Senate rejects policy on LNG’s mandatory capacity purchase

By Myrna M. Velasco – April 11, 2019, 10:00 PM
from Manila Bulletin

The proposed mandatory capacity purchase or off-take from liquefied natural gas (LNG) power projects is “dead on arrival” at the Senate Committee on Energy as it does not see the need for this as a policy especially if that will eventually redound to additional pass-on charges to the Filipino consumers.

“My worry there is, it might be a pass-on to consumers, and it might be detrimental to consumers in terms of pricing, so I don’t see the need for that anymore,” Senate Committee on Energy Chairman Sherwin T. Gatchalian said.

He likewise opined that the two serious investors in LNG import terminals – First Gen Corporation with Tokyo Gas and the group of businessman Dennis Uy with China National Offshore Oil Corporation (CNOOC) – seem ready to stake capital even within the prevailing competitive phase and incentive scheme of the deregulated electricity sector.

It was the Department of Energy (DOE) which dangled the policy proposal on at least 10% mandatory capacity purchase from LNG-fired power facilities by private distribution utilities like the Manila Electric Company (Meralco) as well as the electric cooperatives.

According to Energy Undersecretary Felix William Fuentebella, the DOE submitted such policy proposal to Congress for their consideration once they start crafting and deliberating on the targeted Natural Gas Bill.

Without a mandatory offtake (power capacity purchase) and in the absence yet of a well-defined “market pricing” for the transforming and expanding LNG industry, it is targeted that gas players will have to deal with more flexible pricing strategy and incentive scheme when it comes to contractual arrangements on their power supply deals.

The policy thrust of the Philippine government leans on the setting up of not just one but two or even more LNG import facilities – but the biggest dilemma is providing market for such investment behemoth.

Within Asian markets – and this will also cover the highly anticipated gas market reset in the Philippines, it is projected that gas prices will remain oil-indexed until year 2030. But given the incessantly rising oil prices in the world market, LNG-fed power plants are foreseen saddled with higher costs on generated electricity, hence, LNG may be squeezed out by cheaper coal and the continuing downtrend in the cost of renewables.

It is being prescribed by experts then that LNG buyers and sellers will have to be more creative in firming up their deals – putting into consideration the different circumstances overwhelming competing fuels and technologies.

As reckoned by many global LNG players, including Tokyo Gas Co. Ltd. which is the partner of Lopez-owned First Gen Corporation on its blueprinted LNG import terminal project, “it is still a major hurdle to make gas affordable,
acceptable and reliable form of energy.” This after previous perceptions that the Asian market will accept gas at any price had turned out to be wrong.

It was expounded that the Asian market had grown comfortable with oil-linked gas because they deem such to be a “transparent” pricing system, therefore, moving away from that practice will take a lot of preparation and ‘soul searching’ for gas players in this regional market.

Japanese firm JERA Co., Inc. similarly sounded off in many global forums that “after 2020 or 2030, oil indexation for gas market would still be mainstream in the Asian market.”

Amid the flourishing Henry Hub index in the global gas market that some Asian LNG players have already shifted to, it has been noted that oil indexation in the region has remained high at roughly 80 percent.

“Even if it will decrease to 50 percent, that would still be a big market,” the company said, emphasizing that the pricing shift for most in the Asian gas market may move at considerably slow pace.

The Japanese firm noted that “there are some contradictions – pros and cons presented – but the goal is to eventually introduce an Asian or Japan index…or several kinds of indices might be a suitable situation.”

Kunio Nohata, senior executive officer of Tokyo Gas, had indicated that “apart from indexation, we want to have Asian market hub pricing… at the end of the day, we will have our market price, but it will take time. Gradually, very gradually, it will change.”

In gas sale and purchase contracts, it was similarly noted that Japan is the only market in Asia that adheres currently to a “review clause,” with most in the region still not getting into that contracting paradigm.