China’s independent energy firms step up to meet LNG demand

China’s leader, President Xi Jinping, wants to increase the country’s use of cleaner fuels like liquefied natural gas to help reduce the country’s reliance on coal-fired power plants.

To do this, China needs to increase LNG imports, and the state-backed giant energy companies cannot keep up with demand. This is where the smaller independent energy firms step in. Companies like Guanghui Energy Co. and ENN Group have built their own new natural gas import facilities, so they don’t have to rely on the state-backed companies’ facilities.

“This is part of the government’s efforts to open up the sector to non-state actors and increase efficiencies through greater competition,” said Meidan at Energy Aspects.

Last month marked the second shipment of LNG into Guanghui Energy’s Qidong terminal, located north of Shanghai. Guanghui Energy received one of the first licenses for non-state firms to import crude and the company allows third-party firms to store LNG at their Qidong facility. The terminal has a capacity for 650,000 metric tons of LNG, but Guanghui Energy plans to expand the capacity to 3 million metric tons by 2019. Currently there are three more terminals under construction by independent firms with at least two more in the planning phase.

“The key thing about having your own terminal is that you can take advantage of potentially lower pricing in the market. Also, it’s very difficult to get supply through the infrastructure of the Chinese oil majors because the access rules and regulations are not terribly transparent and not terribly well enforced,” said Neil Beveridge, an analyst at Sanford C. Bernstein & Co. in Hong Kong.

The big state-run energy firms own over a dozen LNG terminals, but they buy most of their gas on long-term contracts. With the current state of the market, the new smaller firms can find much better deals on LNG, sometimes less than half of the price the big firms paid.

“Those companies can get cheaper LNG prices from the spot market on a more flexible basis and they can meet demand from their widespread distribution networks,” commented Maggie Kuang, an analyst with BNEF in Singapore.

This issue becomes even more crucial since experts estimate that China will more than double their LNG imports by 2022. China will steadily increase their demand for LNG by 5 to 6 million metric tons per year into the near future. This comes from the Chinese government’s goal of producing at least 10% of the country’s energy from natural gas by 2020 and at least 15% by 2030.

One drawback for the small-independent firms is that they have to rely on the state-run giant’s pipeline networks and infrastructure to move the LNG.

Beveridge added, “It’s still all about access with the majors for an independent distributor. There are still more regulatory rules that are needed, so these companies are very much pioneers.”

China looks to become a very large consumer of natural gas in the next decade, which could help reduce the global glut.

Article written by HEI contributor Raymond Arrasmith.

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