TEPCO Signs Massive LNG Supply Deals with Chevron, ExxonMobil

TEPCO Scores Contract Duo

Japan's Tokyo Electric Power Company (TEPCO) has signed two massive deals to receive LNG from Chevron's Wheatstone project in Australia and ExxonMobil's PNG LNG terminal in Papua New Guinea. Chevron signed a non-binding heads of agreement (HoA) with TEPCO to supply a hefty 4.1 million t/y of LNG from the Wheatstone project for 20 years. As part of the deal, TEPCO has bought 15% of Chevron's equity stake in the Wheatstone field licences and an 11.25% stake in the Wheatstone natural gas processing facilities to be developed onshore near Onslow in north-western Australia. The Nikkei newspaper reports that TEPCO will invest more than 300 billion yen (US$3.34 billion) in the project. ExxonMobil is also set to supply TEPCO with around 1.8 million t/y of LNG from its PNG LNG project after agreeing a 20-year supply deal with the company. First shipments of LNG are expected to commence in late 2013 or early 2014.

TEPCO is the largest electricity generating company in Japan and along with Korea Gas Corp. (KOGAS) ranks among the largest buyers of LNG in the Asia-Pacific region. The company is the leading importer into Japan, which is itself the largest LNG importer in the world. TEPCO consumed a massive 18.97 million t/y of LNG in 2008 and given Japan's lack of indigenous gas reserves is a key contributor to the country’s gas supply security. TEPCO imports from many countries including Malaysia, Brunei, and the United Arab Emirates (UAE), although the company has increasingly been looking towards large planned liquefaction projects in Australia and Papua New Guinea, which are supported by sizeable untapped gas reserves for long-term supplies given expectations of a rebound in regional demand as the global economy begins to recover. Indeed, TEPCO is already a buyer from the North West Shelf (NWS) project in Australia and from the Darwin LNG project run by ConocoPhillips. TEPCO may be concerned to shore up new contracts in order to stabilise future LNG supplies given that, in addition to established buyers in the region such as KOGAS, Tokyo Gas, and Chubu Electric, there are a growing number of new consumers largely comprised of NOCs such as China National Petroleum Corp. (CNPC), Sinopec, CNOOC, and India's Petronet that have been moving aggressively to gain supplies. With new carbon intensity targets unveiled by India and China, their emphasis on increasing the consumption of gas, which on a heat-equivalent basis emits around 45% less CO2 than burning coal, is likely to grow. Indeed, China is forecast to consume 300 bcm of gas by 2020, according to CNPC, up from 80.7 bcm in 2008. Other countries such as Singapore, Thailand, and Pakistan are also looking at developing regasification capacity, which could place further pressure on regional supplies. In addition around 70% of TEPCO's LNG purchasing contracts are due to expire in around 10 years and the new supplies will help offset these contracts in case they do not get renewed. These include a 20-year contract from Brunei LNG that will need to be renewed before 2013, a contract with Malaysia LNG due to expire in 2018, and a contract with Abu Dhabi Gas Liquefaction due to expire in 2019.

Outlook and Implications

TEPCO's binding supply contract with PNG LNG comes one day before the final investment decision (FID) on the terminal due for 8 December... ExxonMobil signed a 20-year gas sales and purchase agreement (GSPA) with Sinopec for PNG LNG for 2 million t/y on 4 December but with only 3.8 million t/y of the 6.6 million t/y terminal capacity contracted ExxonMobil will have to finalise further sales and financing agreements before construction can commence. The government is now moving to sign off on 10 development licences for the project and is working to reach a revenue sharing agreement with landowners for the Hides gas field (the main supply source for PNG LNG). With preparations for the official signing ceremony already underway, the FID tomorrow is looking likely, putting the project on schedule for completion in 2013-early 2014.

For the Wheatstone project, which is in an earlier phase of development, TEPCO has signed a non-binding heads of agreement (HoA) with Chevron. TEPCO's move to purchase equity in the upstream and downstream components of the project will give the company interests across the supply chain, providing security for its contract. The equity stake could also give TEPCO access to a further 1 million t/y of supplies. Investing in the project and taking a large portion of output will help the company secure long-term revenue streams from the project, which could begin to offset the massive LNG supply contract that the Western Australian state government has put at a record-breaking US$82.3 billion. The HoA with TEPCO accounts for around 47% of the total capacity of 8.6 million t/y and will provide a big boost to Wheatstone, which has been competing to find customers with many other LNG liquefaction projects in Australia that are also due to reach an FID in 2011. The early signing of the HoA could help secure confidence in the project from financiers, helping partners to meet construction costs and gain access to Australia's rather limited workforce before other projects do, helping to bring it online quickly. TEPCO may have chosen Wheatstone partly because of previous reservations over a planned CBM-to-LNG project in Australia due to concerns over how to store LNG-from-CBM with conventional LNG and its lower calorific value. The HoA could be a blow for other projects run by Woodside, Santos and for Origin Energy, which is currently looking for buyers for its planned project on the east coast of Australia. Chevron has said that it expects to sign up more customers for Wheatstone LNG in the coming months and with another regional heavyweight, KOGAS, also expressing interest in buying output from the project, the prospects of Wheatstone advancing swiftly look positive in a sector where delays due to financing, and technical or regulatory issues all too often hold up developments.