TOKYO Forced into action by falling customers due to market liberalization and a shrinking population, Japan's utilities are ditching old long-term coal and gas supply contracts in favor of more short-term, opportunistic trading.
The move represents a sea change for the traditionally risk averse utilities as they seek to cut costs, but will make life harder for liquefied natural gas (LNG) producers who have relied on long-term sales to underwrite costly new projects and expansions.
It could also help Japan, the world's biggest LNG buyer and the No.3 importer of thermal coal, meet its goal of becoming an LNG trading hub, although it faces stiff competition from China and Singapore.
Almost entirely without its own energy resources, power companies in Japan, have long put security of supply over cost. But a falling population - down 1 million since 2010 to 127 million - a new wave of competition and the rise of renewable energy, have forced a re-think.
"Things are very uncertain and we have to deal with these uncertainties by changing how we procure LNG, including the flexibility to trade unused LNG in overseas markets," said Yuji Kakimi, President of Jera Co, the world's biggest buyer of LNG and one of Japan's largest buyers of thermal coal.
Barely recovered from higher costs in the wake of the Fukushima nuclear crisis, utilities are grappling with a regulatory shake-up that ended their monopoly powers and threw open the $77 billion a year retail market to more than 350 firms.
Tokyo Electric Power Company Holdings and Chubu Electric Power, which formed Jera to buy their fuel in 2015, have lost 1.2 million customers since April, official figures show, while Kansai Electric Power has lost over 380,000.
Jera said last month it plans to buy the coal trading unit of French state-controlled utility EDF, more than doubling its coal trading volume and potentially transforming it into a global leader of coal and natural gas trading.
"We expect to benefit from economies of scale and stronger bargaining power," Jera general manager Izumi Kai said, adding that the company hopes to create an integrated coal, LNG and electricity trading platform.
Shikoku Electric Power, which relies on coal for half its power generation, has formed a joint venture in Australia with trading house Noble Group to trade thermal coal, and is set to buy coal from Russia and Colombia.
Tokyo Gas, Japan's biggest city gas supplier, is looking at business tie-ups in Southeast Asia, and has already started reselling some LNG at ports in Japan.
"Trading has been expanding and if our investments overseas go well, we would think about selling to overseas markets to help drive profits," said Shuichi Yoshida, a general manager of accounting.
HUBS AND ARBITRATION
The biggest changes may come in LNG, typically priced in Asia in reference to what's known as the Japanese Crude Cocktail (JCC) price, which links contracts to oil prices.
"There is a secular trend away from JCC and towards hybrid prices, which will include spot prices," said Jonathan Stern, Distinguished Research Fellow, Natural Gas Research Programme at the University of Oxford's Institute for Energy Studies.
If the gap between JCC and LNG spot prices widens dramatically then trading would "rapidly accelerate," increasing liquidity and potentially reducing prices for utilities, he said.
The JCC price for LNG was $7.62/mmBtu in September, with Asian spot LNG prices nearly 30 percent cheaper at around $5.50/mmBtu.
The utilities want to rid themselves of fixed-volume LNG supply contracts with time frames that can last a generation, and are set to push hard during pre-set negotiating periods in long-term contracts.
Jera plans to cut the amount of LNG it gets from long-term contracts by 42 percent by 2030, while Japan's second-biggest city gas supplier, Osaka Gas, has also said it may not sign new long-term LNG contracts for the next several years.
Re-writing existing deals or setting up new structures will likely result in a wave of arbitration and regulatory rulings, as happened in Europe after electricity market liberalization over the past two decades.
"With the need to renew LNG supply agreements into Japan and an oversupplied global LNG market in the coming years, diversity in LNG contract terms will increase," said Daniel Muthmann of consultancy global gas partners in Essen, Germany.
"Japanese utilities have already started to inform themselves quite extensively about European market developments."
(Additional reporting by Aaron Sheldrick in TOKYO and Vera Eckert in FRANKFURT; Editing by Henning Gloystein and Richard Pullin)