Sumitomo and Tokyo Gas agreed to buy 2.3 million metric tons of liquefied natural gas annually for 20 years from Dominion Resources Inc. (D)’s Cove Point project, the trading house said today in a statement. Dominion, which needs U.S. approval to sell to Japan, plans to build and start operating the Cove Point plant in 2017. Dominion, based in Richmond, Virginia, will liquefy the gas from Sumitomo’s assets in the northeast of the U.S.
“If the project is finally agreed, Sumitomo will be able to establish a natural gas and LNG value chain in the U.S.” stretching from extraction to export, Sumitomo said.
Japanese traders, led by Mitsubishi Corp. (8058)’s $6 billion outlay on an Encana Corp. (ECA) shale project announced in February, are stepping up purchases of U.S. and Canadian natural gas assets as they seek to export the fuel in the form of LNG to Asia. The 40-year-old oil-linked price mechanism for Asian LNG means buyers in the region, which accounts for more than 60 percent of global demand, are paying nine times more for gas than U.S. domestic users.
U.S. Henry Hub futures rose 4.8 percent to $2.134 per million British thermal units as of 12:29 a.m. in New York. Japan, which has just one of its 54 nuclear reactors in operation since a March 2011 meltdown at its Fukushima Dai-Ichi plant, paid about $18.85 per million Btu in the first 11 months of last year, according to finance ministry data.
At current U.S. prices, the Japanese partners will be able to sell their contracted LNG in the domestic market at less than $10 per million Btu, Kunio Nohata, senior general manager at Tokyo Gas, told reporters in Tokyo today.
Sumitomo was among the first Japanese traders to invest in U.S. shale with the 2009 purchase of a 12.5 percent stake in the Barnett Shale Gas project in Texas from Carrizo Oil & Gas Inc. (CRZO) Together with its stake in Rex Energy Corp. (REXX)’s Marcellus shale area, the trader has a 140 million cubic feet per day supply of gas, JPMorgan Securities Japan Co. said in a March 19 report.
“For the trading companies the areas for new acquisitions are food, base metals like copper, and especially shale gas and oil,” JPMorgan analyst Akira Kishimoto said yesterday in Tokyo, before the Sumitomo announcement. LNG exports from North America may become one of the main businesses of Japanese trading companies in about five years, he said.
Sumitomo, which also owns U.S. gas trader Pacific Summit Energy LLC, said the Cove Point LNG will be destined for Japan. Cove Point currently acts as an LNG import terminal, operated by Dominion.
The feed for Dominion’s Cove Point LNG, also in the northeast of the U.S., will come from the Marcellus shale project, Sumitomo said. The LNG plant Dominion plans to build will have an annual 5-million-ton capacity, it said.
Japan’s imports of spot LNG surged 20 percent to a record in February, with supplies from Nigeria providing more than half of the total as the country seeks fuels to replace power from nuclear plants that have been shut, customs data showed. Imports under immediate and short-term contracts rose to 1.18 million tons, according to data from the finance ministry.
Japan’s total LNG imports, which include long-term contracted shipments, rose 22.5 percent in February from a year earlier to 7.67 million tons, according to the finance ministry.
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