China is flexing its muscles in the global LNG market

Dec 07, 2009 01:00 AM

Multibillion dollar deals for imports of liquefied natural gas from Qatar and Papua New Guinea are the latest examples of China flexing its muscle in a market where it was previously a bystander. But they are unlikely to be the last.
Analysts expect China to overtake Japan as the world's biggest importer of LNG-a natural gas cooled to a liquid form so that it can be transported by ship-within decades as its economy develops. A raft of new LNG terminals is planned along China's coastline, along with expansions of existing plants in Shanghai, Guangdong and Fujian.

Climate change concerns are also forcing China's hand. The country wants to reduce its reliance on coal and crude oil for its energy needs, and boost the share of natural gas in its energy mix to 10 % by 2020 from 3 % in 2005.
To be sure, China's LNG supply is currently small. In the first nine months of this year, China imported 3.96 mm tons of LNG, or less than Japan imported during the month of September.

Japan's reliability as a customer ensures it's still courted by companies with gas to sell. But its LNG demand is expected to remain flat or rise only slightly in the coming years due to its greying population and a shift toward energy efficient technologies.
"China is the centre today of the new LNG compass," said Qatar's Deputy Premier and Minister of Energy and Industry HE Abdullah bin Hamad al-Attiyah has said.

QatarGas has signed preliminary agreements to sell PetroChina and China National Offshore Oil Corp additional volumes of LNG. It means QatarGas could be shipping as much as 7 mm tons of LNG to CNOOC and 5 mm tons of LNG to PetroChina within six years.
Moreover, gas exporters including ExxonMobil, Royal Dutch Shell, Malaysia's Petroliam Nasional (Petronas), and BG Group have signed deals with China's state companies since 2006.

This activity is putting Asian utilities in a bind. Do they stick with traditional strategies for buying LNG, or work together to source supply?
Early evidence suggests a move toward the latter. In July, Korea Gas Corp and Mitsubishi signed a memorandum of understanding to co-operate on energy issues, including LNG. Both are heavyweights in the LNG market. Mitsubishi is Japan's largest trading company by revenue, while Kogas is the world's largest LNG buyer by volume.

One of their target areas for possible co-operation is the joint development of unconventional gas, such as coalbed methane, then converting it to LNG. Tokyo Gas also rates unconventional gas as a supply option.
"Coal seam gas is estimated to exist in large volumes. In that sense, these projects are very meaningful," said Kentaro Kimoto, general manager of the company's Gas Resources Strategy and Planning Department.

A challenge is that it is hard to know how much of China's future gas demand will be met by LNG. China's natural gas demand is expected nearly to triple to 230 bn cf in the 2008-2020 period, estimates Mitsubishi Research Institute, a think tank. Liu Hequn, a senior engineer at China National Petroleum Corp, said China's LNG demand growth will largely depend on how competitive it is versus pipeline gas from Central Asia and Russia.
A 7,000 km pipeline linking Turkmenistan to China is due to start operations in December, transporting natural gas from the Caspian Sea.

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