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Gorgon’s Delays May Force Tokyo Gas, Chubu to Pay More for LNG

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Gorgon’s Delays May Force Tokyo Gas, Chubu to Pay More for LNG 

By Dinakar Sethuraman

June 6 (Bloomberg) — Tokyo Gas Co., Chubu Electric Power Co. and Osaka Gas Co. may pay higher prices for liquefied natural gas contracts after delays at Gorgon, Australia’s biggest planned LNG project.

Japan’s largest utilities face increased charges because LNG prices have doubled since they agreed to buy gas from Gorgon in 2005, said Frank Harris, head of LNG at Edinburgh-based energy adviser Wood Mackenzie Ltd. Chevron Corp., the venture’s lead partner, signed up buyers when oil was at $57 a barrel, less than half the record $135.09 on May 22.

Nuclear plant shutdowns in Japan boosted LNG imports by 7.6 percent to a record last year for the world’s biggest user of the fuel. Delays at the Gorgon project, which will tap gas off the coast of Western Australia, falling LNG output in Indonesia and rising demand in China and India have reduced supplies in Asia.

“The Japanese have been spooked by China and India grabbing large volumes,” said Arthur Dixon, an LNG consultant and former head of the marketing unit of North West Shelf LNG, Australia’s largest producer of the fuel. “They are now able to accept the reality of high oil prices and are stepping up to get any supplies coming around.”

Gorgon’s planned LNG output, at 15 million tons a year, is almost 22 percent of Japan’s purchases last year. The development, which has no scheduled start date, has been dogged by regulatory obstacles, spiraling costs, and delays by partners Royal Dutch Shell Plc and Exxon Mobil Corp. Japan purchased 67 million tons of LNG last year for $30 billion, according to the Ministry of Finance.

Confidential Talks

The venture is seeking higher prices for LNG from alternate developments, said a Gorgon official who declined to be identified because talks are confidential.

The project was estimated to cost A$11 billion ($10.6 billion) when planned in 2005 with a capacity of 10 million tons a year. The amount may double to $20 billion because of rising construction costs, according to Wall Street Access, a U.S. securities firm. Gorgon’s partners may increase the capacity to 15 million tons a year, Chevron said in December.

Global LNG consumption is set to increase 10 percent a year through 2015, more than five times estimated gains in crude oil demand, Citigroup Inc. analysts led by James Neale said in an April 15 report. Gas demand is poised to grow as government regulations require power producers to switch to cleaner-burning fuel from coal and oil.

Crude Oil

Japanese utilities are forced to pay record prices for LNG because of increased demand from China and India, said Yasuo Ryoki, a director at Osaka Gas, the second-biggest gas distributor in Japan. The company plans to increase imports 3.7 percent this year to 7.58 million tons for heating, he said in a June 3 e-mail.

“The prices they got for Gorgon were largely lower by current standards,” Wood Mackenzie’s Harris said. “Every deal done today is at parity to oil.”

Noriyuki Narugami, Chubu Electric’s spokesman, declined to comment on negotiations. Tokyo Gas can’t comment on commercial negotiations, said Yoko Iwazaki, an official from the gas resources department of the company.

Japan paid an average 87,833 yen ($839) a ton, or $16.8 per million British thermal units, for spot LNG cargoes in February, more than double prices in 2006 and three times rates in 2003, according to the Ministry of Finance.

China agreed in April to pay about $16 per million BTU for LNG from Shell’s Qatar project, Harris said. That compares with the $6 they agreed to pay for the fuel from Indonesia under a 2006 contract.

Chevron said in March that a formal investment decision on Gorgon will be made in 2010. Exxon Mobil and Shell own 25 percent each.

To contact the reporter on this story: Dinakar Sethuraman in Singapore at[email protected].

Last Updated: June 5, 2008 10:00 EDT

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