Tokyo Gas Co. (9531.TO) is in talks with several companies including ConocoPhillips (COP) on long-term supply of liquefied natural gas produced from coal seam gas in Australia, a person close to the situation said late Wednesday.

Tokyo Gas "would buy it if the prices are low enough," said the person, who spoke on condition of anonymity.

The company is Japan's largest gas utility by sales volume and uses about 10 million metric tons of LNG a year.

As LNG made from coal seam gas mostly consists of methane, it has a lower calorific value per volume than conventional LNG, which includes other elements like butane and ethane.

Japan uses mostly rich LNG now, and many utilities, including Tokyo Electric Power Co. (9501.TO), have said they aren't interested in coal seam gas LNG, citing technical difficulty in handling lean LNG together with conventional LNG.

"You have to add liquefied petroleum gas to boost the calorific value to make it useable in Japan. It's a bit more work," besides the additional cost of the LPG, said the person.

But sellers of coal seam gas LNG understand these inconveniences for users and are offering competitive prices, said the person.

In Australia, several projects are planning to convert coal seam gas to LNG for export, and they're all trying to pull it off in the port city of Gladstone in Queensland state. Among them is a project being developed by BG Group PLC (BG.LN) unit Queensland Gas Company on Curtis Island, near Gladstone.

Many analysts have said that participating companies will have to offer a discount on their LNG to account for coal seam gas' lower calorific value, especially in Japan, where some utilities have stricter quality control standards.

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