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Highlights

Supply proximity of S Korea, Japan proves attractive

Deliveries from Americas, Australia tested for operational viability

Singapore — China, the world's second largest LNG importer, is exploring LNG break-bulk opportunities at facilities in neighboring countries like South Korea and Japan, as the importer's demand for small-scale LNG continues to grow.

The process involves breaking standard-sized LNG cargoes into ISO tank containers for delivery to China's regular coastal and riverbank ports. Potential supply partners include South Korea's Kogas and Japan's Shizuoka Gas.

The move comes amid China's plans to expand small-scale LNG import infrastructure in order to diversify energy supply sources and enhance energy security. China has also tested options for importing small-scale LNG from traditional LNG exporters like Australia and the US, which have proved to be operationally feasible, but highly costly.

Importing ISO container-sized LNG cargoes, however, is expensive.

The cost per unit of LNG through such means is substantially raised due to diseconomies of scale in the transportation and storage processes.

The difference in the cost per unit between a conventional 65,000-mt LNG cargo and a 20-mt ISO tank is significant -- particularly as an ongoing structural oversupply has kept global spot prices under pressure.

"The [ISO container] business had room to play only [for a short seasonal period] in late 2017 when there was amassive domestic gas shortage and the JKM was floating around $10/MMBtu for winter [months]," a China-based end-usersaid.

"Only at that [price] level for spot LNG, would it make sense for buyers to pay up on small-scale [imports] formeeting winter shorts," the source added.

In 2019, the JKM averaged at $5.497/MMBtu as of November 26, 44% lower than the $9.823/MMBtu averaged for the same period in 2018, S&P Global Platts data showed.

AMERICAS ROUTES VIABILITY TESTED

Over the past few years, Chinese companies carried out trial runs with LNG exporters in Australia, Canada and the US, opening up potential import routes for small-scale LNG.

China Energy Reserve and Chemicals Group, or CERCG, received roughly 100,000 mt of LNG through ISO tank containers from the US, Canada and Australia over May 2017-2018, according to local news agencies.

Canadian natural gas utility FortisBC also has a two-year agreement with Top Speed Energy Corp. to send 53,000 mt/year of LNG, or 60 ISO containers a week, shipped from its small-scale liquefaction facility Tilbury LNG, according to a company release in July.

While these longer distance deliveries have been tested for operational viability, their economic viability remains to be tested.

SUPPLY PROXIMITY

Looking to cut logistics expenses and delivery time, buyers in China have started importing reloaded LNG from Japan's Shimizu terminal and South Korea's Gwangyang terminal, signing a number of deals in 2019.

China received its first containerized LNG from South Korea's Kogas through BKLNG on November 15, a company release on the Shanghai Petroleum and Gas Exchange said.

The two ISO tanks containing 28.8 mt of LNG in total, were reloaded and shipped from the Gwangyang LNG terminalto Qingdao port, a source close to the matter told Platts.

Reloaded LNG from Gwangyang terminal shipped through ISO containers took only 24 hours to arrive at Qingdao port, according to the release. The volumes were then sold on SHPGX to Huagang Gas Group Co., Ltd. -- a subsidiary ofstate-owned China National Petroleum Corp., the same release said.

PetroChina International (East China) Co. Ltd., has also started receiving imported LNG via ISO tank containerssince early November from Japan's Shizuoka Gas, sources with knowledge of the matter said.

Five ISO tanks of containerized LNG, each of around 20 mt, were discharged at a regular port in Shanghai on November 8, the source said. Those LNG containers were understood to be sent from Shizuoka Gas' Shimizu LNG terminal.

In January, the city gas distributor signed an agreement with China's Clean Energy -- a subsidiary of Dalian Inteh Holdings Co. Ltd. -- to supply 1,600 mt/year of reloaded LNG over 2019-2021. The LNG will be reloaded from its Shimizu terminal, a company release said.

Jusda Energy Technology, an associated company of IDG Energy Investment, also signed a deal with a Japanese gascompany for receiving LNG through ISO containers, with an annual target volume of at least 200,000 mt, a company release said.

While Japanese and South Korean end-users are trying to ramp up terminal utilization through such small scale reload opportunities, buyers in China are facing challenges of getting competitively priced supply.

Expensive logistics, the small scale nature of seaborne containerized LNG, and high procurement costs at Asian reload facilities are concerns that could impede this trade flow.

-- Shi Yun Fan, shiyun.fan@spglobal.com

-- Edited by Haripriya Banerjee, haripriya.banerjee@spglobal.com