“Deep Winter” in the LNG Sector — Opportunities & Challenges

By Liu Siming, China National Petroleum & Chemical Planning Institute


Convenient for storage, transportation and use, liquefied natural gas (LNG) has broadened the applications of natural gas and protected China’s environment. In recent years, the LNG sector has developed rapidly. It is influenced by the price of raw material gas and the end user market. Since 2014, international oil prices have decreased drastically, the domestic price of natural gas has climbed, profits in the LNG sector have declined, and the growth of demand has slowed down.

1. Excess capacity

There are two major sources of LNG in China: liquefied onshore-pipeline natural gas and LNG directly imported from the sea. As of the end of 2014, China’s capacity to liquefy LNG reached 65.36 million m3/a (volumes of LNG in this article are standard-state gas), up 65.7% YoY, the actual supply was 8.295 million tons, a YoY growth of 38.3%; the number of new projects was 38, and the operating rate of units was only 53%. Sinopec, PetroChina and CNOOC have actively implemented a layout of LNG receiving stations in coastal regions, and the total scale of receiving stations being constructed or planned for construction around 2015 is 34.17 million t/a. It is expected that China’s total scale of LNG receiving stations will be close to 89.6 million t/a by 2020, gasifying 125.46 billion m3/a of natural gas. Due to the price relationship between imported LNG and domestic natural gas, the utilization rate of LNG receiving capacity in coastal regions declined from 76% in 2010 to 50% in 2014.
China’s capacity for LNG liquefaction is underutilized, mainly because the overall layout of capacity is irrational, the development of upstream and downstream sectors is not balanced, and the receiving capacity in coastal regions lacks reliable resource supply.
(1) The capacity of LNG liquefaction units in inland China is distributed mainly in provinces along the West-to-East Gas Transmission Pipeline, within which the capacity in Northwest China accounts for 70% of the total. In the west, the population density is low, the total consumption of urban gas is lower, the LNG vehicle fuel network does not match the liquefaction capacity, and compressed natural gas (CNG) automobiles still dominate the alternative fuel market, so the product cannot be consumed in the local market, resulting in fierce local competition. While in regions like East China and South China, the regional economy is developed and the natural gas supply does not meet the demand. On one hand, several large energy central enterprises have built LNG receiving capacity, increasing it drastically. On the other hand, the prices of natural gas in Asia have remained high, and cheap offshore LNG resources are becoming increasingly scarce, causing the utilization rate of LNG receiving capacity to reduce from 76% in 2010 to 50% in 2014.
(2) At present, LNG mainly has the following applications in China: peak-shaving substitute for urban gas, transition gas source for urban gas, transition gas source for gas peak-shaving power plants without pipeline gas, transition gas source for industrial users without pipeline gas, and fuel of LNG automobiles. China’s consumption market structure of LNG is irrational, with over 90% of it being used for urban heating and industrial uses after regasification. For these applications, liquefaction only solves the problem of long distance transportation and does not make full use of the price and environmental protection advantages of natural gas. As of 2014, China’s retained quantity of natural gas automobiles was around 1.0 million vehicles, the consumption of natural gas for automobiles reached 8.0 billion m3, the number of LNG fueling station was less than 300, and the direct-sales market of LNG for vehicles and vessels has not been effectively released.

2. Price

Due to the drastic decline of oil prices since the second half of 2014, the prices of fuels such as gasoline and diesel, imported fuel oil and liquefied petroleum gas (LPG) have fallen significantly, resulting in a drop of imported LNG prices. However, due to the long-term agreement price being used in the natural gas pricing method for China’s LNG import activities, the reduction of international oil prices has had little impact. In contrast, with the gradual growth of international prices for the long-term supply of LNG, LNG resources with low prices and long-term agreements will become increasingly difficult to arrange. Due to the tight supply of natural gas in the domestic market, China will inevitably increase its import volume of high price gas from Qatar. It is expected that China’s contract prices for importing LNG will climb steadily, and the long-term supply price of LNG will increase to US$12-15/MBtu (equivalent to RMB2.6-3.0/m3). In the long term, affected by the world’s constant growth of demand for energy, LNG prices will continue to grow. However, influenced by the current low prices of oil, the price growth will slow down.
On the other hand, the national government has implemented a calculation method that is linked to alternative energy such as fuel oil and LPG (weighted is 60% and 40%, respectively) to set prices for pipeline natural gas. According to the latest policy released by the National Development and Reform Commission, China unified natural gas pricing between incremental gas and stock gas on April 1st, 2015. The maximum city-gate price for incremental natural gas was reduced by RMB0.44/m3, and was expected to remain at RMB2.0-3.0/m3. Considering the cost of liquefaction (around RMB1.0/m3), the ex-factory price of LNG is expected to remain at RMB3.0-4.0/m3. Therefore, the coastal imported LNG will have a certain cost advantage in the short term; however, because of the transport distance, this will not have a substantial impact on onshore LNG units. On the contrary, LNG produced in the western region from onshore domestically produced pipeline natural gas will have a price advantage within a certain range.

3. Development of LNG
for automobiles

Since the second half of 2014, international oil prices have decreased drastically, and the prices of domestic oil products have also been adjusted. To take the highest retail price of diesel as an example, it has decreased from RMB8 455/t to RMB5 890/t, being equivalent to the price of RMB6.65/m3 and RMB4.63/m3, respectively after being converted to natural gas according to the heat value. This change weakens the advantage of LNG as an alternative fuel for automobiles, to a certain extent.
The carbon emission of LNG automobile fuel is around 140 g/km, much lower than the carbon emission of gasoline and diesel in automobiles – which is around 220 g/km – and even lower than that of liquid-hydrogen, hybrid power and lithium-battery automobiles. The existing particulate matter emissions of LNG automobile can meet the requirements of the Euro-V Standard or even higher emission standards. LNG buses produce 90% less inhalable particulate matter (PM), 20% less hydrocarbons and 60% less nitrogen oxide, so using LNG as automobile fuel is an effective way to improve the urban environment. The purchase prices of LNG automobiles are higher than those of diesel automobiles, but the fuel cost of LNG automobiles is low. Therefore, the competitiveness of natural gas automobiles is weakened under low oil prices and improved by high oil prices. Even when the price of crude oil is at the low level of US$60/bbl, there is still a certain cost advantage in some regions.
China’s LNG automobile sector has formed the equipment manufacturing capacity covering the whole industrial chain – the whole LNG vehicle, engine, vehicle cylinders, fuel supply system, LNG charging equipment. Compared with CNG automobiles, LNG automobiles have an obvious advantage (a single filling of a 200 L cylinder can propel a vehicle over 400 km) in the application fields with large fuel consumption like buses and heavy trucks. After cryogenic purification treatment, LNG is cleaner than CNG. Due to fuel storage at low temperature and atmospheric pressure, LNG automobiles are also safer than CNG automobiles. Therefore, CNG automobiles will become a transitional product of LNG automobiles, and will be replaced by LNG automobiles in the future.
China’s retained quantity of automobiles will reach 270 million vehicles by 2020, with an average annual growth of around 13%. A pattern will be formed that is based mainly on diesel and gasoline automobiles and supplemented by alternative-fuel (including fuel methanol and fuel ethanol) automobiles as well as new-energy automobiles. With the growth of China’s natural gas supply and the rapid development of the pipeline natural gas network, the profit-earning pattern of the LNG sector will be adjusted, LNG will gradually shift from an urban civil gas to direct use in vehicles (including marine vessels), and the main gas for urban residences will be pipeline gas. It is expected that the consumption of natural gas for vehicles (and vessels) will be 20.0 billion m3 by 2020, replacing 16.0 million tons of traditional fuels. It will develop rapidly in regions producing natural gas and in the eastern coastal provinces, forming a complementary development pattern with electric vehicles.