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FEATURE: China gas distributors eye competing with state giants in LNG imports

Highlights

Not content with selling gas domestically, some of China's private gas distribution companies are becoming increasingly ambitious and are planning to enter the LNG import business, competing directly with state-owned LNG buyers such as PetroChina and China National Offshore Oil Corp.

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The domestic distributors, which have traditionally operated in the mid-stream by buying gas from upstream producers and selling it to downstream end-users, are now looking at sourcing their own supplies.

This is in part driven by China's insatiable need for natural gas, as well as the companies' desires to develop into more diverse entities.

The distributors currently procure gas via long-term contracts with the three state-owned giants PetroChina, CNOOC and China Petroleum and Chemical Corp., or Sinopec.


Their sources are varied and include domestic onshore and offshore gas, imported gas from Central Asia that flows through PetroChina's Second West East gas pipeline, and LNG imported by both CNOOC and PetroChina.

But with double-digit demand growth outpacing production, existing gas supplies are tight so gas distributors, which derive a significant proportion of their revenue from connecting new customers to their gas grids, are venturing further afield.

ENN Energy, one of China's largest gas distributors, recently hired the former chairman of Shell China to head up its international division, with a view to developing the company's LNG business.

"We want to import LNG to support our domestic business. But even if we find any supplies, we can't do that unless we have an LNG import terminal," said a source at ENN. "We cannot get access to any terminals now."

The central government has pledged to promote mixed ownership of energy resources and recently put forward a plan to allow third-party access to infrastructure such as pipelines, LNG terminals and storage facilities.

This could eventually pave the way for other companies to access oil and gas infrastructure currently owned and operated exclusively by the state-owned giants. There is uncertainty, however, on how or when this will be implemented.

In the meantime, ENN is developing an LNG import facility with 3 million mt/year of receiving capacity in the city of Zhoushan in the prosperous eastern province of Zhejiang. It is slated for completion by 2016.

Xinjiang Guanghui Petroleum, another city gas distributor, has started construction of a terminal at Qidong in Jiangsu province. Scheduled for completion by the end of 2016, the project is a joint venture with Shell and will have an initial capacity of 600,000 mt/year. This will be expanded to 3 million mt/year by 2019, a Guanghui official said. This will allow it to supply eastern gas-hungry provinces like Shandong, Anhui and Jiangxi as well as Shanghai.

Guangdong-based Jovo Energy already has a small receiving terminal in Dongguan and started receiving small LNG cargoes last year, including one from Malaysia.

Shenzhen Gas, a distributor in southern Guangdong province, is also mulling building its own import facility in Dapeng, not far from CNOOC's flagship Guangdong Dapeng import terminal, with startup planned for 2016.

Analysts welcomed the entry of more Chinese players into the global LNG market.

"We are bullish on LNG so we think this is a good development. China needs the gas and this is in line with the opening up of the energy sector," one Hong Kong-based equity analyst said.

CHALLENGING PROCUREMENT

The new terminals will admittedly comprise just a fraction of existing and planned projects spearheaded by the state-owned companies.

CNOOC and PetroChina currently operate over 30 million mt/year of LNG receiving capacity, while Sinopec is expected to commission its first LNG terminal in Shandong province later this year.

The Chinese oil companies have in the past shown a willingness to pay high prices for LNG. Delivered prices for cargoes from Qatar last year averaged $17.70/MMBtu, while volumes from Africa were at least $16/MMBtu, according to customs data.

The new players are therefore not finding it easy to secure LNG supplies at favorable terms. This is despite emerging supplies from new projects in Australia and North America in the medium term, as well as from sources like Mozambique in the long run.

ENN is hoping to lock up at least 2 million mt/year of LNG through term contracts but its asking price is lower than current contract prices, said one person with knowledge of the matter.

While Guanghui will benefit from its alliance with Shell, the Chinese company is solely responsible for sourcing volumes beyond the first 1 million mt/year, another source said.

One key challenge is that as privately-run companies, they may not have access to as much capital as China's state-owned firms. A source at one gas distributor says it had been approached numerous times by foreign operators of budding LNG liquefaction projects but it did not have the financial capability to take a stake in such capital-intensive projects.

The companies may also run into difficulty trying to tie up long term supplies because international sellers may not be as familiar with their credit profiles. "If that's the case and they find it hard to sign longer-term contracts, they may have to rely more on spot volumes at higher prices," the Hong Kong analyst said.

END-USER SEGMENTS

Given that natural gas prices in China are capped, LNG importers also face profitability issues. PetroChina, for example, has been complaining about the huge losses it has incurred from importing LNG and selling it at domestically-capped prices over the last few years.

In order to avoid the same predicament, gas distributors can only divert their imported LNG to specific customer groups in the non-residential segment. This is because the government has not raised prices for residential customers, but has shown more willingness to deregulate prices for industrial and commercial end-users. It last raised non-residential gas prices by over 15% last July and has indicated more hikes for these consumers this year.

For gas distributors, catering to more industrial and commercial customers is therefore vital as they are able to pass through any upstream price adjustments promptly.

Hong Kong-listed Towngas China, for example, said it started 14 new gas distribution projects across various provinces last year, with customers as diverse as pipe fitters, ceramics manufacturers and glass chemicals companies.

ENN has said it sees tremendous volume growth potential from these types of customers, yet the investment requires limited capital expenditure.

Another strategy is to expand in the transport sector through compressed natural gas and LNG filling stations for vehicles, as ENN has done aggressively. It now has over 250 CNG refueling stations and over 120 LNG filling stations in operation.

"LNG pricing is market-driven [and] increasing supply of LNG through import and onshore liquefaction facilities [can] sustain its price competitiveness," particularly as LNG can be sold at a discount to substitute fuels, ENN said in its interim report in September last year.

--Song Yen Ling, with staff, yenling.song@platts.com
--Edited by Wendy Wells, wendy.wells@platts.com