Tokyo (Platts)--7Nov2012/436 am EST/936 GMT

Japan's Tokyo Electric Power Company said Wednesday it is considering importing up to 10 million mt/year of lean LNG, such as North American shale, in a bid to lower its increasing fuel costs.

As part of its 10-year business action plan released Wednesday, Tepco said its possible import of up to 10 million mt/year of lean LNG would account for roughly half its annual purchase volumes.

Tepco's annual LNG consumption volume is forecast at a record 23.95 million mt for fiscal 2012-13, up 5% from its previous record of 22.83 million mt in 2011-12.

Article continues below...

Commodity Pulse Video: Top 250 Energy Company Rankings analysis: oil reigns supreme; commodities diverge across regions
	Platts editors take an in-depth look at Platts Top 250 rankings for 2012 and explain how record average crude prices have seen the oil & gas sector extend its dominance of the world's top energy companies; the disparate fortunes of gas, coal and power utilities & producers across each region; & how Asian & Russian companies dominate where return on invested capital (ROIC) is concerned. Watch the video

A Tepco spokesman said it intends to compile a specific action plan on lean LNG imports as soon as possible, declining to elaborate on the timing.

Tepco's announcement that it is mulling importing up to 10 million mt/year of lean LNG comes after the company said it was considering importing LNG from North America in the mid- to long-term with a view to lowering its import costs.

Tepco's fuel costs have increased due to the higher consumption of fossil fuels -- coal, crude, fuel oil and LNG -- following the March 11 earthquake in 2011, which caused an automatic shutdown of its Fukushima-1 (Daiichi) and Fukushima-2 (Daini) nuclear power plants with a combined capacity of 9 GW in Japan's northeast.

As part of its plan of action, Tepco said Wednesday it will also consider measures to cut an additional Yen 100 billion ($1.2 billion)/year of fuel and repair costs as well as depreciation expenses in addition to its already committed reduction of an average Yen 336.5 billion/year in costs over the next 10 years.

Tepco's overall LNG import costs have also increased as prices for its long-term contracts, which are linked to crude prices, increased when crude values rose, as well as due to increased spot purchases, particularly since the March 2011 earthquake.

This is in contrast to US gas markets, where Henry Hub prices fell to 10-year lows earlier this year and are currently at a fraction of oil-linked LNG prices, attracting a number of Japanese utilities to try and secure LNG at Henry Hub-linked gas prices.

EYEING US LNG ON HENRY-HUB GAS PRICING

As part of its response, Tepco is considering importing 1 million-1.5 million mt/year of LNG from the US at Henry Hub-linked gas prices under a long-term contract from as early as 2016 in a bid to lower its fuel costs, Platts reported on August 24.

If this prospective deal is concluded, it could be Tepco's first long-term LNG purchase at Henry Hub-linked prices, a source close to the matter said at the time.

Unlike a number of other Japanese companies, which are securing natural gas liquefaction tolling agreements at proposed US projects with a view to exporting the LNG to countries with which the US has no free trade agreements like Japan, once approvals from the US Department of Energy have been received, Tepco is looking to sign a long-term contract instead, the source said then.

As a result, Tepco is in talks with a number of proposed projects in the US which are seeking approval from the DOE to export LNG to non-FTA countries, the source said then, declining to specify project names.

The DOE has approved a number of applications to export LNG to countries with which the US has an FTA, but has only approved Cheniere Energy's Sabine Pass project in Louisiana for export to non-FTA countries.

The source added that Tepco's actual LNG import volume from the US would be determined after scrutiny of contractual terms on its imports and its capability to receive shale-gas based lean LNG at its import terminals by having a closer look at its storage tank operations.

This is because Japanese power utilities do not normally want to blend lean regasified gas in the same tank as they store richer gas, which has been a barrier for utilities in considering the import of lean gas-based LNG.

Currently, Tepco has long-term contracts to import up to 17.93 million mt/year of LNG from Malaysia, Brunei, Abu Dhabi, Qatar, Australia, Indonesia and Russia. This means Tepco secures around 5 million mt/year of LNG from such arrangements as incremental supplies from its existing long-term contracts, short-term contracts and spot procurements, according to sources.

Tepco's consideration of importing up to 10 million mt/year of lean LNG comes at a time when its long-term contracts to import up to 4.8 million mt/year of LNG from Malaysia and 4.30 million mt/year from Abu Dhabi expire in 2018 and 2019, respectively.

It has started looking for new supply sources, including the US, as well as seeking to renew its existing contracts, the source added in August.

Tepco scrapped its No. 1 460 MW reactor and No. 2, No. 3 and No. 4 784 MW reactors at the Fukushima-1 nuclear power plant on April 20.

This leaves Tepco with the No. 5 784 MW and No. 6 1.1 GW reactors at the Fukushima-1 plant, and four nuclear reactors with a capacity of 1.1 GW each at its Fukushima-2 nuclear power plant.

Tepco also has five reactors with capacities of 1.1 GW each at its Kashiwazaki-Kariwa nuclear power plant in the northwest, where it also has two more reactors with a capacity of 1.356 GW each.

Tepco lost all its nuclear output on March 26 when it shut its remaining 1.356 GW No. 6 nuclear reactor at the Kashiwazaki-Kariwa plant for scheduled maintenance. It remains unclear when it will be allowed to restart any of its nuclear reactors.

--Takeo Kumagai, takeo_kumagai@platts.com --Edited by Wendy Wells, wendy_wells@platts.com

Tweet