
One other possible option would be for Mitsubishi and the Japanese utilities, along with Kogas, to opt to send their future shale resources as feed-gas to this plant for export to Japan and Korea.
The entry of state-run Kogas into the Mitsubishi-led Canadian venture has had one follow-on result in that the governments of Japan and South Korea initiated a programme of regular meetings to discuss their future strategies as the world’s two largest LNG buyers.
Bilateral
Their first formal meeting took place in Tokyo on November 28. The two sides agreed to improve cooperation on joint LNG procurement and to obtain more rights to develop natural gas fields overseas as a way of reducing the amount both countries pay for LNG.
However, they stopped short of announcing any joint purchase policy for short-term cargoes.
LNG, which in 2011 was costing Japan as much as $850 per tonne, has been pushing at wholesale natural gas price levels and worsening the effects of the economic slowdown by adversely affecting their balance of payments positions.
The Japan-Korea LNG dialogue will now take place twice a year, the Japanese government said, offering future opportunities for action and joint investment in upstream projects.
In addition to increasing their search for North American investment opportunities for LNG, Japanese LNG buyers are focusing on one venture in particular, right in their backyard, the Vladivostok LNG project.
Neighbours
The Russians plan to construct a liquefaction plant near the Pacific port of Vladivostok , in which four Japanese partners will have stakes.
This venture is now at the centre of Japan's lobbying efforts as it would add 10 million tonnes per annum to the nation's requirements.
Japanese LNG executives believe the Vladivostok project could cushion against a further increase in LNG demand and prices.
Russia's hydrocarbon projects in eastern Siberia are seen as a crucial part of the future energy mix for Japan and other Asian nations.
Japanese LNG demand could rise even further after 2012 when it will have finalized its new energy strategy, and after a decision would have been made on the future of nuclear power plants in the country.
Expansion
Russia's LNG projects, including Vladivostok, Yamal LNG, Shtokman and a Sakhalin plant expansion, are regarded as crucial in Japan as a way of helping ease the tightness in global LNG supply.
Japan is also concentrating on the construction and expansion of LNG thermal power plants and new and expanded LNG receiving terminals.
Japan’s utilities, which have remained in rigid form for the past 50 years, are also being foreced to look at their corporate structures and to consider overhauling themselves, particularly Tokyo Electric Power Co., which was worst hit by the March disaster.
Tepco has paid out billions in compensation and has had its generating capacity much reduced because of the Fukushima diaster.
Tepco has been one of the key players in the nation’s LNG procurement with annual purchases of 20 million tonnes, diversified LNG sourcing, a small LNG carrier fleet and existing and planned equity participation in two LNG liquefaction projects from where it buys output.
Forward
Tepco has also been active in expanding its presence in the wholesale and and retail natural gas business. It has also started tank-truck LNG deliveries from its Futtsu LNG import terminal and has a deal to sell LNG to Shizuoka Gas.
Although Tepco was the most affected by the nuclear crisis, its LNG business is still world-class and the company will have substanial influence in the Asia-Pacific market for some years to come.
As companies such as Tepco restructure and streamline their businesses and update their LNG procurement strategies, they will take decisions based principally on Japan’s future energy security.
The Japanese export bank has stepped forward to pledge financial backing for Australia’s new coal-seam-gas-to-LNG industry, while at the same time it made yet another loan to an Asia-Pacific liquefaction project - this time in Papua New Guinea.
The Japan Bank for International Cooperation said it had confirmed and underwritten a $263 million loan for Nippon Oil to help finance its investment in the ExxonMobil-led PNG LNG project.
Co-financing
The loan will be co-financed by the Bank of Tokyo-Mitsubishi, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corp. and is part of the JBIC’s mission to help “to secure energy resources” for Japan.
The JBIC has also signed a memorandum of understanding (MOU) with the Australian state of Queensland on a “comprehensive strategic partnership.”
Japan currently relies on Queensland for 60 percent of its coal imports and will soon be receiving LNG from some of the four large CSG-to-LNG projects currently under development.
“Japanese companies are already investing in various resource projects in the state, and are currently considering participation in the new projects such as CSG,” the JBIC said in a statement.
The MOU between the JBIC and Queensland sets forth that both parties exchange information with respect to investment that Japanese companies are considering making in Queensland and establish a framework to have periodic meetings.
“Through these arrangements, JBIC will help bolster a foundation for promoting Japanese business activities and smooth project implementation in Australia,” the bank stated.
On the PNG LNG project financing, the JBIC said it was underwriting the financing of the development of 6.6 million tonnes per annum of new LNG output. “Of the LNG that will be produced, about 50 percent will be supplied to Japan,” the JBIC said.
“The world's LNG supply and demand are expected to be tight over the long term amid increased demand from emerging countries,” the JBIC said. “For Japan it has become increasingly important to have stable LNG supply,” it stated.
LNG Journal, Project Finance editor
