China gas sellers sidestep state giants to ride demand surge

By Bloomberg News on 8/8/2017

SHANGHAI (Bloomberg) -- China’s independent energy firms are seeking to circumvent its state-backed giants as they cash in on swelling natural gas use, buoyed by President Xi Jinping’s drive for cleaner fuels and nimbler companies.

New import facilities developed by firms including Guanghui Energy Co. and ENN Group offer direct access to cheap liquefied natural gas and cut their reliance on supply and infrastructure controlled by the country’s national oil companies. That may help new players tap China’s booming gas demand, up 15% in the first half of the year.

“The key thing about having your own terminal is that you can take advantage of potentially lower pricing in the market,” said Neil Beveridge, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “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.”

Smaller gas distributors and importers have found an opening as Xi’s government seeks alternatives to coal and encourages private competition in the energy sector. They’re poised to follow a similar trend in the oil industry, where independent refiners known as “teapots” have been allowed greater freedom to import crude, helping push China ahead of the U.S. this year as the world’s biggest importer.

Guanghuai Energy last month received the second LNG cargo at its Qidong terminal, about 100 km north of Shanghai. At least three more terminals are under construction or proposed including a port by ENN Group that’s scheduled to start next year. Guangzhou Development Group has proposed a new import terminal, as has China Huadian Corp., one of the nation’s biggest power generators, according to Bloomberg New Energy Finance.

New private ports enhance the bargaining power for distributors, which will lower downstream sales prices and boost China’s consumption, ENN Energy Holdings, the listed unit of ENN Group, said in an emailed response to questions. It declined to comment specifically on the Zhoushan LNG terminal owned by its parent, which didn’t respond to a separate request for comment.

Xinjiang-based Guanghui, which was one of the first non-state companies to receive a license to import crude, plans to allow third parties to deliver and store LNG at the Qidong site, chief engineer Xue Wenting said last month. The terminal’s annual capacity will be expanded to 3 million metric tons by 2019 from 650,000 tons now, he said.

Jovo Energy, which was the first private Chinese company to begin importing LNG, began operating its Dongguan facility in Guangdong in 2012. The company also stores and sells liquefied petroleum gas and has an oil and chemicals business, according to its website.

China, which is forecast to more than double LNG purchases by 2022, has more than a dozen import terminals owned by its three state energy giants, which buy most of their cargoes on long-term contracts. But given the current global gas glut, new buyers can pick up cheaper shipments on the spot market, where analysts at SCI International estimate costs are about 50% less than average rates under the country’s existing term contracts.

“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,” said Maggie Kuang, an analyst with BNEF in Singapore.

China’s LNG demand will expand by 5 million to 6 million tons annually over the next few years and private investors may account for about 20% of that growth, according to Michal Meidan, an analyst with Energy Aspects in London. Bernstein’s Beveridge estimates that share to be less than 10% of the 60 million tons of LNG he forecasts the country will be importing annually by the end of the decade.

China’s national oil companies account for about 92% of the country’s long-term contracts and “still firmly dominate the LNG import market,” said BNEF analyst Nannan Kou. While Guanghui Energy has been buying spot LNG, it’s seeking to sign long-term contracts with suppliers, including Malaysia’s Petroliam Nasional Bhd, chief engineer Xue said.

The Chinese government is encouraging private capital to help construct LNG receiving facilities and pipelines, according to guidelines published last month by the country’s National Development and Reform Commission. China’s top economic planner also said LNG import capacity and natural gas pipeline length will more than double in the 10 years to 2025.

Opening Up

“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.

China National Offshore Oil and China National Petroleum, the country’s first and second-largest LNG importers, didn’t respond to calls seeking comment. A spokesman for China Petrochemical, known as Sinopec Group, said Monday he couldn’t immediately respond to questions.

LNG imports in June hit the highest on record for that month, in line with the country’s booming demand, offering a boost for gas distributors. China Gas Holdings Ltd. has gained 85% this year while ENN Energy has climbed 69 percent. That compares with a 27% gain for the benchmark Hong Kong Hang Seng Index.

The Chinese government has set a goal of getting as much as 10% of its energy from gas by 2020 and 15% by 2030, up from 6% in 2015. To meet these goals, demand will grow by an average of 15% annually between 2016 and 2020, according to Macquarie Group.

Enough Supply?

The country’s natural gas production, which is dominated by CNPC and Sinopec Group, rose 8% in the first half of 2017 compared to the same period a year ago. Meanwhile, imports have jumped 21% in the first seven months of the year, according to data released Tuesday.

Fast-growing supply may be needed, as Sinopec Group has already flagged a possible “big” increase in gas demand this coming winter compared to last year, particularly in the country’s north, Shanghai Securities News reported Tuesday, citing a company meeting.

Even after independent gas distributors build LNG facilities, they’re often still reliant on pipeline networks operated by the state-backed giants, according to Bernstein’s Beveridge.

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

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