An unprecedented shortfall in Japan’s liquefied natural gas supplies through 2017 is poised to push cargo prices toward a two-year high, benefiting suppliers from BG Group Plc to Royal Dutch Shell Plc.

The nation, the world’s biggest buyer, has long-term contracts to buy 76 percent of the LNG it will consume this year, meaning it will have to purchase at least 21 million metric tons in the so-called spot and short-term markets, according to data from Tri-Zen International Inc. Asian spot prices, or the cost of cargoes for prompt delivery, rose to $18 per million British thermal units in May, the most in at least two years, before sliding to about $13 last month, according to World Gas Intelligence data. Japan paid as much as $19 for some cargoes in September, government data show.

Japan’s failure to renew long-term purchase contracts with Indonesia, the world’s third-biggest supplier, has left buyers including Tokyo Electric Power Co. seeking extra imports as the loss of almost all the country’s atomic capacity boosts demand. BG more than doubled sales to Japan in the first nine months of the year, coinciding with a 25 percent increase in LNG operating profit, while Shell attributed a 2.3 percent gain in third- quarter net income to increased earnings from the fuel.

“Spot prices will remain firm and could go up from their current levels as demand picks up in the winter,” Shantanu Bhushan, a Gurgaon, India-based analyst at Drewry, a shipping- research company, said in an interview. “Issues with nuclear power continue in Japan.”

Indonesian Contracts

Japan is forecast to require 88 million metric tons of LNG this year, while it has contracts for about 67 million tons from countries such as Australia, Malaysia and Qatar, according to Tri-Zen, a Singapore-based energy researcher whose clients have included Marathon Oil Corp. and Lukoil OAO. Until 2017, when gas from new export projects in Australia and the U.S. boost Japan’s contracted volumes, annual demand will outstrip supply by at least 9.4 million tons, according to the estimates.
“A lot of the Indonesian contracts haven’t been renewed,” as the South Asian country keeps the supply to meet its domestic needs, said Tony Regan, a consultant with Tri-Zen in Singapore. Japan bought 365,526 tons from Indonesia in September, down 46 percent from September 2011 and the lowest monthly imports in Finance Ministry data going back to February 1999.
Much of that uncontracted demand will be satisfied by gas offered through short-term commitments from Qatar, which agreed in September to boost supplies to Japan. Still, the Asian nation’s presence in the spot market will be sufficient to keep prices near their current levels, Regan said in an e-mail.

Spot Prices

The country paid an average $16.84 per million British thermal units for contracted and spot LNG in September, up 2.3 percent from a year ago, according to the Ministry of Finance in Tokyo. The prices, which include term and spot purchases, are down 6.8 percent from a record $18.07 in July.
Japan is paying more for LNG from countries such as Nigeria and Equatorial Guinea, its two biggest suppliers that don’t currently have long-term contracts, according to finance ministry data. Japanese buyers paid about $17 per million Btu for gas from Nigeria in September, up 29 percent from a year earlier. Cargoes from Equatorial Guinea, where ministers from the world’s biggest gas exporters met yesterday, cost about $19 per million Btu, up 5.8 percent from September 2011.

Spot LNG cargoes cost $13.20 per million Btu in the week through Oct. 22, according to an assessment by New York-based World Gas Intelligence. They touched the year’s low of $12.75 per million Btu on Sept. 27, after climbing to $18.40 on May 28, and were at $14.65 in the week through Nov.19.
Nuclear Outages

Japan has turned to replacement energy sources after losing almost all of its nuclear output following the March 2011 earthquake and tsunami, which caused the meltdown of three reactors at Tokyo Electric’s Fukushima Dai-Ichi plant. That’s boosting energy costs just as economists forecast the country will enter its third technical recession since 2008 this quarter. Japanese recessions are officially defined by a government-charged panel that considers data beyond gross domestic product figures.

Only two of the nation’s 50 functioning reactors, all of which were idled for safety checks since the disaster, have been permitted to restart. Japan’s nuclear utilization rate was 5.2 percent in October, compared with 18.5 percent a year earlier, according to the Federation of Electric Power Companies.
The country imported 66.1 million tons of LNG during the first nine months of this year, up 25 percent from 52.7 million during the same period in 2010, before the nuclear accident, according to finance ministry data.
Spot prices may increase if colder-than-expected weather increases demand for gas as a heating fuel, according to Noel Tomnay, the head of global gas research for Wood Mackenzie Ltd. in Edinburgh, Scotland. Japan is expected to experience average or slightly above-normal temperatures through the winter, according to Commodity Weather Group LLC in Bethesda, Maryland.

Cold Weather

“It depends on the weather and it depends on the case of nuclear coming back, so our view is each of those two conditions could still mean that Japanese buyers will be inclined to be active in the spot market,” Tomnay said. “Any participation in the spot market has an impact of increasing prices.”
Qatar Liquefied Gas Co., the world’s largest LNG producer, boosted short-term supplies to Japan by 11 million tons for a total of 20 million tons to be delivered over “several years,” it said Sept. 12, helping fill some of the nation’s shortfall.
Tokyo Electric, which has a long-term contract through 2021 to buy 200,000 tons a year from state-owned Qatargas, as the company is known, said in June it agreed to purchase an additional 1 million tons a year starting August 2012.

BG, Shell

The utility’s additional imports, along with other short- term sales to Japanese buyers, are believed to be part of the 20 million tons of supplies, Tomnay said. Other Qatari supplies are probably being bought through a relaxing of volume limits in existing contracts, he said.

BG delivered 52 cargoes of LNG to Japan in the first nine months of this year, compared with 24 a year earlier, the company said in its quarterly earnings statement on Oct. 31. LNG operating profit rose 25 percent during that period from a year earlier to $2.2 billion.
“We have sold LNG to many different Japanese buyers under a range of spot, short-term and mid-term contracts,” said Kim Blomley, a spokeswoman for BG in Reading, England.
Shell’s LNG sales rose 4 percent to 4.97 million tons in the third quarter from a year ago, boosted by the Pluto project in Australia, which provides fuel to Tokyo Gas Co. and Kansai Electric Power Co., the company said in a Nov. 1 statement.

‘Very Robust’

The spot LNG market is “very robust” and Shell’s challenge “is ensuring we have enough supply to meet that obvious market demand,” Simon Henry, the chief financial officer, said on a conference call Nov. 11. Sam Glennon-Bond, a spokesman for Shell, didn’t reply to an e-mail seeking comment.
Shell shares rose 0.2 percent to 25.78 euros ($33.15) in Amsterdam yesterday, trimming their decline this year to 8.4 percent. BG shares climbed 2.8 percent to close at 1,060 pence ($16.90), paring their drop this year to 23 percent.

“Prices have been increasing and are expected to continue to rise as the winter comes on,” R.K. Garg, finance director at Petronet, India’s biggest LNG importer, said by phone from New Delhi on Nov. 9. “Japan and China are buying more cargoes, and there are supply issues in Yemen and Nigeria.”
A pipeline supplying natural gas to Yemen’s biggest liquefaction plants was attacked for the seventh time in a year, Yemen LNG said Oct. 31. Nigeria LNG Ltd., operator of the largest LNG production plant in Africa, also faced a drop in output last month as flooding and theft reduced fuel supplies.
In New York, natural gas for December delivery rose 7.1 cents yesterday to $3.903 per million Btu on the New York Mercantile Exchange, the highest settlement price since Oct. 31, 2011. The futures were at $3.914 today, up 15 percent from a year ago.

By Jacob Adelman and Rakteem Katakey, Bloomberg News | Nov 22, 2012 3:29 PM ET
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