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Japan's Tepco Turns to U.S. Cameron for LNG Purchase

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Tokyo Electric Power is nearing completion of a deal to import 800,000 tonnes of liquefied natural gas a year from the U.S. starting in 2017, a new sign of the effect North American shale is already having in global energy markets.

The proposed 20-year deal between Tokyo Electric, also known as Tepco, and potential LNG supplier Cameron LNG, follows contracts Cheniere Energy has inked with Korea Gas Corp and others. Utilities in energy-strapped Japan have become eager to tap into U.S. shale gas, which hydraulic fracturing has made abundant and cheap. The interest is heightened by a steep reduction in their use of nuclear power in the wake of the Fukushima catastrophe.

Tepco said in a press release the natural gas it buys from Cameron would be linked to U.S. natural gas price benchmark Henry Hub, which settled Thursday at $3.285 a million British thermal units, down 13.3 cents. Buying U.S. gas would allow Tepco to diversify its sources of LNG and to tie the price of part of the natural gas it consumes to U.S. prices, which are seen as more stable than the oil price benchmark most LNG trades at. Currently, Tepco buys most of its LNG from Brunei, Malaysia and other countries.

The deal could have wider repercussions in the global LNG market by helping break the link between oil and LNG and eventually helping to bring world LNG prices down, said Macquarie Research energy analyst Vikas Dwivedi.

"The fact that you're moving away from that oil-linked formula, over time you will move away from," an oil-linked price, Mr. Dwivedi said.

Currently no infrastructure to liquefy and export natural gas exists in the lower 48 U.S. states, but Cameron and many other companies are building or planning natural gas export terminals. Cameron, an affiliate of Sempra Energy, operates a $900 million LNG import terminal near the U.S. Gulf Coast in Hackberry, La. Cameron expects to finish converting the terminal to export up to 12 million tonnes  a year of gas by the end of 2017.

But potential exporters must first clear regulatory hurdles, including obtaining government permission to export the gas to countries not in a free-trade agreement with the U.S., a group that includes Japan. So far only Cheniere has received government approval to actually ship the gas to much of the world, and its terminal to export LNG out of Louisiana is scheduled to be ready in 2015.

Tepco said it would rely on Japanese trading firms Mitsui & Co and Mitsubishi to each transport 400,000 tonnes of contracted gas every year. The natural gas would come from various shale plays, Tepco said.

Tepco and other Japanese power companies are dependent on natural gas imports to generate electricity. The Japanese government shut down most nuclear power generators after a March 2011 tsunami caused Tepco's Fukushima Daiichi nuclear plant to undergo a reactor meltdown.

A spokeswoman for Sempra said that the company is pleased with Tepco's decision, which "demonstrates the strategic importance of U.S. natural gas to the energy security and economic growth of Japan."

Tepco imported about 24 million tonnes of LNG in 2011, nearly a quarter of the total brought into Japan, the company said. The company was seeking to buy another 1.2 million tonnes a year of natural gas but didn't say where it was looking.

Copyright (c) 2012 Dow Jones & Company, Inc.

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