Japan hedges against LNG price-hikes by buying U.S. shale

Gas tanks in Japan
Source: DollarPhotoClub

Chubu Electric Power Co, the world’s third-biggest liquefied natural gas (LNG) buyer, is planning to buy acreage in the U.S. shale plays to hedge itself against price-hikes in American LNG – Reuters reported today.

Japanese power companies are stepping up plans to buy cheap LNG from U.S. shale projects from as early as next year, in a bid to cut the cost of soaring LNG imports in the wake of a nuclear power shutdown following the Fukushima disaster.

Today Nippon Steel & Sumitomo Metal Corporation (NSSMC) announced that its 7% nickel steel will be used to build an LNG storage tank at Soma Port terminal in Fukushima Prefecture, Japan, for imported shale gas from Canada.

The Soma LNG terminal will be used for imported liquefied shale gas produced in British Columbia, Canada, and is due to be completed by fiscal 2017.

Meanwhile, Chubu has agreed to buy 2.2 million tonnes of LNG a year from Freeport LNG project in Texas from 2018.

Buying an upstream stake would help Chubu hedge its fuel expenses by offsetting feedstock costs in the event of a rise in the Henry Hub U.S. domestic gas benchmark price.

“Natural hedging would be the main purpose,” Hiroki Sato, general manager of Chubu’s fuels department and head of its trading business, said in an interview. The firm would look to hedge only part of its purchases, he added.

Chubu, which provides electricity for Japan’s third-biggest economic region, would need to purchase a stake covering production of about 107 billion cubic feet a year to provide a full hedge, equivalent to about 2 percent of output in the giant U.S. Marcellus region. The company has not yet decided on a stake.

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