WOODSIDE has criticised the Japanese government's intervention in the LNG market, saying it was driving gas buyers to big losses and stalling the development of new projects in Australia.
Mark Hanna, senior general manager of LNG pricing at Woodside, told a conference in Tokyo yesterday Japan's Ministry of Economy, Trade and Industry was distorting the LNG market, "resulting in uncertainty and creating profitability pressures on Japanese utilities".
He said Japanese power companies -- among the world's largest LNG buyers -- were posting losses because they were being prevented from raising prices to the extent needed, and from paying reasonable prices for their gas, at the ministry's insistence. As a result, power companies were becoming increasingly reluctant to commit to large capital-intensive projects such as those proposed in Australia, he told a gathering of Japanese and Australian business leaders.
Over the past year the Japanese government has repeatedly declared its intention to smash the current oil-linked pricing of LNG in Asia in favour of a pricing linked to US domestic gas prices, which are at historic lows of less than $4 per million British thermal units. At the same time it has been pressuring utilities to invest in shale gas supplies from the US in an attempt to bring down prices from producers in Australia and the Middle East.
Mr Hanna said the actions had created "pressure to purchase US shale gas based on the lure of cheaper prices which may not be sustainable and has a higher-risk profile".
The comments -- made to the annual Japan-Australia Joint Business Conference in Tokyo -- mark what is believed to be the first time an Australia gas industry executive has publicly criticised the Japanese government for its intervention in the market.
Mr Hanna, a 25-year veteran of the LNG industry, said the pressure from the ministry meant buyers were shying away from committing to long-term agreements to develop conventional LNG projects.
"The reluctance of Japanese buyers to commit to projects other than US shale gas will result in delays in projects other than US-supplied sources," he warned.
Woodside is a major producer of LNG and has been exporting gas from the North West Shelf to Japan for several decades.
Mr Hanna told the conference that although gas trading would become increasingly flexible in the future, oil-linked prices and long-term contracting would
survive until at least 2020. Any future pricing model that incorporated an element of US prices would have to feature a floor price and long-term contracts to make projects such as Woodside's Browse venture in Western Australia viable.
"If we are looking at a new project like Browse that's in the market now, the capital investment could be tens of billions of dollars. Whether the price is indexed to Henry Hub (US domestic) prices or oil or Japanese red beans, there will have to be a floor price and some certainty as to price levels," he said.
Executives from giant utility J-Power and trading house Itochu, who spoke in the same panel session, said Japan had to find new sources of supply to boost its energy security.
They said Japan was working hard to find new sources of LNG and new pricing mechanisms, and this was vital for stability of energy supply.
Mr Hanna warned that emerging new suppliers all faced challenges in getting their gas to Japan.
"Export approvals remain a key uncertainty for US projects, Canadian greenfields projects face some challenging economic and logistical issues. Projects in East Africa are not progressing as quickly as the market anticipated," he said.
KAR Price at posting:
$4.65 Sentiment: Buy Disclosure: Held
(20min delay)