Sydney (Platts)--20Nov2012/405 am EST/905 GMT

Emerging Australian LNG producer Santos believes LNG contracts will mostly remain linked to crude oil prices due to the importance of security of supply to Japanese utilities, who are the world's biggest buyers of the fuel.

"It is an important factor that you can buy Henry Hub gas and transport it to Tokyo Bay for about $7/MMBtu, but it's a factor that probably in the long term is going to be on the margin," Santos CEO and Managing Director David Knox told the Australian Institute of Energy Conference in Sydney Monday.

At current Henry Hub prices it would be theoretically possible to deliver LNG from North America to Tokyo Bay at around $11/MMBtu, compared with the Japanese spot price of around $12.50/MMBtu and Australian LNG price of $14-14.50/MMBtu, Knox said. Henry Hub cash averaged $3.455/MMBtu on Friday.

"The key thing if you are in Japan and you are running a major utility is security of supply," according to Knox. To maintain security, Japanese buyers "need multiple sources of supply and they like very much to look right the way through to the reservoirs," he added.

"They like to know that the molecules are there in the ground and they will, through prudent operators, be delivered into Tokyo Bay," Knox said. "I suspect there will be a mixture of the way contracts are linked but I think ... fundamentally [oil price-linking] will remain and the reason it will remain is [because] of security of supply being so important."

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Knox said he believed regulators would allow North America to export 5-10% of domestic gas consumption. "That's 30-40 million mt/year in a global LNG market by 2025 of 450 million mt/year, so less than 10% of the global LNG market," he added.

Japan imported 78.5 million mt of LNG in 2011 and is expected to take 82.2 million mt in 2012, according to FACTS Global Energy figures, presented at the AIE conference Tuesday. FACTS sees Japan's demand rising to 84.3 million mt in 2015 and 88.5 million mt in 2020.

Earlier in the day, Japan's Kansai Electric said it had signed a "key terms agreement" to buy about 500,000 mt/year of LNG from BP Singapore for 15 years from fiscal 2017-2018 at Henry Hub-linked gas prices.

Santos, which claims the top spot among Australian domestic gas producers, holds stakes in four producing and developing LNG projects in the region. Santos owns 11.5% of the ConocoPhillips-operated Darwin LNG project, which produces 3.5 million mt/year.

The company also has 13.5% of the 6.6 million mt/year Papua New Guinea LNG project, currently under construction by operator ExxonMobil and scheduled for startup in 2014. In Australia, Santos holds a 30% operating stake in the 7.8 million mt/year coalseam gas-based Gladstone LNG project in Queensland, approved in January and slated to start up in 2015.

In addition, Santos is targeting a final investment decision in 2014 and first production in 2018 at its Bonaparte floating LNG project off northern Australia. The company holds 40% of the planned 2 million mt/year facility in a joint venture with GDF Suez.

--Christine Forster, christine_forster@platts.com --Edited by Haripriya Banerjee, haripriya_banerjee@platts.com

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