Japanese utilities are weighing the option of indexing a portion of the import price of their LNG procurements from North America to gas price benchmarks such as Henry Hub, rather than solely to crude oil, a Japanese government official told Platts late Thursday in Calgary.
"It is still early days, but this is likely to be a trend, with our utility firms preferring the Henry Hub as part of a portfolio of prices," Hirohide Hirai, Director of Petroleum and Natural Gas at the Ministry of Economy, Trade and Industry, said in an interview.
This would be for the risk mitigation of not depending solely on Japan Customs-cleared Crude or JCC prices, and also for securing a cheaper price, he said. "We would be open to new forms of pricing and, as a suggestion, Japanese utilities could think of indexing to the Henry Hub 5-10% of their North American LNG purchases."
Hirai is part of a Japanese delegation that is in Calgary on a two-day visit to launch an energy policy dialogue with Canada to discuss how Japan's investments could be accelerated in unconventional oil and gas developments in Alberta and British Columbia. The delegation includes officials from METI, Japan Gas Corporation and state-owned Japan Oil, Gas and Metals National Corp.
Japan is the world's largest LNG buyer, importing around 78.5 million mt in 2011.
"The Canadian Prime Minister [Stephen Harper] was in Tokyo in March and we discussed co-operation in the energy sector related to regulatory structures and sharing of technology," Hirai said. "We feel the [Canadian] regulatory system could be improved and are willing to assist the Canadian government in case there will be a need," he added, without elaborating.
The METI delegation's visit comes at a time when Japanese companies and trading houses are on the hunt for overseas hydrocarbon assets and taking equity positions in international oil and gas ventures.
Japanese investments in Canada's oil and gas sector to date in 2012 include a C$600 million ($593 million) commitment by Toyota Tsusho Corp. to Calgary-based Encana to invest in a coalbed methane project in southern Alberta; Mitsubishi Corp. signing a C$2.9 billion deal with Encana to take a 40% interest in Cutbank Ridge natural gas production in British Columbia; and most recently Mitsubishi Corp. joining Shell as a 20% partner to develop a 12 million mt/year grassroot LNG complex in British Columbia.
"Japanese utility firms have to look at cheap and stable supplies and from that perspective, Canadian LNG projects are lucrative for us," Hirai said. "The investment climate in Canada is stable and any investments we make here will be stable," he added.
GEOGRAPHICAL PROXIMITY
The geographical proximity of the Canadian Pacific coast is also another favorable factor, Hirai said. The sailing time for an LNG cargo from Kitimat to Tokyo Bay is 10 days, compared with about 20 days from Ras Laffan, Qatar.
"Our focus is on the upstream sector and the preference of Japanese firms will be to take Canadian LNG to consumers in Japan, rather than market it in North America," Hirai said.
The challenges posed by the remoteness of Canadian LNG export projects, particularly the lack of an existing pipeline system, is unlikely to get in the way of the planned ventures, he added.
A May 10 report by Ernst and Young suggested C$50 billion would need to be invested over the next decade in infrastructure works to sustain an LNG industry in western Canada.
"We are not planning to invest in pipeline facilities, but all the deficiencies will have to be overcome if Canada wants to compete with US LNG projects," Hirai said. "One advantage for Canadian projects is the support they have from the government for exporting LNG. The US government is still not clear on its export policy,' he added.
OIL SANDS
Meanwhile, Hirai said Japan was willing to import bitumen from Alberta's oil sands if an export pipeline was built to the Canadian Pacific coast.
Hearings are underway at Canadian federal regulator National Energy Board for the Enbridge-sponsored Northern Gateway pipeline that will allow for the transport of 525,000 b/d of bitumen from Hardisty near Edmonton to Kitimat.
The proposed pipeline is facing opposition from 63 First Nations Groups for environmental reasons.
"We view this [First Nations opposition] as a domestic issue and are hopeful it will be resolved soon," Hirai said.
