Japan’s top gas utility and major LNG importer, Tokyo Gas, has signed the world’s first coal price-linked LNG heads of agreement (HoA) with Shell Eastern Trading, a Singapore-based subsidiary of Royal Dutch Shell. LNG sales agreements are usually linked to crude oil prices. But Tokyo Gas is seeking to diversify LNG suppliers and purchase contracts to procure the fuel at stable prices.
As part of such efforts, Tokyo Gas started importing shale gas-based LNG from the US, where natural gas is priced primarily against Henry Hub, in 2018.
Under the basic agreement with Shell Eastern Trading, Tokyo Gas will purchase an average of about 500,000 tpy of LNG over 10 years from April 2020, to March 2030, on a delivered ex-ship (DES) basis, the Japanese company said on April 5.
The LNG to be purchased by Tokyo Gas from Shell Eastern Trading will come from Shell’s global LNG portfolio. The annual amount of LNG to be purchased from the Shell subsidiary is equivalent to about 4% of Tokyo Gas’ yearly LNG purchases.
Shell’s vice president, Steve Hill, expressed delight in working with Tokyo Gas and “offering this innovative solution to meet their energy needs. Our broad portfolio enables us to provide reliable LNG supply as well as tailored solutions including flexible contract terms under a variety of pricing indices.”
Tokyo Gas’ managing executive officer, Kentaro Kimoto, said this deal would “enhance further diversification of price indexation pursued by Tokyo Gas. We will continue to tackle new challenges that would contribute to the development of [the] LNG industry.”
This is not the first time Tokyo Gas has chosen a new approach for LNG deals. In February, it struck a deal to buy 2.6 million tpy of LNG from the proposed Mozambique LNG project, which is due to reach FID this year.
This deal was notable in that Tokyo Gas and Centrica agreed to handle the purchases jointly, allowing cargoes to be diverted to meet needs in different geographic markets.
Coal has been used as a price link for other gas deals, for instance in an agreement between Gazprom and Finland, but this is the first time it has been used to price LNG.
Short-term trends in coal pricing highlight the feedstock's challenges. Prices have fallen by around 30% since the start of the year.