china and ng - ref

The following article is extremely important for the future direction of Chinese interests in energy production: CHINESE and INDIAN back COPENHAGEN deal

It might only be a small step, but is a commitment on expenditure from the OECD which means that CO2 is going to be priced into energy in an ever increasing fashion, and what happens on one side of the world, will quickly be replicated with their trading partners.


I posted recently that the Chinese natural gas mix is changing. They are hitting year on year double digit growth for natural gas and I cannot see this abating anytime soon. Current demand is at around 3TCF.

There are some very interesting assessments in the IEA report on chinese gas. Namely, that they have all but stitched up supply for future demand. I approach these forecasts with a little skepticism as it is not easy to predict a moving target like energy consumption when you have an integrated Europe and Asia and a significantly changing energy mix.

The Chinese market is rapidly evolving from being an indigenously supported coal and gas mix, to a large dependence (more so for gas) on foreign sources that will one day loose their rigid supply and pricing mechanisms and create a more efficient supply and pricing/tarrifed gas supply network.


Quick Summary by the numbers from the IEA report:

-They have proved reserves of around 133 TCF (5 TCF which is CBM).

-reserve/ production profile has declined from 51(2002) to 47 (2007) despite increases in reserves



DEMAND and INFRA
-They are looking at an existing, constructing, approved and planned import regasification capacity of 33 mtpa.

-They have an East/West 4000km main trunk line and another planned that lays down as the backbone of the countries gas infrastructure. This runs right through AOEI confirmed interests in China.

-They (China) are planning for 9TCF (high) of natural gas consumption by 2020, or 10% of the total primary energy mix for china.

-Since 2000 (in just 10 years) it has grown from a demand of around 1TCF to 3TCF. This is a 200% increase. They are looking at possibly achieving a net 200% increase on the 3TCF again to reach the 2020 target.

-They have already raised their annual growth target of 7% gas increase to 10% over the past few years.

-china per capita consumption is 53m3 compared to 430m3 in the rest of the world



ELECTRICITY

-baseload power from Natural gas is prohibited.

-Priority is placed on City Gas (DOMGAS) and in some areas with abundant supply, peak shaving is allowed.

-despite these restrictions on gas use in power, China has 15.6GW installed capacity, or 2.5% of the total elec cap. Much of this capacity is idled due to lack of supply and high prices.

-despite this again, predictions for 70GW installed capacity by 2020 are contained within the governments long term electricity supply plan



SUPPLY

-3 companies dominate the gas market (in order of size), PetroChina (subsidiary of CNPC), Sinopec, and CNOOC.

- Petro hold ~75% of production, reserves and infrastructure as well several LNG regas terminals and the massive Central Asian>China pipeline.

- CNOOC is considered the LNG leader.

- 2007 the country opened to foreign operators to accelerate CBM development.

-CUCBM (China united CBM) is a sole state owned company. This is the company that AOEI has an agreement with in the PSC in the Ordos basin (near the major city centre Xian).

-Arrow have a few deals in work with several Chinese companies, including PetroChina, Binchang Mining, and Shenyang Gas.

- Arrows areas of interest are centred around the well developed Ordos gas basin as well as the PSC with PetroChina in the highly prospective Junggar basin.

- The PSC deal with Petro was due for wrap in lat 2009 and I am unsure if this been completed or announced?

-2007 supply from CBM was 14PJpa and a targeted increase to 360PJpa

-IEA estimate on Chinese cities with gas distribution 60 (2003), 140 (2005) and 270 (2010-projection)



approximately LNG IN >>> LNG FROM

-June 2006 first LNG shipped from Aussie NWS to Guandong
-Guandong(CNOOC) >>> Aussie NWS / QatarGasII / BG (QCLNG)
-Fujian(CNOOC) >>> Indonesia Tangguh
-Shanghai(CNOOC) >>> Malaysia Tiga
-Dalian(PetroC) >>> QatarGas IV
-Jignsu(PetroC) >>> Gorgon(Shell) / Gorgon (Exxon)
-Zejiang(CNOOC) >>> QatarGasII / Total
-contracted volume is estimated at 22.5mtpa
-Estimated future pipeline supply from Central Asia is around 1.4TCF or roughly equivalent to 20mtpa.


FUTURE???

-there is a wide variety of projections on the gas industry including an increased domestic demand and reduced industrial use

-projections for demand range from a conservative 5TCF to a high side of 9TCF demand. Most reasonable assumption cited was ~7TCF by 2020.

-demand/domestic production gap looks to be filled by the external supply from C. Asia and LNG.

-China is currently making good use of a buyers market due to the GFC as well as considerable foreign currency reserves



SOME COMMENTS

China is pegged to be Asia's leading gas consumer in just 5 short years. On a comparative basis to the rest of the world, on a PER CAPITA BASIS they are CONSUMING 11% of what other nations are. Double or triple this and you see where the gas market is heading with considerable upside still available.

The government currently regulates gas price so that it is lower than international prices. Increasing demand will place pressure on this regime of discounting as more gas is sourced externally, however with prices for energy universally going up, you could expect this effect to be nullified.

The estimation that the supply gap is forecast to be filled is very interesting considering Petrochinas interest in developing more projects with Shell through an acq of Arrow. Especially when you consider there is a lot of gas from Qatar and Iran that needs a home. This leads me to the opinion that the estimates on demand and supply need to be adjusted, especially in a carbon priced environment.

So now go back to the top and read the article again.
When you consider that:
1/ chinese energy demand is increasing

2/ chinese energy mix will change considerably if they are to switch their supply base from being carbon intensive 70% COAL


This leaves considerable scope for increasing the mix of gas in the mix.


SOME IDEAS on COMPETITORS
I think that suggestions of additional BG commitment to CSG are a little over cooked considering they already have a significant acreage holding and reserves as well as capital commitments for field development and LNG plant. there time to development for the resource would eat away at their investment.

There are a lot of other quiet Japanese parties out there such as Mitsui, Toyoda and Sojitz that have demonstrated an interest in CSG and LNG.

I would doubt Origin, rather that they are a potential competitor.

I reckon STO is off the cards with a heavy set of commitments.


So, I guess my opinion is that, the game is on, but it is not local players dictating the terms, more the suppliers calling the shots. Arrow has some good leverage on the future demand which is all sourced external to Australia from Japan and China; just as much as those external sources have for options around the region for gas.

Arrow has some terrific prospects and to consider that they have to accept a lowball offer is a bit nutty imo.

Cheers and please DYOR!!!!

SF

NOTE: most Chinese and European figures are quoted in cubic metres. As a very basic and approximate conversion I have used the following 1bcm = 36 bcf = 36 PJ.