Insight

Coal indexation in LNG pricing: why it matters

21 May 2019

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What’s inside this report?

Japan's power sector is in flux due to liberalisation and overcapacity. This is challenging the utilisation of gas generation, which is less competitive than coal.

In April, Tokyo Gas announced a 10-year deal with Shell to supply LNG using a coal-linked pricing formula – a rare move that broke the mould of the typical oil-linked contracts that have been used for decades in the market.

In this insight, we unpack the significance of the deal for Japan’s power sector and for LNG.

Contracts that make use of coal-indexation, such as the Shell/ Tokyo Gas deal, could be an important step to enable gas to better compete with coal-based power generation.

Prakash Sharma

Vice President, Multi-Commodity Research

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Why buy this report?

While the details of Shell’s contract with Tokyo Gas have not been made public, we explore how the deal could have been structured.

We apply our deep understanding of commodity dynamics, local energy dynamics and power market design to consider:

How could a coal-indexed LNG contract be priced?
What LNG price is required for existing gas plants to displace new coal power plants?
What carbon price is required for existing gas plants to compete against existing coal?

21 May 2019

Coal indexation in LNG pricing: why it matters

Report summary

In April, Tokyo Gas announced a 10-year non-binding HOA with Shell Eastern Trading Pte Limited for supply of 0.5 mmtpa of LNG from 2020. The contract price includes coal indexation. We understand this is the first such LNG contract for supply to Japan. While the details of the deal are not yet public, this could be a paradigm shift in LNG pricing because thermal coal is the lowest-priced fuel compared with oil and gas.

Executive summary
- What is driving the Shell-Tokyo Gas deal?
- What LNG price is required to displace coal in the power sector?
- How could the Shell-Tokyo Gas contract be structured?
- What carbon price is required for existing gas to compete against existing coal plants?
- Conclusion