Tokyo Gas Co. (9531.TO) has signed a preliminary agreement with BG Group PLC (BG.LN) to buy liquefied natural gas from its proposed gas export terminal in Australia's Queensland state, the companies said Wednesday.

The deal represents a major credibility boost for the concept of using coal bed methane to feed a large gas-export terminal amid concerns Japanese buyers would shun the unconventional fuel for its slightly lower calorific value.

It also cements BG's frontrunner status among four rival ventures attempting to convert coal bed methane to LNG for export from the Queensland port town of Gladstone.

Under the agreement, Tokyo Gas aims to buy 1.2 million metric tons a year of LNG for 20 years from 2015. It will take a 1.25% stake in a coal seam gas field and a 2.5% stake in the project's second LNG processing unit.

BG said the agreement is expected to be finalized by the end of 2010. It recently sealed a separate offtake deal for the project with China National Offshore Oil Corp. and wants to make a final investment decision to build the terminal in mid-2010.

Many Japanese LNG buyers have so far been cautious about committing to LNG sourced from coal bed methane as they will need to reconfigure their equipment to accommodate the gas, or boost its heating value by spiking it with more liquefied petroleum gas than usual.

Satoru Yasuoka, general manager of the Gas Resources Department at Tokyo Gas, said, "We have enough experience in handling lean gas, as we have bought LNG from Alaska for about 40 years."

The Alaskan LNG is almost the same as coal bed methane LNG, composed of mostly methane, Yasuoka said.

Tokyo Gas will add 10% liquefied petroleum gas to 90% of lean LNG to boost the calorific value, he said.

Tokyo Gas is Japan's largest gas utility by sales volume and uses more than 1 million tons of LNG a year.

BG Chief Executive Frank Chapman said Tokyo Gas will become one of the Queensland project's foundation customers "as we progress rapidly towards project sanction later this year".

A rival joint venture between Santos Ltd. (STO.AU) and Petroliam Nasional Bhd., or Petronas, has so far only managed to agree to sell its LNG back to Petronas. A joint venture between Origin Energy Ltd. (ORG.AU) and ConocoPhillips (COP) and a standalone project proposed by Royal Dutch Shell PLC. (RDSB.LN) are yet to sign any customers.

Tokyo Gas's willingness to buy LNG sourced from coal bed methane could enhance their prospects in the Japanese market, but may also take away one potential customer opportunity if Tokyo Gas stays with BG.

-By Mari Iwata, Dow Jones Newswires; 813-6269-2798; mari.iwata@dowjones.com
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