Experts warn against rushing into LNG market
(China Daily)
Updated: 2004-04-02 09:27

China's coastal provinces and oil companies are rushing to invest billions of dollars to build liquefied natural gas (LNG) import projects to feed power generators as well as private stoves, amid wide-spread power shortages.

But experts warn that any hurried investments in the LNG market would be risky. If the power market turns around, investors may suffer losses since the government has not yet rendered stimulus to support gas consumption.

At least three more LNG projects are currently under discussion. If all are approved, China is expected to have seven LNG terminals built along China's coastline before 2010.

Shanghai plans to build a 3-million-ton-a-year LNG terminal in 2008, local industrial sources said yesterday.

Annual production capacity could further double to 6 million tons a year in the future, pending on market demand.

The local government is talking with three of China's largest oil companies, namely PetroChina, Sinopec and China National Offshore Oil Corp (CNOOC), separately, to build the project. The project is still awaiting central government approval.

A typical project will import LNG for at least 25 years to supply a terminal where LNG will be transformed back into natural gas and delivered to local power plants, residents and industrial users through gas trunklines.

Earlier last month, CNOOC, the nation's third-largest oil company, announced it would build China's third LNG terminal in East China's Zhejiang Province. The US$1.7 billion terminal has a capacity of 3 million tons a year.

Later in the same month, CNOOC signed a memorandum of understanding (MOU) to study the possibility of building a fourth terminal in Tianjin.

CNOOC is also the major operator of China's first two LNG projects in South China's Guangdong Province and Fujian Province which have a combined capacity of 6.3 million tons a year.

More projects are on the waiting list. East China's Jiangsu Province is talking with PetroChina, while Shandong is likely to join hands with Sinopec to build LNG projects.

Coastal areas, where few coal, gas or oil reserves exist, hope imported LNG could help satisfy their demand for energy to fuel the brisk economy.

At least half of the LNG imports will be used for power generation. Local governments intend to replace coal with clean natural gas gradually for power generation in an attempt reduce air pollution and traffic congestion caused by coal transportation.

Oil companies are also jostling for the embryonic LNG market to take advantage of China's move to increase natural gas consumption. The government plans to increase gas consumption to 8 per cent in the total energy consumption mix by 2010 from less than 3 per cent at present.

Meanwhile, the LNG projects also allow oil companies to take stakes in supply gas fields in foreign countries to raise their reserves, analysts said.

CNOOC Ltd has acquired stakes in a Northwest Shelf joint venture and Gorgon in Australia as well as in Indonesia's Tangguh field after the parent CNOOC committed itself to LNG purchase contracts with these fields.

Still, experts warn of risks in building LNG projects.

"It is developing too fast," said a senior executive of a foreign oil company's Chinese branch. "There is over-competition among oil companies. It seems that everyone just wants to grasp at it without consideration of possible risks."

The executive said LNG projects are very complicated and consist of upstream supply fields, middle-stream infrastructure construction and downstream market development. Many other issues such as the fluctuation of foreign exchange rates and international relations, transportation and security of supply should also be heeded.

"It should take years to complete the evaluation process. But it now takes only a month to complete it," said the executive.

Local officials said they hope the LNG projects would be approved as soon as possible. They worry that LNG prices will surge as more and more Chinese buyers come to the market.

The riskiest element in these projects is seeing whether market consumption can absorb enough LNG supply, said experts.

The central government is pushing through reforms to encourage competition among power generating plants. But as China now lacks an incentive policy to support the consumption of natural gas, gas-fired power plants will be edged out of the market due to the higher price of natural gas over coal, they said.

"Once there is an electricity glut, the survival of gas-fired power plants would become a question mark," said a manager from another foreign oil company's branch in Beijing. "If this is the case, the LNG project will be loss making."

Or, if it takes too long a period for gas consumption to increase to a level justifying the project, the profitability of the LNG project will also be at stake, said the manager.

The manager also indicated that the government's lack of uniform planning to coordinate the markets and pipelines for LNG and traditional natural gas pose a problem.