Tepco Said to Be in Talks With BP to Buy 500,000 Tons of LNG

Tokyo Electric Power Co., Japan’s largest power utility, is in talks with BP Plc to buy 500,000 metric tons a year of liquefied natural gas, according to two people with knowledge of the discussions.

Tepco, as the company is known, will pay for the fuel using a formula linked to both gas and oil prices, said the people, who asked not be identified because they aren’t authorized to speak to the media.

Tepco is negotiating with potential suppliers to buy as much as 1.2 million tons of LNG a year, said Yusuke Kunikage, a Tokyo-based spokesman, without providing further details. Lynda Goh, a spokeswoman for BP in Singapore, said by phone that the company declined to comment.

Tepco and other Japanese power companies are seeking to move away from oil-indexed prices and reduce fuel costs with all of the country’s 50 reactors still offline after the Fukushima disaster in March 2011. Japan’s nine power companies will almost double expenditure on fuel to 7.5 trillion yen ($73 billion) this fiscal year from three years earlier, the Ministry of Economy, Trade and Industry predicted in October.

“By diversifying supply sources and increasing LNG linked to gas prices, buyers could put pressure on Middle Eastern suppliers in a bid to lower fuel costs,” Osamu Fujisawa, an independent energy economist in Tokyo, said by phone today.

Tepco plans to expand the use of “lean LNG”, such as that from shale gas in North America, to as much as 10 million tons a year, or about half its needs, it said in a business plan released in November 2012.

Henry Hub

Tepco will buy at least 800,000 tons a year of LNG starting in 2017 from the Cameron project in Louisiana, it said in February. Prices will be linked to U.S. Henry Hub, the delivery point for natural gas futures on the New York Mercantile Exchange, a benchmark for the fuel. The company currently buys 20.56 million tons annually through term contracts, according to data compiled by Bloomberg.

Prices in long-term LNG purchase contracts, which usually run for more than 10 years, are typically linked to Brent oil or a basket of prices known as the Japan Crude Cocktail.

Japan paid an average of $15.55 per million British thermal units for LNG in August, according to the latest data from LNG Japan Corp. That compares with an average of about $3.41 in the same month for U.S. natural gas futures traded in New York.

Kansai Electric Power Co., Japan’s second-biggest power utility, agreed with a Singapore unit of BP in November last year to buy about 500,000 tons a year of LNG under a 15-year contract linked to Henry Hub gas prices. LNG will be supplied from BP’s global portfolio, starting in April 2017, it said at that time.

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