Analysis: Where is gas used next in China? Trucks and trawlers

By Chen Aizhu

BEIJING (BestGrowthStock) – Feeling the pain of soaring fuel bills, trawler captain Liang Liming is thrilled to hear that in a few years his diesel-guzzling 400-horsepower boat may shift to natural gas, a cleaner fuel about a third cheaper.

Independent firms supplying retail volumes of liquefied natural gas (LNG) around China are targeting hundreds of thousands of users such as Liang, gunning for as much as 10 percent of China’s roughly 1.6 million barrels per day diesel market for transport use by 2015.

LNG, gas chilled to liquid form for transport, will be used to fuel heavy-load trucks, city buses and river fleets as the world’s top energy user and greenhouse gas emitter moves aggressively to boost gas use to combat emissions.

Firms such as Xinao Gas (2688.HK: ) and Xinjiang Ghuanghui are involved in the sector, which liquefies and transports small volumes of gas and which has flourished quietly outside of the focus of China’s leading energy firms.

The bigger companies have preferred to invest in giant LNG import terminals and a pipeline grid to pump larger volumes of gas to factories, power plants and residents.

But the pace of growth in the trucked LNG sector has caught the attention of giants such as CNPC and CNOOC, and would probably spur an increase in spot LNG imports on top of long-term deals with exporters such as Qatar and Australia.

“The weigh-in by majors means they now realize it’s a market of huge potential,” said Ye Yong, deputy general manager of Shenghui Gas & Chemical Systems, a Jiangsu-based manufacturer and engineering firm specializing in LNG trucks and storage.

Industry estimates of the amount of LNG being trucked around vary between 2 and 6 million tonnes a year, versus China’s total annual imports of around 10 million and total Chinese gas demand equivalent to 73 million tonnes this year.

“Six million tonnes is doubtful, it’s so big. But my bet is that trucked LNG will probably grow at 25 percent a year in the next five years, because its price is competitive and the government in clearly on the path toward low carbon and energy saving,” said a manager at private gas firm JOVO Energy Co Ltd.

POLICY EVOLUTION

Energy policy makers in Beijing started with a “no-go” for onshore liquefaction plants, seen as a distraction from China’s massive pipeline drive, but the surging demand for gas, which tripled in the past decade, and recurrent winter shortages forced the government to review its stance.

Despite the lack of policy support, scores of LNG plants have mushroomed since 2001, near marginal gas reservoirs often overlooked by big oil firms and which are now churning out some 20 million cubic meters of gas a day, equivalent to 7 percent of China’s total gas demand, industry officials estimated.

Similar to the “teapots” — China’s small oil refiners — these liquefaction facilities have become a dynamic swing supplier to container trucks at major ports, factories and new residential compounds, a cluster of consumers that has expanded faster than the pipelines can reach.

Gas for transport is not new in China, which early this decade started using compressed piped natural gas under high pressure (CNG) for thousands of city buses and cabs, replacing diesel or liquefied petroleum gas – a refinery byproduct.

But gas in liquid form is more efficient, with a driving range nearly triple that of CNG.

At the height of a supply squeeze last winter, LNG tankers operated by private firm Xinjiang Guanghui, a pioneer in the sector, shipped gas traveling over a week from the remote northwest to fuel-thirsty factories in the southeastern province of Fujian 3,000 miles away.

“It signals a number of things that are positive for the gas sector — the strength of demand not yet fully supplied by on-grid supply and the overall willingness of buyers to pay higher prices,” said Gavin Thompson of Wood Mackenzie.

Though more pricey than piped gas, trucked LNG costs a third less than diesel, which is in scarce supply in some parts of the country, with prices at a record above 8,000 yuan per tonne.

In a shift of policy, the National Energy Administration is drafting technical standards for LNG filling stations in a push to use LNG in vehicles and ships, a development industry players said was prompted by rapid growth in end-user demand.

BIG GUYS ON BOARD

As recently as 2008, powerful state energy firms were drawn into the booming niche business that they found fitted nicely into their broader green strategy, swiftly expanding into LNG retailing starting in the booming south, while adding smaller receiving terminals along the coast to allow for more flexible spot imports of the fuel.

CNPC, parent of PetroChina, in 2008 turned its subsidiary Kunlun Energy Co Ltd (0135.HK: ) into an LNG specialist that covers receiving facilities to distribution to retailing, industry officials said.

The firm, which has taken over control of PetroChina’s first two major coastal LNG terminals, is also quietly planning half a dozen mini terminals of 300,000 tonne per annum size within the next couple of years, a development likely to spur more spot imports of LNG.

The growth in the sector could help absorb global oversupply after a rise in output of unconventional gas took the United States out of the market as an importer.

“That is going to divert Middle Eastern supplies earlier earmarked for the U.S., and China is an obvious destination,” said Yan Kefeng of Cambridge Energy Research Associates.

THOUSANDS OF LNG STATIONS

In 2009 Kunlun built 65 filling stations in 18 provinces, boosting gas supplies by one billion cubic meters a year.

CNPC has partnered with local firms to become the operator of at least five inland liquefaction plants, with its largest plant in Ansai in the northern Shaanxi province to liquefy 500,000 tonnes per year slated to begin operations at the end of 2011.

CNOOC, parent of CNOOC Ltd (0883.HK: ), a leading investor in big import terminals, set up an LNG retailing department under its gas and power group, having built dozens of filling stations in manufacturing hub Guangdong in the south and looking to build more in the eastern and northern part of the country.

Developers are targeting thousands of vessels cruising Chinese rivers, lorries that transport coal and trawlers like Liang’s.

Engineering firm Shenghui, a joint venture with Norwegian oil services firm I.M. Skaugen (IMSK.OL: ) alone has been approached to work on more than 2,000 filling stations in the next three years, though experts warned the industry would first need to overcome technical and policy hurdles as it scales up.

“It would perhaps take three years to solve the technical problems — to revamp ship engines and truck engines,” said Shenghui’s manager Ye, adding that there is still no national safety standard for LNG use in transport or a rule to allow LNG vessels to cruise along the main Yangtze river.

But users such as fisherman Liang are eager to cut oil bills.

“My boat gobbles up over three barrels of diesel, that is almost 5,000 yuan a day at current prices. It’s not every day I can catch fish worth that much,” said Liang from his home at Zhoushan, a main fishing zone off east China.

(Editing by Clarence Fernandez)

Analysis: Where is gas used next in China? Trucks and trawlers