August 1, 2022

WWW.ENERGYINTEL.COM

Japan Seeks to Retain Sakhalin-2 Stakes

Japan wants to retain stakes in the Sakhalin-2 project in Russia’s Far East.

It informed the US of its decision just before a deadline, imposed by a Russian decree, that expired on Jul. 31.

Japanese term buyers have also been cornered to accept revisions to their existing contracts.

Japan’s trade and industry minister Hagiuda Koichi said over the weekend that he relayed Japan’s position during the inaugural "two-plus-two" talks held by foreign and economic chiefs of Japan and the US in Washington last Friday.

Russian leader Vladimir Putin signed a decree at end-June to transfer the ownership of the Sakhalin-2 upstream and LNG project from the Bermuda-registered Sakhalin Energy Investment Co to a new Russian-registered entity. The decree gave foreign shareholders Shell, Mitsui and Mitsubishi a month to notify the Russian government on whether they wanted to apply for respective stakes in the new company. Their decisions will be subject to approval by Russia.

Shell said last week that it is unlikely to seek a stake in the new operator.

Mitsui and Mitsubishi

Japan is the largest LNG buyer from the 9.6 million ton per year Sakhalin-2 which accounts for almost 10% of the country’s total imports. Japanese buyers have continued to lift term cargoes from the project since the start of the Ukraine war, though imports are down historically (see graph).

Japanese trading house Mitsui owns 12.5% and Mitsubishi 10% in Sakhalin Energy.

Mitsui's Chief Executive Tatsuo Yasunaga told local media last month it was important to maintain Sakhalin-2 LNG supplies to Japan but he had no information about the conditions for investment in the new company. Mitsui will consult with Japan’s government, but "if [Russian] conditions are unacceptable, then we may abandon” the project, he reportedly said.

Created with Highcharts 9.0.0(million tons)SAKHALIN-2 LNG EXPORTS TO JAPAN200820092010201120122013201420152016201720182019202020212022012345678910Source: Kpler

Out of Step with G7 Allies

Trade and industry minister Koichi said he was aware of calls for Japan to withdraw from the project. However, he said “Japan’s withdrawal would mean ceding its rights to a third party and Russia would reap huge profits as a result” – in a thinly veiled reference to China.

The minister said he has explained Japan's intention to maintain the status quo to US officials. “I believe the US side understood our position.”

Japan’s decision to retain its position in Sakhalin-2 is expected to open itself up to criticism from G7 countries and possible tough terms and conditions from Moscow.

“It is likely that Russia will accept Japan's application to maintain stakes, yet this is not a foregone conclusion,” said James Brown, associate professor of political science at Temple University, Japan campus, noting some Russian politicians have called for Japan to be excluded from the project entirely.

Since Japan seems to have cleared its decision with the US, Brown expects greater criticism may come from Europe, where countries have taken the difficult decision of placing solidarity with Ukraine over their own energy security. “Some in Europe will feel that Japan, despite its rhetoric, is not doing its part.”

Change in Payee Bank

Meanwhile Russia is strong arming Japanese buyers into accepting revised contractual terms. Buyers have little option but to accept.

Buyers have been asked to pay to a Moscow branch of an unnamed European bank. They would still be allowed to pay in US dollars and LNG supplies would be uninterrupted, according to Japanese newspaper Nikkei. Previously, buyers have been paying in US dollars to an offshore bank based in Singapore.

Operator Sakhalin Energy did not respond to questions at press time.

Japan is still waiting for full details of the new Russian entity to be announced. "All (currency) options are still possible at this stage," Brown reckons.

It remains to be seen whether Moscow will insist its LNG buyers pay in rubles in order to be consistent in its approach with European buyers or explore alternative currencies such as Japanese yen.

A total of eight Japanese power and gas utilities — Jera, Tokyo Gas, Osaka Gas, Hiroshima Gas, Toho Gas, Tohoku Electric, Kyushu Electric, Saibu Gas — have contracted to buy a combined 5 million tons/yr from Sakhalin-2. These supplies are currently priced much more competitively than today’s high LNG spot prices above $40 per million Btu, which means buyers would want to cling on to their term supplies amid a tightening of global supplies.

Tohoku Electric and Kyushu Electric have reportedly agreed to Moscow’s request for a change in payee bank while other buyers are still considering it. Jera and Tokyo Gas declined to comment.

Another buyer said his firm is still gathering information. “So it is uncertainty for now.”

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Who Are Sakhalin-2's LNG Term Offtakers
BuyerVol. (million tons/yr)
Japan
Jera 2.00
Tokyo Gas1.10
Kyushu Electric0.50
Toho Gas0.50
Tohoku Electric0.42
Osaka Gas0.20
Hiroshima Gas0.21
Saibu Gas0.07
Others
Korea Gas1.50
Shell1.00
Gazprom Global LNG1.00
Total 8.50

Clara Tan, Singapore

Australia Warns of Bigger Gas Shortfalls in 2023

Australia’s competition watchdog said Monday its interim review showed that a gas shortfall in the east coast of the country would widen to 56 petajoules (PJ) (52.8 billion cubic feet) in 2023, renewing calls for LNG exporters to divert more gas into the domestic market.

To ensure energy security, the Australian Competition and Consumer Commission (ACCC) recommends the resources minister Madeleine King initiate the first step of the Australian Domestic Gas Security Mechanism (ADGSM). The mechanism, also known as the “gas trigger,” gives the federal government the power to limit LNG exports during domestic gas shortages.

“Our latest gas report finds that the outlook for the east coast gas market has significantly worsened,” ACCC Chair Gina Cass-Gottlieb said. “We are also strongly encouraging LNG exporters to immediately increase their supply into the market.”

The watchdog last said in February that the southeastern states of Victoria, New South Wales and Tasmania are expected to face a gas shortage of 10 PJ of gas — equivalent to 9.4 billion cubic feet of gas — starting from this year instead of 2024.

There are three LNG export projects on the east coast — the Australia Pacific LNG plant operated by ConocoPhillips, Gladstone LNG operated by Santos and Shell’s Queensland Curtis LNG plant — with a combined production capacity of 25.3 million tons per year. Asian spot LNG prices have been trending higher due to higher European gas prices and prices are expected to go even higher as winter approaches due to stronger competition for LNG in the global market — a factor which may have exacerbated Australia's concerns over its own energy security.

ACCC’s Claims

The anticipated shortfall of 56 PJ represents about 10% of east coast annual demand for gas, or around 14 LNG cargoes. According to the ACCC, the east coast is forecast to produce 1,981 PJ of gas in 2023 of which 1,299 PJ, or 65.6%, is forecast to be exported overseas under long-term contacts. LNG exporters are also expected to produce a further 167 PJ over what they require to meet their contractual commitments.

This excess gas is not contractually committed and could be supplied into either the domestic market or the international LNG market.

“Increasingly, LNG exporters have diverted most of their excess gas to overseas spot markets, with as much as 70 per cent of the excess volume going overseas in recent years,” Cass-Gottlieb said.

“If LNG exporters were to provide all of their excess gas to overseas markets, the east coast gas market would be facing a supply shortfall 56 PJ.”

The ACCC report highlights concerns that some LNG exporters are not engaging with the domestic market in the spirit of a heads of agreement signed in early 2021, which commits LNG exporters to offer uncontracted gas to the domestic market first on internationally competitive market terms before it is exported.

Government’s Response

Resources Minister King responded to ACCC’s report by outlining a range of government actions to safeguard Australia’s gas supplies, including plans to issue a notice of intent to make a determination as to whether to trigger the existing ADGSM. Gas producers will be able to provide information on gas production and export volumes once the notice of intent is released.

However, the notice of intent can only be issued when the regulations extending the ADGSM are in place, expected later this month. The government wants to extend the ADGSM, which is due to expire on Jan. 1 2023, to January 2030 with a review due in 2025.

The minister said she would make a decision by early October after consulting LNG exporters and Australia's trading partners (see graph below).

King added her office will open consultations on reforms to the existing ADGSM which is "a blunt instrument and a measure of last resort" so that it would be "an effective tool and is fit for purpose."

It also wants to start negotiations on a new heads of agreement with east coast LNG producers which is also due to expire in January 2023.

The ACCC report was released shortly after Australia witnessed a surge in demand for gas for power generation due to coal-fired plant outages and strong heating demand. The surge in demand has triggered a steep rise in prices for both gas and power and nearly led to blackouts in eastern Australia in June.

Analysts have expected Australia's new Labor government to be more willing to intervene to bring down domestic gas prices and adopt a tougher approach under the ADGSM.

Created with Highcharts 9.0.0EASTERN AUSTRALIAN LNG EXPORT CUSTOMERS (2022, YTD)(million tons)ChinaChinaSouth KoreaSouth KoreaJapanJapanMalaysiaMalaysiaSingapore RepublicSingapore RepublicChileChileThailandThailandSource: Kpler

Clara Tan, Singapore

Woodfibre LNG Brings on Enbridge

Canadian midstream giant Enbridge has agreed to invest in the construction and operation of the Woodfibre LNG export project.

Woodfibre LNG is a 2.1 million ton per year LNG export terminal with 250,000 cubic meters of floating storage capacity being built near Squamish, British Columbia.

The project is underpinned by two long-term offtake agreements with BP Gas Marketing for 15 years, representing 70% of the capacity, with additional commitments in development for up to 90%.

Woodfibre LNG announced in April that it had issued a Notice to Proceed to global engineering and construction company McDermott International and that the project is expected to be in service in 2027.

“Enbridge is an accomplished North American energy company with substantial natural gas operations in BC,” said Christine Kennedy, president of Woodfibre LNG.

The partners will jointly participate in project execution and governance of ongoing operations, while developer Pacific Energy retains responsibility for daily operations.

Billion Dollar-Plus Investment

Under a partnership agreement, Enbridge will invest in a 30% ownership stake in the $5.1 billion Woodfibre LNG project, with Pacific Energy retaining the remaining 70% stake in the facility.

Capital for the project includes a contribution to aid construction for the expansion of FortisBC Energy’s Eagle Mountain to Woodfibre pipeline, which will connect the facility through FortisBC’s system to Enbridge’s T-South natural gas transmission system.

“This partnership is a milestone for the Woodfibre LNG project,” said Ratnesh Bedi, President of Pacific Energy, adding that it “further accelerates Canada’s ability to be a meaningful player in the global energy transition."

The investment comes on the heels of an LNG Canada agreement with its Coastal GasLink pipeline that will pave the way for completion of a 416 mile pipeline to supply the future 18 million ton/yr export plant in Kitimat, British Columbia.

Boxes Checked

Woodfibre LNG will use electric motor drives powered by renewable hydroelectric power, "making this one of the lowest-emission LNG export facilities in the world," the company said.

The company said that the project is the only one in Canada with a non-treaty Indigenous-issued environmental assessment certificate, the first project approved under the government of Canada’s “Five Principles” for environmental assessment, and has received all major federal, provincial and First Nations approvals.
Michael Sultan, Washington


In Brief

CPC Taiwan Hikes LNG Prices

State-owned CPC Taiwan hiked its domestic rates for natural gas supply to power generation companies by 5%, effective Aug. 1, a company spokesperson stated, citing the impact of rising global LNG prices.

As a result, state-owned Taiwan Power and several IPPs which use LNG will pay NT$18.47 per cubic meter, up from NT$17.59/cm.

Industrial users will also continue to pay NT$12.78/cm for LNG from CPC and households will continue to be charged NT$12.09/cm.

CPC's supply cost of LNG to industrial users will remain NT$9.37/cm, while household users will continue to pay NT$8.88/cm for LNG.

The CPC spokesperson said the rate hike will add NT$6.6 billion in revenue.
Dennis Engbarth, Taipei


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India39.0739.5339.1539.5238.7338.5639.9938.2239.9139.1838.4038.1338.49
Sodegaura, Japan39.7441.1341.1541.2339.7136.2940.7638.6340.6241.5838.9638.1239.91
Zeebrugge, Belgium37.5835.9535.5936.0337.0837.4336.7135.5736.5635.5837.2036.2837.30
Huelva, Spain38.0536.4636.1036.5337.5337.3337.1936.0037.0536.0937.5836.6037.60
Isle of Grain, UK33.2431.6531.3131.7232.7833.0932.5031.2932.2531.3032.8731.9932.97
Everett, US6.475.115.445.166.206.080.015.825.624.806.65----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback28. Feb14. Mar28. Mar11. Apr25. Apr9. May23. May6. Jun20. Jun4. Jul18. Jul1. Aug102030405060Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia0.0042.34-0.5942.34
SW Europe0.0038.731.9338.73
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.058.288.238.73
NBP, UK (futures)-0.3342.7943.1239.26
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF1.5859.2257.6450.67
Zeebrugge (Belgium)2.0529.3527.3030.23
German NCG1.2656.9855.7233.66
NBP (UK)1.7234.0632.3531.49
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.188.168.348.52
Corpus Christi, Texas-0.317.808.118.34
Cove Point, Maryland-0.397.447.837.88
Elba Island, Georgia------8.40
Nymex Henry Hub Futures
Near Month0.058.288.238.73
Second Mth0.058.268.218.57
Third Mth0.058.338.288.55
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaAug '21Sep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Aug '…020406080Energy Intelligence