Japan's Chubu plans to buy stake in U.S. shale gas field

NAGOYA Japan Wed Jun 25, 2014 12:02pm EDT

Chubu Electric Power Co.'s Hamaoka Nuclear Power Station is seen from a beach in Omaezaki, Shizuoka Prefecture May 17, 2013.  REUTERS/Toru Hanai

Chubu Electric Power Co.'s Hamaoka Nuclear Power Station is seen from a beach in Omaezaki, Shizuoka Prefecture May 17, 2013.

Credit: Reuters/Toru Hanai

NAGOYA Japan (Reuters) - Chubu Electric Power Co, the world's third-biggest liquefied natural gas (LNG) buyer, is seeking its first stake in a U.S. shale gas field as a hedge against planned purchases from the Freeport LNG project in Texas, the company said.

Japanese power companies are stepping up plans to buy cheap LNG from U.S. shale projects from as early as next year, in a bid to cut the cost of soaring LNG imports in the wake of a nuclear power shutdown following the Fukushima disaster.

Chubu has agreed to buy 2.2 million tonnes of LNG a year from Freeport from 2018, and buying an upstream stake would help hedge its fuel expenses by offsetting feedstock costs in the event of a rise in the Henry Hub U.S. domestic gas benchmark price.

"Natural hedging would be the main purpose," Hiroki Sato, general manager of Chubu's fuels department and head of its trading business, said in an interview. The firm would look to hedge only part of its purchases, he added.

Chubu has yet to identify a potential stake, Sato said. It would need to purchase a stake covering production of about 107 billion cubic feet a year to provide a full hedge, equivalent to about 2 percent of output in the giant U.S. Marcellus region.

Japan, which buys a third of global LNG shipments, hopes to win price reductions of as much as 30 percent from its average import price by buying from U.S. fields, and use the lower prices to bargain down purchases from other regions.

The average price for LNG imports was $16.83 per million British thermal units (mmBtu) in April. Henry Hub prices are currently around $4.50/mmBtu, while the final cost would include liquefaction and transport.

Japan imported a record 87.5 million tonnes of LNG last year, helping to push trade deficit to the highest on record.

COST CUTTING

Chubu, which provides electricity for Japan's third-biggest economic region, has increased its LNG purchases by about 4 million tonnes to nearly 14 million tonnes a year since its sole Hamaoka nuclear station near Tokyo was shut in May 2011.

Its efforts to cut the cost of LNG include partnership agreements with Korea Gas Corp, Taiwan's CPC Corp and China National Offshore Oil Corporation (CNOOC) in ship swaps and the exchange of market information.

It signed a joint LNG purchasing arrangement with KOGAS in 2013 covering about 1.7 million tonnes of the fuel, and has also agreed to start joint LNG purchases with India's GAIL in an effort to win cheaper prices.

Chubu and GAIL signed a preliminary agreement on buying supplies together in March and will start detailed discussions on July 15, Sato said.

GAIL has signed up to buy 5.8 million tonnes per year of LNG from the U.S. Sabine Pass and Cove Point projects. Sato said the companies could look at switching supplies between them should deliveries be canceled from a particular project.

Another option would be to swap supplies from different regions to shorten transport routes, he said, although that may require renegotiating contracts because many LNG agreements have clauses restricting shipments to a specific port.

Chubu, which buys the majority of its LNG under crude-linked contracts, is aiming to cut this to about 50 percent, Sato said. The rest would ideally be linked to other, cheaper benchmarks, including a gas hub price and average import prices to Japan.

(Reporting by Osamu Tsukimori; Editing by Aaron Sheldrick and Richard Pullin)