Shell and Japan's Tokyo Gas Co Ltd have signed a long-term liquefied natural gas (LNG) deal, whose price will include a link to coal prices, in an innovative type of LNG contract aimed at diversifying price indexation.
Typically, long-term LNG contracts for Asia are linked to the price of oil, while U.S. LNG sales are priced off the U.S. natural gas benchmark Henry Hub.
Industry observers told Reuters that the Shell-Tokyo Gas deal is believed to be the first time in which a Japanese LNG customer has used a coal pricing formula in an LNG contract.
According to Christopher Goncalves, chair of the energy practice at Berkeley Research Group, who spoke to Bloomberg, pricing an LNG contract to coal is a kind of a risk management strategy for companies competing with coal-fired power generation and would be attractive in markets with solid shares of coal generation, including the Asian markets Japan, China, and India.
Under the heads of agreement, Shell Eastern Trading will supply Tokyo Gas with around 500,000 tons of LNG per year between April 2020 and March 2030, the Japanese company said in a statement on Friday.
Shell Eastern Trading and Tokyo Gas have been discussing a new type of LNG agreement that can contribute to creating LNG demand, Tokyo Gas said, noting that "as a result, for the first time among the two companies, Shell and Tokyo Gas have come up with an innovative pricing formula that is based on coal indexation and included this to the agreement."
"Our broad portfolio enables us to provide reliable LNG supply as well as tailored solutions including flexible contract terms under a variety of pricing indices," said Steve Hill, Shell's Executive Vice President said.
"With our long-term relationship and joint consideration, we were able to achieve an innovative agreement that would enhance further diversification of price indexation pursued by Tokyo Gas," said Kentaro Kimoto, Tokyo Gas's Managing Executive Officer.
By Tsvetana Paraskova for Oilprice.com
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