Regional LNG: Supply snags hit China's LNG drive

Mainland oil companies are facing increasing difficulties securing liquefied natural gas supplies amid a drive to cut the country's reliance on oil and clean up the environment, The Standard reported Monday.

The country, being a relatively new user of natural gas, faces tough competition from more mature consumers such as South Korea, Japan and the United States.

CNOOC, PetroChina and Sinopec plan to build several LNG terminals in the country's coastal provinces, but a new policy limits each province to just one terminal.

A senior official from the energy bureau under the National Development Reform Commission said the country's companies are finding it hard to secure gas supplies.

"The Chinese companies are unable to secure affordable supply for their proposed terminals as gas prices are too high," the official said.

However, Beijing is not keen to support LNG import projects because it feels such moves are commercial decisions best left in the hands of the companies involved, the official added.

"Some of the issues [faced by mainland firms] include pricing disagreements in Australia, supply uncertainties in Indonesia and transportation issues in the Middle East," said a source from PetroChina's natural gas market section.

CNOOC Ltd, the unit of CNOOC Corp, has secured LNG supplies from Australia and Indonesia and hopes to buy more from Australia.

But given the current high oil prices - which gas prices are based on - it is unlikely CNOOC will be able to get sufficient LNG supplies at competitive rates.

"Why would any seller want to sell at low prices when there is always the option of selling to the US West Coast for higher prices," said Andy Flower, an independent LNG consultant.

CNOOC secured gas for its Guangdong project from Australia's Northwest Shelf project at about US$3.50 (HK$27.30) per million Btu - British thermal unit, a standard unit of energy - including delivery costs.

But prices have almost doubled since, according to energy reporting service Petroleum Argus.

China is shifting from coal to gas to fuel power generation as it moves toward cleaner energy and in the wake of deadly accidents in coal mines.

In more mature markets such as South Korea, the United States and Europe, LNG makes up a third of fuel needs in power generation, according to Takeo Suzuki, senior coordinator at the Japanese think tank, Institute of Energy Economics (Japan).

In China, however, gas accounted for only 3.6 percent of fuel for power generation as of last year, according to the International Energy Agency.

Still, power plants are expected to consume about 64 percent of the estimated 3.7 million tonnes of LNG per year of Guandong's estimated storage capacity by 2006, according to an LNG company in the province.

Gas pricing is a bigger problem in provinces further north where coal is abundant.

"Currently, there is no long-term gas PPA [power purchase agreement] between the power producer and the power grid company to guarantee power consumption since gas-fired power is a new issue in China," said a Guangdong Dapeng LNG spokeswoman.

CNOOC Ltd, meanwhile, is facing difficulties negotiating with the partners of Australia's giant Gorgon project due to pricing, delivery and volume issues, a CNOOC source said earlier.

Mainland companies also prefer to take up equity stakes in projects. Yet, according to a Sinopec source, its plan to invest in Russia's Sakhalin project has faced opposition from the consortium partners.

For now, Chinese companies are looking at Iran as a potential source for LNG.

Yet, there are uncertainties surrounding Iran's prize offshore gas field, the South Pars project.

Although there are claims that the field holds up to 500 trillion cubic feet of gas, no one knows how big the field is or when it will start production, according to a recent report by consultant Facts Inc.

Sinopec aims to import up to 250 million tonnes of LNG over 30 years for its proposed Qingdao project. But the terms are still inconclusive due partly to high transportation costs, according to a Sinopec Group source.

CNOOC is also in talks with Iran but has yet to reach an agreement, according to industry sources.

Malaysia's Deputy Prime Minister Najib Tun Razak was quoted recently by the New Straits Times as saying the country may supply LNG to CNOOC's proposed Shanghai terminal but it is unclear if Malaysia, which already has its own shipping fleet, would let China use its own transport.

Without government backing and with numerous purchase issues, it is a big question if the dozen proposed terminals will be built.

"Ultimately, China has to decide whether it is willing to pay a high price for gas if it wants to build these terminals," said Flower.(*)