Opportunities Emerge for Private Firms to Enter China's LNG Market

Source: www.gulfoilandgas.com 5/1/2015, Location: Asia

There were no half measures when China embarked just over a decade ago on a policy of putting liquefied natural gas at the heart of the country's push to diversify its energy sources.

The clean-burning fuel, created by cooling natural gas to minus 160 degrees Celsius, was championed as an alternative to a decades-long reliance on the use of coal and petroleum that brought choking smog to the mainland's cities. But with a liquefication or regasification facility costing tens of billion dollars to build, the development of the industry became the exclusive turf of the state-owned energy giants.

Beijing added LNG to the national energy strategy with a clear aim to control the supply chain - unlike the case with crude oil imports. That quest started in 2002 when China National Offshore Oil Corp (CNOOC) struck long-term contracts for gas supplies from Australia's North West Shelf project and from the Tangguh field in Indonesia.

China has since paid hundreds of billions of dollars for long-term supply contracts and equity stakes in foreign gas fields, as well as undertakings to build regasification facilities at home and to set up and operate a national fleet of LNG carriers with help from partnerships with energy leaders such as ExxonMobil and BP and Japanese shipping operator Mitsui OSK Lines.

Such high cost barriers were not the main hurdle for private companies seeking a share of the market. With the state majors handed the job of building the LNG supply chain over the past decade, there was no room for new entrants. Now that this task has been completed, opportunities have emerged.

"As China was diversifying its energy mix and supply chain, any attempt for the smaller companies to come into the space was essentially blocked," said Andrew Bridson, business development manager at energy and transport consulting firm BMT Asia Pacific.

Last year was seen as a turning point, when a number of private firms broke new ground by importing small amounts of LNG from the spot market. A slide in spot LNG prices - indexed to crude oil - also put wind in their sails.

The National Development and Reform Commission had earlier that year issued guidelines to encourage the private sector to invest in LNG and natural gas infrastructure and open access to existing LNG terminals owned by the three national majors.

Six shipments totalling 362,000 tonnes - sourced from the LNG spot market - were imported by private energy firms between August and March, according to data from energy consulting firm ICIS China. "Now that the national majors have developed capability across the entire LNG supply chain, [the Chinese government's] needs for state enterprises to control the sector have reduced, which in turn has reduced the barriers for entry for smaller domestic players to enter the market," said Bridson.

He added that, in many countries, the capital-intensive nature of the industry and the long investment horizon determined that imports of the fuel were managed by state-controlled entities.

China's drive to secure the supply chain is underscored by the fact that most of its LNG imports are transported by Chinese-built ships - costing more than US$200 million each - thanks to technology transfers from foreign partners. In contrast, more than half of China's crude imports are hauled on foreign vessels.

Zhou Yingying, a senior gas and LNG analyst at Wood Mackenzie, sees the low LNG prices as a key driver of private firms' imports. "They realised they could source much cheaper gas, at US$7 to US$8 [per million British thermal units, mmbtu] in the spot market, versus the long-term contract prices at US$15 to US$16 mmbtu signed by state-owned companies."

Many more private firms are sniffing out the opportunities. "They are watching the loosening-up with enormous interest. I could feel some of them almost couldn't wait to take the plunge," said a ship-brokering source, who in recent months has fielded inquiries on how to import LNG from the spot market to China.

The lack of terminal access, stable distribution channels, and the steep learning curve in international procurements and transport are daunting roadblocks.

There are 12 LNG terminals along China's coast, where cargo is discharged and stored onshore, or regasified for pipeline distribution into the hinterland. Most of these facilities are owned by CNOOC, PetroChina and Sinopec.

ENN Energy, a Hong Kong-listed, Hebei-based private firm that imported one shipment of LNG last year, said it had signed contracts with PetroChina to use two of the national major's underutilised terminals in Rudong, Jiangsu and Dalian, Liaoning, for its own imports. "The agreement dictates we must sell out our imports within 30 days after the cargo is discharged onshore, otherwise additional charges will be incurred for extended use of the storage facility," chief financial officer Wang Dongzhi told the South China Morning Post.

Wang said the firm's first LNG import last year was sold out within weeks, via its own distribution network. "LNG is very popular, clean and cheap. Many factories hope to use it but lack the access to pipeline gas. So we see opportunities to fill that demand," he said. ENN is aiming for four to six shipments this year. It also won approval in February to build a small LNG terminal in Zhoushan, Zhejiang province.

CNOOC has been a notable holdout against directives from Beijing for third-party access to facilities. "CNOOC has been adamant that it won't let others use its terminals," a source close to the firm said. The LNG pioneer did not respond to requests for comment. The source added: "I'm surprised by what ENN managed to do, convincing PetroChina to open up its terminals - that really amounted to something."

Terminal access is less of a headache for Jovo Group, another private energy firm, based in Guangdong. The frontrunner among its peers in the sector, Jovo has built is own terminal in Dongguan, China's manufacturing powerhouse, and has signed contracts to supply LNG to the local bus company and plants, thanks to a partnership with PetroChina, its website shows.

Jovo has also signed two long-term LNG supply contracts with Qatar Gas and Malaysia's Petronas, both of which are also suppliers to the Chinese majors.

The fact that Jovo could ink long-term contracts with Qatar and Malaysia implied endorsement from the government or the three national majors, according to Bridson. "In order to secure LNG from international suppliers such as Qatar Gas, companies like Jovo would have been subject to a significant amount of due diligence and credit checks. So personally I think, from a political point of view, Malaysia and Qatar would have had some dialogue with major stakeholders in government, or one of the 'big three', to get the ticks in the box to go ahead," he said.

Jovo declined an interview request.

Wang said ENN, still facing a steep learning curve, had no plan yet to sign long-term contracts. "We're still learning. Long-term supply contracts are very complex, involving technical matters such as shipping and discharging cargo. We still have much to study and explore."

Bridson said the private players did not aim to compete head on with the majors, but rather to serve and stimulate growth in their local markets. "That model is built around small-scale infrastructure, pipeline, importing terminals," he said. "China has developed a diversified energy mix. This allows the government to reduce the monopoly the big three have on all aspects of China's LNG value chain and divest smaller areas of domestic interest to new entrants."

When China has accumulated sufficient infrastructure and demand diversity, a natural gas trading platform could be built, analysts say. "Currently, natural gas trades in China are scattered. There is no system where a market price could be built and manifested," said Chen Yunying, an analyst with ICIS China.

China's LNG terminals can be, for example, 60 per cent utilised to serve fixed long-term contracts, and the rest for trading in domestic or re-export to overseas markets, Bridson suggested. "If both terminal capacity and gas volumes are sufficient, moving gas around can be profitable. The major importing terminals will still be controlled by the big three, but gas still needs to be supplied around the vast country, a role that small players are needed to play," he said.

ENN, having sold 10 billion cubic metres of natural gas last year, has a bolder vision. "We think the upstream will definitely open up. Our imports at present are based on the hopes to command the pricing power in the domestic natural gas market one day," Wang said.


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Related Categories: General  LNG Carriers  LNG Terminal  Natural Gas Storage  Oil and Gas Pipeline  Oil Storage  Railways  Tank Truck  Tankers 

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