As natural gas prices fell to their ten-year lows, scraping beneath the $2 per MMBtu spot price level, with the oversupply glut the source of consternation among US commodity investors, the story is different in China. China, with its enormous energy needs and its dependency on coal, has been trying to engineer a long-term shift to cleaner energy, with natural gas part of the centerpiece of this policy. To combat pollution, China’s green energy policy has made a large space for natural gas to fill domestic energy needs now and in the future.
A recent Reuters article stated that China intends to double its use of gas to 8 percent of energy supply by 2015, which would be about 260 billion cubic meters (bcm) of use. This would bring coal consumption down to 60 percent of energy supply. The even more ambitious goal for 2030 is to increase gas consumption to 500 bcm, which would be on a par with what all of Europe now consumes.
Natural Gas Use In China (KWH) Source: Tradingeconomics.com
To that end, China has been attempting to build up its natural gas industry by expansion and acquisition. This includes imports, including a planned pipeline to Myanmar and an existing one already from Turkmenistan. More well known is the importation of liquefied natural gas, or LNG, from Australia. PetroChina (PTR) and Royal Dutch Shell (RDS.A) have a joint venture for LNG in Australia, and although the project is already experiencing cost overruns of 50 percent to an estimated $34 to $36 billion, the Arrow Energy terminal project will ship 8 million tonnes when completed in 2017.
Policy And Strategy
The massive scope of the Arrow Energy terminal project in Australia is an example of the size of the projects China is pursuing. The major oil companies in this way are more than following state policy, they are implementing it. The other major development is a domestic one, where the state-owned energy companies are using their size and scale to buy up smaller natural gas companies. In addition to the major energy companies such as PetroChina and Sinopec, or China Chemical & Petroleum Corp. (SNP), along with CNOOC (CEO), all of which have extensive natural gas interests, there are several major natural gas companies and many small regional and local ones. The thinking is that the major oils, with their tremendous scale and leverage, which includes their extensive exploration and production facilities, will be buying up the smaller players. Sinopec’s attempt along with gas company ENN (2688.HK) to buy China Gas Holdings (0384.HK) for $2.2 billion with an unsolicited offer is perhaps only the opening salvo in a spirited battle for natural gas assets.
The Changing Picture
China Gas has rejected Sinopec’s and ENN’s offer, while Beijing Enterprises Group has stepped up its stake in China Gas which may inaugurate a rare bidding war among state-run companies. Meanwhile, some of the large natural gas players aren’t waiting around idly to be, as Kunlun Energy (0135.HK) has recently invested $1.3 billion to expand its LNG business. Kunlun is the gas distribution segment of Petro China. Kunlun has the stated aim to become the largest gas distributor in China. If you have the feeling that major consolidation is going to take place, with the largest entities in the energy business amassing most of the natural gas assets, you’d likely be right. That is what’s clearly underway in China’s energy sector already.
Kunlun Energy 5 Year Chart Source: Yahoo! Finance
Investing In Gas Giants
The shift to more natural gas is underway all the way to the user end, also. China is erecting more gas-run power plants to supply electricity, so the energy sector from upstream, or exploration and production, through downstream, refining and marketing, to sales, will all see expansion of the total infrastructure. It’s estimated that there will be five times as much natural gas electricity producing power, or 220 gigawatts compared to 40 gigawatts, in the next eight years. The expansion of the natural gas industry bodes well for power plants, generating equipment, and of course, the new gas giants who are also the old oil giants. Investors take heed.
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