June 15, 2018 / 9:35 AM / 2 years ago

UPDATE 2-Centrica, Tokyo Gas break mould in Mozambique LNG deal

(Recasts, adds context, explains significance of the deal structure for LNG markets, consultant comments)

By Oleg Vukmanovic

LONDON/TOKYO, June 15 (Reuters) - Britain’s Centrica and Japan’s Tokyo Gas aim to buy liquefied natural gas (LNG) from Anadarko Petroleum’s $20 billion project in Mozambique, the first joint procurement deal designed to defuse risks facing the buyers in their respective markets.

The deal also brings Anadarko one step closer to constructing its East African LNG project just as it corrals $14 billion to $15 billion from banks and export credit agencies for the 17,000-acre liquefaction complex in Mozambique’s remote north.

Lenders require Anadarko to fix at least 8.1 million tonnes (mt) of the project’s 12.88 mt total annual output in long-term sales deals to guarantee project revenues.

The preliminary agreement between Centrica and Tokyo Gas for 2.6 mt of LNG annually brings Anadarko’s total supply tally to 7.7 mt, via a mix of binding and non-binding deals.

Deliveries will commence once Mozambique LNG starts operations, expected to be in the early- to mid-2020s and last until the early 2040s, the companies said.

The main destinations are Tokyo Gas’ four terminals in Japan and Centrica’s terminal at Britain’s Isle of Grain, but the two firms also have the right to ship cargoes to other destinations, Centrica Vice President, LNG Business Development, David Dunlavy said in Tokyo during a joint news conference.

How much each company will buy has not yet been decided, said Tokyo Gas Executive Officer Takashi Higo.

The LNG will be priced based on multiple unidentified indexes, but they did not give details.

Centrica’s purchases will likely be linked to Britain’s National Balancing Point gas trading hub and Tokyo Gas will pay a price linked to a basket of crude oil grades, such as the Japanese Crude Cocktail, sources said.

“The transaction represents the first long-term offtake agreement from Africa for both Tokyo Gas and Centrica, in line with ongoing efforts to further diversify their respective portfolios of LNG sources,” Centrica said in a statement.

Sharing the supply between buyers - an innovation - allows each company to weather domestic demand uncertainties by gaining an alternative outlet.

Japanese utilities, for example, must grapple with the impact of the liberalisation of domestic power markets and the potential impact on demand, as well as uncertainty over nuclear reactor restarts and the role of renewables, any of which may undercut LNG demand.

In Britain, dwindling North Sea output, Russia’s unpredictable export strategy, rising offshore wind output and the potential for more or less LNG from the United States all complicate demand forecasts.

“This deal is an example of buyers cooperating to create flexibility rather than relying on sellers to create it for them,” said Frank Harris, head of global LNG consulting at Wood Mackenzie.

Centrica and Tokyo Gas will benefit from being able to direct shipments into the most competitive region as prices fluctuate.

In 2016, the companies signed a memorandum of understanding on a “location swap” for LNG deliveries that helped to cut transportation cost on their gas purchases. (Reporting by Oleg Vukmanovic and Sabina Zawadzki in LONDON and Osamu Tsukimori in TOKYO; editing by Jason Neely, Tom Hogue and G Crosse)

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