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 A plunge in Asian gas prices means an expected U.S. export bonanza
has fizzled out before it even started, and has left the giant
conglomerate potentially exposed to LNG processing fees of up to
$370 million a year.
Toshiba confirmed in an interview that it is looking to cut its
commitment in the early years of the 20-year contract, but declined
to comment on cost.
"We have to admit the competitiveness of (U.S.) LNG is getting
weaker compared to JCC prices," said Akira Nakatani, a manager in
Toshiba's LNG group, referring to the typical price mechanism for
long-term supplies to Japan.
In recent weeks, Toshiba has held talks with oil and gas majors,
utilities, trading houses and other potential LNG buyers to try to
offload its commitments, according to six industry sources. Nakatani
declined to comment on the names of possible buyers.
Other Asian buyers are also trying to reduce their exposure to
long-term LNG import obligations, as their demand wanes along with
stalling economic growth and as excess supplies become available
cheaply on the spot market.
Toshiba, which is due to report an operating loss on Saturday
following a $1.3 billion accounting scandal, may find it difficult
to exit its commitment, say industry experts.
TOLLING DEAL
The issue stems from a 2013 decision to buy the right to liquefy 2.2
million tonnes of LNG annually from 2019 from the proposed Freeport
LNG export plant in Texas.
The purchase of the so-called tolling agreement by an electronics
conglomerate that makes everything from computers to vacuum cleaners
stunned the market.
"It was like Sony buying LNG," said Tom O'Sullivan, an independent
energy consultant and former investment banker with many years
experience in Japan.
Toshiba's plan was to pitch LNG supplies as a sweetener to likely
Asian buyers of its electricity turbines used in combined cycle
gas-fired power plants, said Nakatani.
Turbines are part of Toshiba's energy and infrastructure division,
which accounted for $17 billion of net sales in the last fiscal
year, about 30 percent of the company's total.
However, the company has yet to sign any firm contracts to supply
turbines, and is aiming to sell the rights for liquefied gas on a
short-term or spot basis, at least in the early phase of the plan,
he said.
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Nakatani said Toshiba is in talks with potential buyers of both
turbines and gas and expects to sign firm agreements later this year
or next year.
The company expects to have long-term supply contracts from 2020 or
2021, he said, and remained confident of its long-term strategy.
BINDING COMMITMENT
Toshiba's tolling deal with Freeport requires it to pay liquefaction
plant fees even if it does not use the facility to produce its share
of LNG.
It exposes Toshiba to $7.4 billion in liquefaction charges over 20
years, according to Reuters calculations based on a tolling fee of
$3.25 per million British thermal units (mmBtu). This is the
midpoint of a Wood Mackenzie estimate that Freeport is charging
between $3.00 and $3.50 per mmBtu.
Nakatani would not comment on the tolling fee, and Freeport declined
to comment.
As potential profits from shipping U.S. gas to Asia are eroded,
Japan's Kansai Electric Power Co has agreed to a swap arrangement
with France's Engie to reduce shipping costs, and Osaka Gas has sold
some Freeport LNG to Germany's.
"There are a number of players trying to sell out of their U.S.
positions," said an industry source with knowledge of U.S. LNG
resale efforts.
"Anyone who has not sold them yet will find it hard to do. U.S. LNG
is out-of-the-money given recent market conditions and things are
projected to get even worse over the next two years."
(Editing by Richard Pullin)
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