Tokyo (Platts)--6Feb2013/621 am EST/1121 GMT

Japanese power utility Tokyo Electric Power Company is close to securing a deal to import 2 million mt/year of lean LNG from the US and other sources and has initiated works to set up the necessary infrastructure to facilitate these imports.

Tepco was in the final stages of negotiations with Japanese trading houses Mitsui and Mitsubishi to buy a total of 800,000 mt/year of LNG from the US Cameron project over 20 years starting 2017, Managing Executive Officer Toshihiro Sano told a press conference in Tokyo.

Tepco also said it has secured an additional 1.2 million mt/year of lean LNG from "numerous sources," but did not elaborate.

Tepco said its latest efforts are part of its 10-year action plan announced in November to import up to 10 million mt/year of lean LNG from sources such as US shale plays in a bid to cut its increasing fuel costs.

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Tepco's possible imports 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 23.82 million mt for fiscal 2012-13, up 4.1% from its previous record of 22.83 million mt in 2011-12.

Lean LNG is predominantly methane with small quantities of ethane and has a very low High Heating Value.

Japanese power utilities do not normally want to blend lean LNG in the same tanks in which they store rich LNG and this has been a barrier for utilities in considering imports of the lean fuel.

But Tepco Wednesday said it plans to add two storage tanks with a capacity of 125,000 kl (125,000 cubic meters) each at its Futtsu import terminal by fiscal 2017-2018, running from April to March, for lean LNG imports, and plans to turn its Higashi Ohgishima import terminal solely for lean LNG imports.

Tepco, however, intends to use the Futtsu import terminal for both lean and rich LNG imports but adjustments will be made to pumps and other facilities at the Higashi Ohgishima terminal over the next 10 years to enable this, Sano said.

In order to cut its import costs, Tepco said it is heading for a heads of agreement on the deal and added that it expects to buy Cameron LNG at prices that are linked to Henry Hub gas prices. This will be Tepco's first LNG term import based on a natural gas price benchmark, the company said.

Commenting on its planned purchases of the additional 1.2 million mt/year of lean LNG, Sano said Tepco hopes to conclude the deal "in the next few months" to buy the volume on a long-term contract basis.

Tepco also hopes to buy the 1.2 million mt/year of LNG at a combination of formulas, using natural gas prices or "diversified benchmarks," said Sano, declining to elaborate.

Currently, Tepco imports about 1.2 million mt/year of lean LNG, and 1 million mt/year of that comes from Qatar under a short-term contract, Toshiaki Koizumi, general manager of Tepco's fuel department, told Platts on the sidelines of the press conference.

The rest comes from various sources, including Indonesia's Tangguh project, on a spot basis, Koizumi said.

Separately, Tepco also imports up to 1.2 million mt/year of rich LNG from Qatar through two long-term contracts, Koizumi added.

Tepco's fuel costs have risen due to higher consumption of fossil fuels --- coal, crude, fuel oil and LNG -- following the March 2011 earthquake, 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/year ($1.2 billion) 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 last year and are currently at a fraction of oil-linked LNG prices, prompting a number of Japanese utilities to try to secure LNG at Henry Hub-linked gas prices.

Tepco's plan to import 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.

In August, Platts reported that Tepco was 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.

In April, Sempra Energy said it had signed commercial development agreements with Mitsubishi and Mitsui to develop a natural gas liquefaction export facility at Sempra's Cameron LNG import terminal in Hackberry, Louisiana.

San Diego-based Sempra said then that the agreements "bind the parties to fund all development expenses," including design, permitting and engineering, as well as to negotiate 20-year tolling agreements, based on agreed-upon terms outlined in the commercial development agreements. Each tolling agreement would be for 4 million mt/year.

The Cameron project still requires approval from the US Department of Energy to export LNG to Japan or other nations that have not yet ratified a free trade agreement with Washington.

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 department, however, has already approved Sempra's application to export 1.7 Bcf/d of gas as LNG to countries that have FTAs with the US.

--Takeo Kumagai, takeo_kumagai@platts.com
--Edited by Jonathan Fox, jonathan_fox@platts.com

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