INTERVIEW: Tokyo Gas backs destination flexibility in LNG contracts; focus on diversification

Japanese LNG importer and gas supplier Tokyo Gas continues to back destination flexibility in its LNG contracts and is focused on supply diversification, including price diversification from traditional oil-indexed LNG, Yumiko Yao, executive officer, senior general manager at Tokyo Gas’ LNG Trading unit, said in an interview on the sidelines of the LNG Producer-Consumer Conference 2024 in Hiroshima.

The country's newly-appointed Minister of Economy, Trade and Industry Yoji Muto said last week that securing long-term LNG supply contracts linked to stable pricing was "very important" for energy security, effectively urging Japanese companies to secure long-term deals.

The government is endorsing the importance of LNG in its new energy policy, which creates an environment that will allow companies to consider signing long-term contracts, Yao said.

She said Tokyo Gas evaluates several factors in signing LNG contracts, including the economics, flexibility options, stable supply and the timing of cargo delivery.

When asked about the company’s position on destination restrictions, Yao said Tokyo Gas’ position hasn’t changed over the years.

“We would like to see more destination clause flexibility,” she added.

Destination restrictions in long-term contracts have been a bone of contention between suppliers and buyers as they restrict the delivery and usage of natural gas to a limited region, preventing resale on the open market.

Several Japanese LNG importers, including Tokyo Gas, are expected to see their long-term contracts expire over the next few years, opening up negotiations for renewals at current market levels.

“In terms of the length of the contract, we still think the long-term contract is important. However, the demand fluctuates so we would like to combine midterm or even short-term [contracts],” Yao said.

Tokyo Gas was talking with many existing sellers and new sellers, she said.

“So, who we will have to buy from will depend on the economics and the flexibility of the contract and supply stability. We haven't decided yet. We'll see how things come around,” she added.

Yao said the market had changed compared to a few years, but it wasn’t fully clear whether pricing levels had become favorable, although prices seem to be more stable.

“I think the liquidity of the market is more than before, but still LNG is not totally a commodity. More liquidity of the market will be favorable,” she said.

Tokyo Gas has been focused on many ways of diversification, including different procurement sources and diversified contracts that also means having a different index, Yao said.

“It used to be only oil-linked, but now is more JKM-linked or Henry Hub-linked.”

Winter demand

For the upcoming winter market, Yao said Tokyo Gas was monitoring customer demand and still estimating the amount of LNG needed, depending on different assumptions and forecasts.

In previous years like 2022 or 2023, the Russian invasion of Ukraine was the unexpected factor and the main issue was low European gas storage, but Europe almost has full storage now and is well prepared for a severe winter this year, she said.

“That gives more comfort level in the market in general. So, the situation compared to 2022 is I think a little different.”

About Tokyo Gas’ exposure to Russian LNG volumes from projects that have so far not been sanctioned by the US, Yao said it was very difficult to predict what would happen in future.

“If something happens, we will consult with the government and then see what the appropriate steps are to take. But I understand that so far, the Japanese government supports our existing contract. And they understand that it is important for us to supply our customers,” Yao added.

Overseas investments

Meanwhile, Tokyo Gas is keen on investments in Southeast Asia because for many Asian countries it is not realistic to jump to renewable energy right now and there should be a smooth transition from coal-fired to gas-fired power, Yao said.

“That's where we can contribute our experience in dealing with LNG. So not only in the Philippines, but in other Asian countries, we would like to enter in those energy-related business, which I think is important for those countries to go to net zero,” Yao added.

In May, the Philippines’ First Gen LNG Holdings sold a 20% stake in its subsidiary FGEN LNG Corp. to Tokyo Gas. FGEN LNG is the owner and operator of a floating LNG import terminal called the Interim Offshore Terminal Project, located in First Gen’s Clean Energy Complex in Batangas City. Later in June, First Gen awarded a spot tender to TG Global Trading Co., a subsidiary of Japan’s Tokyo Gas.