Japan makes a stand against LNG pricing

Prospect of rising prices has Japan fighting back. Will LNG producers be affected?

The prospect of rising LNG prices has the world’s largest LNG importer worried, and the country hopes to team up with others to make a stand against current pricing methods.

Japan has become heavily reliant LNG for energy in response to problems with the country’s nuclear reactors after the 2011 tsunami. The country’s Fukushima nuclear plant was severely damaged and is suffering ongoing problems. According to the Associated Press, LNG-powered power plants provided about 30% of the country’s electricity in 2011, but now contribute over half.

Japan’s industry minister Toshimitsu Motegi wants to put together an International Joint Study Group with other big LNG consuming countries to come up with ways to lower the cost going forward. Bloomberg has reported that Japan will spend 1.6 trillion yen, or $17 billion, more on LNG in 2013 than it did in 2010.

One prominent idea has been to push for a de-coupling of the price of LNG, which is linked to the price of oil. Prices could then be set by spot prices which are currently lower than the average price paid by Japan.

Australian companies Santos (ASX: STO) and Origin Energy (ASX: ORG) are among several companies to have spent billions over the last five years on mammoth LNG projects, which will start producing next year.

Could Japan’s backlash have an impact on these producers? It is still early stages in Japan’s planned consortium, but the power of buyers has been ratcheting up in the last year. Woodside Petroleum (ASX: WPL) has already found itself under increasing pressure for lower prices from two of its major buyers, Tokyo Gas and Kansai Electric.

The key driver of the pressure is the forecasted rise in shale gas production out of the US. The volumes are large enough that previous LNG import terminals are being converted to export terminals to sell internationally.

Foolish takeaway

Australia’s LNG producers will be all too aware of the potential pricing risk facing them and will understand the need to work with buyers to ensure they will earn an acceptable return on the billions of dollars sunk into their investments.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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