The number of Chinese companies making a move in the international spot LNG market is growing with the price spread between the global market and domestic prices proving an incentive to new entrants
Currently, gas distributors and power generators in China buy LNG from either domestic producers or the three state-owned energy majors – CNOOC, PetroChina and Sinopec – who import LNG and pipeline gas through, in some cases, expensive long-term contracts. Midstream companies then sell the gas to their downstream customers at a regulated price. Slim margins show they are unable to adjust their upstream costs when possible, and why they are keen to take advantage of the low international LNG spot prices while they can.
“It’s a no-brainer which one I’d rather use. Plus, the price of LNG is good for us sellers in China right now,” the source said. “Why else do you think all the Chinese companies are rushing to import?”
In the year ended January 2015, Asian spot LNG prices fell from the mid-$19.00s/MMBtu to $9.00/MMBtu, while China’s incremental city-gate gas prices remained around $15.00/MMBtu, according to ICIS data. More recently, China’s domestic delivered gas price – which includes the costs of regasification or truck delivery – averaged around $14.00/MMBtu, according to ICIS China.
Gas distributors and power generators stand to make significant profits from selling imported LNG to downstream end-users or sending it to their gas-fired power plants. This is even after factoring in the costs of importing, storing, leasing and tolling at a state-owned LNG terminal.
Most of the volume is loaded onto trucks for delivery to the end-users, with only some gas sent into the grid. Chinese distributors typically do not regasify LNG because it takes a chunk out of their margins. They also typically command a large market share in their respective regions, so are almost ensured a steady stream of domestic customers from the residential, industrial and commercial sectors.
The price difference alone is a key factor driving the interest and urgency in buying LNG imports into China this year, market sources told ICIS. Even if the Asian spot price were to rise to $10.00-12.00/MMBtu, Chinese buyers can still earn a slight margin.
“Of course, there is profit to be made,” a source close to Guangdong-based private gas distributor Jovo Group said.
“Why do you think Jovo has been trying to expand its LNG business in China the past few years? There is huge potential here and the company wants to capitalise on it,” the source added.
The key players
Jovo has been widening its stronghold in the southern China market – it distributes LNG to industrial and commercial users via trucks as well as supplying LNG and compressed natural gas (CNG) to vehicles and refuelling stations. In northern China, Hebei-headquartered ENN Energy is using a similar business model as it embarks on its long-term strategy for LNG.
“It’s not news that China is facing a severe air pollution problem, so the government has been encouraging everyone to use more clean energy like natural gas,” a source close to ENN said.
“Importing LNG is an extension of the domestic natural gas business and the company sees a long-term future for it,” the source added.
Shandong-headquartered China Huadian is one of the country’s five largest state-owned power generation companies, but now wants to extend its presence in LNG. Huadian first caught the world’s attention when Sinopec announced on 30 April 2014 that the utility had taken one-third of its 15% stake in the 12mtpa Pacific NorthWest LNG export project in western Canada. Through the stake, Huadian would offtake 600,000 tonnes/year on a pro-rata equity basis for 20 years and potentially from 2019, although this timeline seems optimistic.
Huadian currently supplies 10% of China’s total power demand through its thermal, coal and renewables generators, but wants to grow its gas distribution network over the long term.
“Huadian’s economists have forecast that it requires more LNG for its natural gas distribution business. It expects a demand of at least 10mpta from 2020,” a source close to the company said.
The source also confirmed that Huadian is in talks with a number of portfolio suppliers and trading houses now for long-term supply.
“The company plans to start term deliveries to China from 2017, so it is looking to sign sales and purchase agreements (SPAs) beforehand,” the source said.
Huadian’s trading arm in Singapore will start operations in the second half of this year, ICIS understands.
Beijing-headquartered China Huaneng Group is the next among China’s five state-owned power utilities keen on exploring the LNG market, following the government’s directive to reduce pollution by using more clean energy.
“As the largest power generator in China, we are always keen to expand our business, but we are still learning how we can import LNG and build the right infrastructure,” a source at Huaneng said.
According to the source, Huaneng has plans to buy LNG for its gas-fired power plants and build LNG-receiving facilities. However, it might take several years before the plans come to fruition because coal remains a key source of its power generation.
“It is challenging for us to switch entirely to natural gas, because coal is much cheaper to burn and readily available, but LNG is definitely part of our long-term thinking,” the source said.
Two names that the international LNG market has become familiar with are RGE, a subsidiary of Singapore-based company Pacific Oil and Gas, and Xinjiang-based private gas development company Guanghui Energy.
Both have had imported some LNG volumes into China since last year and are looking to buy at least one spot cargo each this summer to meet domestic demand, sources close to the companies said.
Guanghui does not have access to an import terminal, meaning it relies on PetroChina’s Rudong and Dalian receiving facilities. RGE has a somewhat easier time in securing delivery windows for any vessel arrivals because it has a share in the Rudong terminal.
“Any purchase [of spot LNG] depends on the negotiations with PetroChina on the terminal usage,” a source close to Guanghui said. It is not alone, as ENN share the same issue.
Third-party access and capacity
When ENN received an LNG cargo in late December it made international headlines as the first Chinese company not run by the government to take the delivery at a state-owned major’s import terminal.
ENN was able to receive the cargo at Rudong because China’s National Development and Reform Commission (NDRC) in 2014 issued guidelines on allowing third-party access to existing state-owned terminals. In its guidelines, the government agency had also encouraged private companies to enter and invest in the domestic LNG market.
This was a turnaround from 2013, when regulations had prohibited private companies from importing LNG directly on their own. However, following a softening in policy, in September 2013 Jovo became the first private company to import LNG into China.
Jovo is the only Chinese company to own and operate its 1mtpa LNG-receiving terminal in Dongguan.
ENN in January this year received regulatory approval for the construction of its 3mpta LNG terminal at Zhoushan Island in Zhejiang province. Construction on the terminal has been progressing well, a source close to the company said.
The terminal is expected to be completed in 2017 and to be operational later that year or early 2018, Ma Shenyuan, the vice-president of ENN, confirmed. “The company has been in talks with several sellers for long-term supply to the terminal, but nothing has been signed. These things take time,” Ma said.
Huadian is in the process of obtaining regulatory approval for its proposed two 3mtpa LNG-receiving terminals in Guangdong and Jiangsu provinces.
Guanghui is building its Qidong LNG terminal – a joint venture with Anglo-Dutch major Shell – in Jiangsu and expects to complete construction by end-2016. It will have an initial receiving capacity of 600,000 tonnes/year and Guanghui plans to expand the terminal to 3mtpa by 2019.
In the meantime, most private companies will have to continue negotiating with PetroChina for third-party access.
Big brothers - the majors’ view
To date, PetroChina is the only known state-owned major that has given third-party access to its LNG terminals. However, such contracts are not legally binding as they are in the form of master sales agreements, according to a source close to PetroChina.
CNOOC is not in discussions with any companies over the use of its seven LNG import facilities across China, as it wants to keep the terminals available for its own term deliveries, a separate source said.
While Sinopec is keen to help smaller end-users import LNG for a fee, the state-owned major is reluctant to allow third-party access to its LNG terminals because of security reasons.
“The guidelines from the government are just guidelines; they are not laws we have to follow,” the source close to PetroChina told ICIS in March.
However, as of 23 April, PetroChina has reopened third-party access to its terminals, allowing Chinese companies to import and store LNG through them for a fee.
The international view
Although several trading sources have expressed doubts over Chinese companies’ import aspirations given the scarcity of import terminals, many traders retain an interest in China. According to market sources in Asia, Europe as well as the US, the number of enquiries from Chinese companies has risen in the past few months.
“Many have approached us to ask about spot cargoes and we are keen to do business with them because we see China as a growing market,” a trading source in Europe said.
However, there have been cases of burnt fingers. On 13 April, the 138,000cbm Cadiz Knutsen was scheduled to arrive at Dalian but left later in the week without discharging the cargo after a Chinese private buyer was unable to obtain a terminal usage agreement in time.
The vessel’s voyage – from Trinidad to China, then loitering around southern Japan before berthing at India – shows the potential hazards for sellers dealing with Chinese companies that depend on third-party access to import terminals.
“Chinese private companies that want to use the [state-owned majors’] terminals have to be more careful. PetroChina never approved that receiving slot to that buyer,” a source familiar with the matter said.
Two separate sources, however, said the vessel’s diversion was likely related to credit issues from the Chinese buyer.
“Dalian is not the busiest port in China. If you look at the delivery schedule, it’s been a while since they have taken a cargo,” one source said.
Regardless, marketers for proposed onshore and offshore LNG projects in North America have been busy seeking out potential Chinese buyers to offer them either long-term or flexible volumes.
Vancouver-based energy company Steelhead LNG is hoping to set up long-term contracts from its planned project in British Columbia with Chinese buyers as is US-based project developer SCT&E LNG who recently received a permit from the US Department of Energy to export LNG.
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