Global Gas to Gas Convergence
and
TEPCO’s Strategy
Naomi Hirose
President
Tokyo Electric Power Company, Incorporated
10th September 2013
LNG Trade Flows － In Transition
 Historically, LNG had been traded within segregated regions
 Since 2009, a significant gap has developed in regional natural gas pricing (JLC, NBP, HH), and inter-regional
trade has grown – some LNG has become available to respond to the price gap
 Inter-regional trade has not been sufficient to close the gap, but increasing diversification of LNG supplies as a
result of the arrival of new suppliers and extension of the currently emerging trend toward inter-regional
supplies should naturally accelerate the dynamism of the global natural gas/LNG market
250,000
18
16
Transaction from ME to Atlantic
Regional Transaction in Atlantic
14
Transaction from ME to Pacific
Regional Transaction in Pacific
10
JLC
8
NBP
HH
150,000
ME: Middle Eastern region
100,000
6
4
Thousand Ton
Transaction from Atlantic to Pacific
12
50,000
2
0
20
11
20
09
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
0
19
79
$/MMBtu
200,000
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1
Global Gas to Gas Convergence Urgently Needs to be Encouraged
 Over time, Asian LNG prices could become level with other gas/LNG market prices through the emergence of
significant inter-regional LNG transactions, with residual gaps reflecting mainly transportation cost differentials
(“Global Gas to Gas Convergence”)
 However, Japanese utilities now face huge deficits partly because their LNG procurement cost is the highest
among the key consumer markets and cannot be passed through. This situation is not sustainable
 Japanese LNG buyers therefore need to take urgent positive action – they need to encourage the dynamism
of the natural gas/LNG market to ensure Global Gas to Gas Convergence
20
100%
Trillion Yen
Financial Condition of 9 Japanese Electric Power Companies
18
90%
16
80%
14
70%
12
60%
58.2 MT
10
LNG Received:
6
41.9 MT
43.9 MT
40%
20%
2
10%
0
0%
FY2009
Ordinary Profit and Loss
30%
4
-2
Total Ordinary Expenses
50%
55.5 MT
8
Net Assets
FY2010
FY2011
Fuel Costs as a
Proportion of Ordinary
Expenses
FY2012
-10%
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2
What LNG Buyers Can Do to Promote Global Gas to Gas Convergence
Improve Operational Capability
Develop capability to receive all grades of LNG, especially leaner LNG
Expand Upstream Business
Acquire more equity LNG, which provides enhanced pricing flexibility and
a natural hedge
Remove Destination Restrictions
Adjust the LNG supply-demand balance through third party sales, which
may lead to more frequent inter-regional trade
Diversify Supply Sources
& Price Indices
Purchase LNG under a portfolio of price indices, including netback
pricing based on gas/LNG prices in other regions
Adjust the gap of LNG prices through price review, and explore new
Improve Price Review Mechanism price review ideas supporting Global Gas to Gas Convergence
Use Futures Market
Hedge fuel procurement costs, and apply hedging techniques to mediate
across regional markets
 If there is strong Global Gas to Gas Convergence, appropriate price signals will be issued which will
enable all LNG market participants to make more appropriate business decisions
 Under such conditions, only competitive projects can launch (while non-competitive projects will not),
and the supply-demand balance will be adjusted properly
 If there is weak Global Gas to Gas Convergence and Asian LNG prices remain higher than in other
markets, Asian buyers will recognize the price signals. One potential business decision for them
would be to switch from LNG to other fuels
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3
TEPCO’s Strategy


The energy prices charged by Japanese energy utilities are facing intensive attention from customers
and the government
In order to accomplish a stable, flexible and potentially less expensive energy supply, TEPCO is well
advanced in redefining its approach to LNG procurement and investment
TEPCO is developing a multi-dimensional strategy that supports Global Gas to Gas Convergence:
“Volume Buyer” x “Value Chain Strategy” x “Lean Spec LNG Strategy”
Strategic Positioning

Value Chain Strategy: 2000~
TEPCO will…
 Seek investment opportunities in every segment of
the LNG value chain – particularly upstream
 Strengthen TEPCO’s supply chain
 Restructure its LNG supply portfolio with focus on
stability and flexibility
 Achieve appropriate and less volatile LNG prices
through optimized use of a basket of indices
Volume Buyer Strategy
Lean Spec Strategy: 2010~
 Deepen its involvement in the value chain,
particularly upstream business
 Maintain and enhance long term relationships with
1st class LNG sellers
 Increase LNG volume offtake to enhance
bargaining power in the supply market
 Modify TEPCO’s integrated operations/facilities to
receive every grade of LNG
 Increase supply source diversity
 Introduce lean LNG price differential
Operational Capability
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