[NGW Magazine] China's independents eye LNG capacity

This article is featured in NGW Magazine Volume 2, Issue 17

 By Tim Daiss

Changes to China’s energy policy, growing demand for gas and the continued downward trajectory of global LNG prices are giving China’s independent LNG players a fighting chance.

In the first half of the year, China consumed 114.6bn m³ of natural gas, a 15.2% year-on-year rise, according to China’s top economic planner, the National Development and Reform Commission (NDRC).

China’s LNG imports are also climbing. In July, the country imported 3.12mn metric tons, the most since January, data from the General Administration of Customs showed. For the first seven months of the year, LNG China’s imports rose 45% from the same period a year ago to 19mn mt.

Last year, China’s LNG imports spiked 10.4% to 27.42mn mt, up 7.4mn mt from the previous year, according to the annual report of the International Group of Liquefied Natural Gas Importers (GIIGNL).

Both the natural gas demand gains and the higher LNG imports come as Beijing tries to cut air pollution levels, now at record highs. The government is implementing its goal of meeting a tenth of its energy needs with gas by 2020, up from 5.9% in 2015. Higher gas demand also springs from economic growth, which in turn leads to greater gas use among industrial users.

The government has also set an objective for gas demand to reach 350bn m³/yr by 2020, an amount that seems ambitious to some analysts.

Moreover, LNG spot prices in Asia are still facing downward pressure. From breaching the $20/mn Btu mark in February 2014, prices in the region have dropped by more than 70%, largely following the plunge in global oil prices that began that summer. Spot LNG prices in Asia, after increasing for six weeks, dropped last week to $6.05/mn Btu for October delivery, and now are even more than ever divorced from the effects of oil prices, thanks to the persistent excess of supply over demand.

Repressed prices are also attributed to the ongoing global LNG supply glut that will remain until at least the first part of the next decade as new projects, mostly from Australia and the US, continue to come on-stream. This has forced other suppliers, notably Qatar, to further cut the discount to crude, agreeing this summer to sell LNG on an ex-ship basis to Bangladesh relatively cheaply at a 12.5% slope, compared with 14% or more in the past. It needs to lock in demand for some of its output that would, but for the rise in US shale gas output, be welcomed worldwide.

The US for its part is projected to become the third-largest LNG exporter in the world after Australia and Qatar by 2020 or 2021 when it will have five LNG export facilities operational for a total liquefaction capacity of 64mn mt/yr.

Opportunities open up

China’s independent energy companies started importing LNG in late 2014, but were mostly limited to importing to terminals owned by the country’s three state-run oil majors: Sinopec, CNPC, and Cnooc.

Since 2014, however, several independents are setting their own courses.  A Bloomberg report from early August said that at least three more LNG projects in China are under construction or proposed by independents that are scheduled to be operational next year.

These include a port by ENN Group – one of China’s largest private companies and a city gas distributor – while Guangzhou Development Group has proposed a new import terminal. Guangzhou Development Group is an integrated energy company whose operations range from selling thermal electricity, to distributing natural gas, supplying coal and constructing oil depots.

China Huadian, one of China’s biggest power generators, has also proposed a terminal. Furthermore, last month Guanghui Energy imported its second cargo at its Qidong LNG terminal, just south of Shanghai. 

Another new LNG entrant, though it’s still state-owned, is also trying to challenge the status quo. Beijing Gas Group, a natural gas production and distribution services company, said last year that it was planning to invest $1.2bn/yr in 2017 and 2018 to build pipelines and storage to meet a surge in gas demand in Beijing. The company also said it wanted to build LNG infrastructure.

Beijing Gas Group procured its first LNG shipment last year from French natural gas energy giant, Engie. Li Yalan, Beijing Gas Group’s chairwoman said that spending was being increased to replace coal with gas as Beijing phased out coal for local power generation.

She added that the company was looking for a coastal site to build its own LNG import terminal able to store 500-600mn m³ to cover any impending shortages. The company currently owns a small share in a Petro-China controlled terminal near Beijing.

These new and smaller terminals will help independents capture a slice of China’s LNG market share – albeit a small slice since Sinopec, CNPC and Cnooc already operate least a dozen large LNG import terminals in the country.

Hurdles remain

Despite Beijing’s loosening its grip on energy policy, there are still hurdles that these newer players face, Mi Lin, an LNG trader at Beijing Gas Group told NGW.

“After oil prices dropped in the last few years, which was mostly the spot cargo link with Brent basis, [independent] Chinese companies have been seeking to capitalise on this change and build their own terminals and LNG tanks,” she said. “However, even if they have their own terminals and tanks, they don’t have the rights to use the pipelines which may limit their profits.”

Mi said that even though gas pipelines are held by China’s three state-owned oil companies, some private companies have already built pipelines in some areas. The problem is, she explained, that they aren’t yet linked with the main pipelines. “These other companies, except the big three [state owned oil companies] and also Beijing Gas Group, have to use tanker cars to transport their LNG,” she said.

“Smaller energy companies also need to consider being efficient so they are building smaller LNG terminals and tanks with less capacity, as the government has already issued regulations about oversized capacity,” she added.

An analyst at Sanford C Bernstein in Hong Kong, Neil Beveridge, said: “It’s very difficult to get [gas] supply through the infrastructure of the Chinese oil majors because the access rules and regulations are not terribly transparent and not terribly well enforced.” He added: “There are still more regulatory rules that are needed, so these companies are very much pioneers.”