CNOOC Launches Construction of Zhuhai Jinwan LNG Terminal in China

Guangdong Gas Struggle

CNOOC Gas & Power Ltd, a subsidiary of China National Offshore Oil Corp. (CNOOC), has started constructing an LNG re-gasification terminal in Zhuhai City, in Guangdong province. The first phase of the Zhuhai Jinwan LNG terminal is due for completion in 2013 and will have an initial capacity of 3.5 million t/y. The first phase of the project will require an investment of 11.3 billion yuan (US$1.69 billion), which will also go towards construction of a special port to allow berthing for LNG transportation vessels, three 160,000-cubic-meter storage tanks and a 291-km natural gas pipeline which will transport around 9 bcm/y of gas to cities on the west bank of the Pearl River in Guangdong province.

Construction of the Zhuhai Jinwan LNG terminal supports CNOOC Gas & Power Ltd.'s strategy of boosting natural gas supplies to Guangdong province, China's economic powerhouse. Guangdong is China's largest provincial economy, accounting for over 10% of China's GDP, and gas demand there is set to rise significantly in the province, from 5.4 bcm in 2008 to 38 bcm by 2020 according to IHS CERA. To capture this demand CNOOC Gas & Power signed a gas purchase and supply agreement with Guangdong Provincial Natural Gas Pipeline Corp (Guangdong Gas), a company established in March 2008 by CNOOC, Sinopec Group, and Guangdong Yudean Group Co. Ltd. in August 2010. Under the agreement, Guangdong Gas would purchase all output from CNOOC's LNG terminals in Guangdong province as well as from offshore gas fields for supply to local consumers. The agreement is significant for CNOOC Gas & Power, helping the company to market its gas while justifying further planned capital expenditure increases on offshore exploration and production operations in the South China Sea, and on LNG terminal construction in the province.

Construction of the Zhuhai Jinwan LNG terminal is further evidence of the central role of Zhuhai City in CNOOC's Guangdong gas strategy. CNOOC Gas & Power already has one operating LNG liquefaction terminal called Zhuhai Hengqin in the city, which is supplied with natural gas from the Huizhou 21-1, Panyu 30-1, and Panyu 34-1 gas fields in the South China Sea. The terminal is small, with a capacity of 130,000 metric t/y, but serves a variety of consumers including Zhongshan Jiaming Power Plant, Hongwan Power Plant, Macao Power Plant, Zhuhai Biyang Chemical Company, and local distribution companies in Zhuhai and Zhongshan via the Zhuhai to Zhongshan gas pipeline, according to the IHS EDIN-GIS database. In May 2010, CNOOC built its position in Zhuhai by signing a comprehensive co-operation framework agreement with the Zhuhai Municipal Government to establish an all-round partnership in the energy sector. A few months later in July 2010, CNOOC's engineering unit, Offshore Oil Engineering Co. Ltd., signed another agreement with the city government to construct the Gaolan Port marine engineering equipment manufacturing base. The base will provide equipment to support development of offshore oil and gas fields in the South China Sea. The Gaolan base will construct floating, production, storage, and offloading (FPSO) units, steel jacket and deep-water platforms and LNG structures from 2011. The agreement supported CNOOC's strategy of exploring for natural gas in deepwater areas of the Pearl River Mouth basin, which can be supplied to Guangdong province, helping to meet gas demand growth over the coming decade. CNOOC's selection of Zhuhai for its new terminal is a tactical move aimed at expanding its penetration of the Guangdong gas market. CNOOC Gas & Power Group already holds a 33.3% stake in Guangdong Dapeng LNG Company, which supplies gas to cities on the east bank of the Pearl River such as Shenzhen, Dongguan, Foshan, and Guangzhou. The Zhuhai Jinwan LNG terminal will boost supplies to cities on the west bank of the Pearl River like Zhuhai, Zhongshan, and Jiamen, while the pipeline network associated with the project will be connected with that of Guangdong Dapeng LNG in Shenzhen city, allowing CNOOC to integrate its transmission infrastructure and capture more market share. The Zhuhai Jinwan LNG terminal stands to become a key supply source to Guangdong over the next decade, as evidenced by CNOOC Gas & Power's plans to boost terminal capacity to 7 million t/y in the second construction phase, and to 10 million t/y in the final phase.

Outlook and Implications

There are still some uncertainties over how CNOOC Gas & Power plans to supply the Zhuhai Jingwen facility with consultancy C1 Energy, stating in April 2010 that the gas source for the terminal had yet to be finalised by CNOOC's headquarters. Some reports suggest that the Zhuhai Jinwan terminal could use natural gas from China's first deepwater gas field called Liwan 3-1 in the Pearl River Mouth basin as a supply source. This would make sense as the field is also due to launch commercial operations in 2013, is a proximate supply source, and with a targeted production level of around 8 bcm/y would nearly have enough production capacity to meet the terminal's requirements, although the construction of berthing facilities at the terminal points to a potential role for imports of LNG cargoes from overseas. Recent reports from Husky Energy who is developing the Liwan 3-1 field suggest that gas-marketing arrangements are still being finalised, and clarity on whether the field will be used as a supply source is only expected by end-2010.

Using a local gas supply source could make gas from Zhuhai Jingwen more competitive with other supply sources going forward. The gas market in Guangdong is set to become more competitive as China National Petroleum Corp (CNPC) moves to complete the eastern section of the Second West-East Pipeline, which will supply gas from Central Asia to the Pearl River Delta industrial zone. Completion of the 30 bcm trunkline would mark a major milestone in CNPC's efforts to develop a nationally integrated transmission network allowing significant volumes of natural gas to be supplied to all China's key demand centres, consolidating the company's leading role in the gas market. CNPC subsidiary Kunlun Gas is keen on new acquisition opportunities in Guangdong province to increase the company's sales in a key provincial market.

CNPC poses a key threat to CNOOC's efforts to develop its position in Guangdong province, which the company has tried to counter through teaming up with Sinopec to establish the Guangdong Gas company to find markets for supplies and by securing co-operative agreements with municipal governments for gas supplies. Looking forward, Guangdong Natural Gas Pipeline Co. Ltd. has announced that it will construct more than 3,000 km of pipelines with an annual throughput of 60 bcm between 2009 and 2020 to capture market share. CNOOC has also been moving to complete the Phase II expansion at the Guangdong Dapeng LNG terminal, while securing new LNG supplies from GDF Suez for all of its operational terminals to match future growth in midstream infrastructure with supplies (see China: 11 October 2010: GDF Suez Clinches LNG Supply Deal with CNOOC).