TOKYO (Reuters) - Japan’s JERA Co, set to become the world’s biggest buyer of liquefied natural gas (LNG) next year, plans to significantly cut the amount of gas it purchases on long-term contracts, the company’s president told the Reuters Global Commodities Summit.
JERA, a joint venture set up by Tokyo Electric Power (Tepco) (9501.T) and Chubu Electric Power (9502.T) to initially handle fuel procurement with a possibility of eventually taking over thermal power stations, has more than 10 million tonnes of gas on long-term contracts that expire by around 2020.
But the company will not automatically renew them, President Yuji Kakimi said.
The move puts more question marks over planned big LNG projects, which rely on long-term contracts to get financing approved, amid a downturn in commodities markets that has cut investment in many areas.
JERA, which buys around 80 percent of its gas on long-term contracts, will only contract volumes to cover the absolute minimum of fuel needed, using the most optimistic scenarios for rebooting its nuclear power plants and the take-up for renewable energy being promoted by the government.
Additional requirements for gas will be met with mid-term and short-term contracts or spot purchases, Kakimi said.
“Our original mission of procuring at a similar level to Europe and the U.S. is close to being achieved with oil price falling, but even if oil prices rose, we have to make sure that (procurement) costs are capped,” he said.
JERA will surpass Korea Gas Corp (036460.KS) as the world’s single biggest buyer of LNG with annual purchases of around 40 million tonnes once it fully integrates the partners’ existing contracts next summer.
Kakimi said Jera’s annual purchases of gas are expected to decline in line with government forecasts, implying the company will be burning around 28 million tonnes a year by 2030.
He also said the company is expanding Chubu Electric’s unit in Houston to start LNG trading opportunities when the Freeport LNG project, in which Chubu invests in, starts export in 2018.
JERA also aims to broaden its sources of coal to lower its reliance on high-quality Australian coals in order to cut costs.
Australia is by far the biggest supplier to Japan, accounting for nearly 80 percent of Japan’s thermal coal imports in the first eight months of this year.
“Since it looks difficult to see more flows from Indonesia under current market circumstances, it is important to develop new sources such as Russia, the U.S., Colombia and Africa,” Kakimi said.
JERA, which buys about 20 million tonnes of thermal coal a year, is also interested in buying into in coal mines to hedge against rises in coal prices, he said.
He declined to say how much a stake it aims to buy, but said stakes equivalent to 30-40 percent of its procurement would be “too much” under the current market.
Thermal coal benchmarks hit record lows earlier this month due to a sharp slowdown in demand, especially in Asia, and with overall mining output remaining stubbornly high.
Kakimi thinks prices have hit bottom.
“I actually said last year the prices had hit the bottom, but they kept on falling,” he said. “But I really think the market is at the bottom as mines have been closing and coal mining companies have been putting themselves up on sale.”
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Additional reporting by Billy Mallard, Kentaro Hamada, Kazuhiko Tamaki and Hitoshi Ishida; Editing by Aaron Sheldrick and Michael Perry