New Long Term LNG Supplies from Sakhalin and Malaysia Secured by Tokyo Gas

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). Tokyo Gas (TG) (PNK:TKGSF) (Tokyo, Japan), Japan's largest city gas supplier, has been making moves to secure gas energy supplies through 2020 and beyond. The company has announced that it has agreed to buy 1.1 million tons of liquefied natural gas (LNG) from Russia's far eastern Sakhalin II field. This is the first contract for the massive Sakhalin gas field and when shipments of Russian LNG start in 2007 it will be the country's first ever LNG export and the first Russian gas to go to Asia.

Yutaka Kunigo, general manager of gas resources at TG said that the company would begin by buying a small volume of LNG in the first year of the deal and gradually increase the purchase volume to 1.1 million tons. TG and the Sakhalin Energy Investment Company (SEIC) (Shell 55%, Mitsui 25%, Mitsubishi 20%) are continuing negotiations to enable a fully termed sale and purchase agreement to be signed by 2004.

TG, without revealing details, said that it had been able to negotiate low prices with SEIC compared to their existing supply contracts. Prices have been negotiated down since China negotiated a large price cut from Australia at the conclusion of its first LNG contract in 2002. Industry sources reported that China's purchase contract was estimated to be about 20% lower than the current LNG supply contracts to Japan, Taiwan, and South Korea.

A spokesman for Shell said that the TG deal was a breakthrough for SEIC, for Russia, and for Shell. He said that SEIC was delighted that TG shared Shell's confidence in SEIC's ability to offer a competitive and reliable source of long-term gas supply. The Sakhalin II project is expected to have a total LNG capacity of 9.6 million tons per annum, when production begins in late 2006.

The Sakhalin field lies off the northern coast of Japan's Hokkaido Island which makes it an excellent source of supply. Japan imports LNG from Malaysia, Alaska, Brunei, Australia, Indonesia, and Qatar under long-term contracts. TG reports that that its use of LNG, estimated at about 7.74 million tons in the twelve months to the end of March, was expected to rise to 9.32 million tons in 2007/8.

TG and Tokyo Electric Power (PNK:TEPFK, Tokyo, Japan) recently signed new agreements with Malaysia worth $20 billion to supply LNG from its Bintulu gas complex. The LNG covering both contracts will be delivered form Bintulu to the receiving terminals of the Japanese companies in Tokyo Bay.

Up to 5.6 million tons/year of LNG will be supplied by LNG tankers owned by Malaysia International Shipping Company (MISC), a subsidiary of the state resources company Petronas. Tankers owned by TEP and TG will transport the LNG balance of up to 1.8 million tons/year. Four LNG tankers under construction in Japan will be delivered to MISC between September 2003 and April 2005 giving the company an LNG carrier fleet of 19 vessels.

The opening the new $4.3 billion Petronas LNG plant, MLNG Tiga, makes the Bintulu LNG complex the world's single largest LNG production facility with a combined capacity of about 23 million tons/annum. Tiga is the third LNG plant on the site and the commissioning of its two LNG trains will be added to the existing six train facilities in operation.

The Petronas project to build Tiga and revamp and develop existing facilities was contracted to a consortium led by Halliburton's Kellog Brown & Root (NYSE:HAL) (Houston, Texas) and the Japanese JCG Corporation (PNK:JCGLK) ( Tokyo, Japan).