Japan LNG buyers wary of Tellurian’s fixed-price offer

CHIBA / Reuters

Japanese buyers of liquefied natural gas have shown cautious interest in Tellurian Inc’s bold guarantee of US LNG delivered at a fixed price from 2023, wary of locking themselves into a price that may eventually work to their disadvantage.
Tellurian Chairman Charif Souki – who pioneered the first US LNG exports ex-Alaska as head of Cheniere Energy – stirred things up at the Gastech conference in Japan from the start, offering cargoes delivered to Japan at a flat $8 per million British thermal units (mmBtu). That goes against four decades of selling LNG and building liquefaction plants worth billions of dollars on the basis of long-term, fixed-volume contracts linked to the price of oil. Souki’s move looked to be in keeping with LNG importers pushing for lower prices and better terms, yet even some of the most aggressive buyers seemed taken aback by the flat rate.
“Fixed prices are a gamble,” JERA Co’s chief fuel transactions office Hiroki Sato told Reuters in an interview at the conference when asked about Souki’s offer. “If you hear now that you can buy LNG for Japan at $8 in 2023, everybody would probably say it’s cheap. But … actions based on predictions rarely work out. That is how it works in the world,” he said.

‘NOT BUYING AT $8’
Tokyo-based JERA Co, a partnership of Tokyo Electric Power and Chubu Electric Power, is the world’s biggest buyer of the fuel. Last month it joined with Korea Gas Corp and China National Offshore Oil Corp to form a club to force producers to drop so-called destination clauses.
Despite Sato’s wariness, Souki “is a genius (for) throwing a stone in the pond and creating a ripple. I don’t know how I evaluate that or if it is good or bad,” he said. During supply shortfalls – such as when the Fukushima nuclear crisis of 2011 led to the shutdown of Japan’s reactors and imports of LNG and coal spiked to records to replace lost power generation – prices can run up rapidly.
Spot LNG prices in Asia <LNG-AS> were at more than $20/mmBtu in February 2014, for instance, but with the more recent surplus they are now trading at less than $6/mmBtu. Buyers might decide that $8/mmBtu looked cheap if oil prices were at $80 or $100, said Ryosuke Tsugaru, chief executive of Diamond Gas International, a subsidiary of Mitsubishi Corp , said on the sidelines of the conference. “But oil by nature is volatile. And if a fixed $8 turned out to be expensive, I don’t know what they would do,” Tsugaru said. “I am not buying at $8,” he said.

DRUM ROLL, PLEASE
Souki made his offer on Tuesday to deliver LNG to Japan at $8/mmBtu from 2023 under five-year contracts, including shipping. The offer covers an initial 7 million tonnes a year of LNG from Tellurian’s planned Driftwood project in Louisiana. “I think we will be sold out by the end of the year,” he later said, as two Taiko drummers banged away at Tellurian’s stand in the conference hall in Chiba near Tokyo, drawing a crowd of gas executives and onlookers who snapped pictures while drinking wine and champagne. Souki told Reuters he had received a strong response from buyers in Japan, which takes about a third of global LNG output. He declined to identify any companies that had shown interest.
Australia’s Woodside Petroleum is also considering sales of some of its LNG on a fixed-price basis, Chief Executive Officer Peter Coleman told reporters at a Gastech press briefing, although he mentioned no specific level.