The Japanese power utilities won price cuts of about 5 per cent this week when they renewed 20-year contracts with Malaysia's Petrolian Nasional Bhd for 15 years starting April 2003.

In an ominous sign for the North West Shelf partners, who are currently trying to win a big LNG contract in China, the price cuts could set the stage for reductions in Korea, Taiwan and in the emerging Chinese market.

"The year 2003 will be the turning point of natural gas prices," a senior manager for Tokyo Gas said. "A 5 per cent reduction will be implemented in some projects in 2003, which may be followed by others. By 2010 some contract prices will be 10% lower than the current level."

Industry watchers believe the Japanese will take advantage of the current expansion in the Middle East and Asia as well as Bayu-Undan coming on stream in 2006 to introduce more flexible terms to replace traditional 20-year contracts, which have rigid pricing formulas.

Japanese utilities are demanding price cuts for LNG as more Japanese manufacturers shift production to China reducing electricity demand in Japan, which fell 1.7% to 824 billion kilowatt-hours of electricity last fiscal year, forcing power companies to cut costs and spending on new projects.