By Brian Spegele
BEIJING--The energy industry overestimated just how much natural
gas China needs, and global oil-and-gas companies risk paying a
heavy price.
When China's economy hummed along a few years ago, energy
companies from Australia to Canada bet its demand for natural gas
would grow fast. They spent billions of dollars on promising
fields, with plans to freeze the gas into liquid, called LNG, and
load it on tankers to sell to energy-starved Asian buyers at a
premium.
China was "always seen as the kind of wonder market that was
going to grow and need so much LNG," said Howard Rogers of the
Oxford Institute for Energy Studies and a former gas executive at
BP PLC. "People got somewhat carried away."
Recent data paints a grimmer picture. Chinese LNG imports are
down 3.5% this year, compared with a 10% rise in 2014. Total gas
consumption grew about 2% in the first half, a turnabout from
double-digit growth in recent years.
Natural gas is an extreme example of how China's slowing economy
has contributed to a global commodities crash. Producers of raw
materials from aluminum to iron ore made heady bets on Chinese
demand. So far, many are being proven wrong.
The downturn is sparking an industrywide recalibration. Energy
consultancy Wood Mackenzie slashed its China gas-demand forecast by
about 15% to 360 billion cubic meters by 2020.
Globally, the market faces 25 million tons of LNG oversupply by
2018, says Citi Research--more than China imported all of last
year. If all the projects being constructed, planned and proposed
today came to fruition, the market would face around one-third more
capacity than it needs by 2025, Citi estimates.
"We're already seeing China cannot absorb all the gas that is
thrown at it--that it's choking on gas somewhat at the moment,"
said Gavin Thompson, an analyst at Wood Mackenzie.
Northeast Asia spot LNG prices have fallen to less than $8 per
million metric British thermal units from over $14 last fall,
according to pricing agency Platts. U.S. Henry Hub prices are under
$3 per mmBtu versus around $4 a year ago.
Slowing demand could affect how North America develops as an
energy-export hub. U.S. gas exporters may have less of a market
than hoped for, though their cheap gas should remain competitive.
Some exports may head eastward to Europe instead.
Depressed LNG demand follows the collapse in crude-oil prices
that has shaken the energy industry to its core and added to global
deflation fears. Natural gas, used in industry, power generation
and transport, has been touted as the fuel of the future; gas is
cleaner than oil and abundant in supply. The road bumps today show
that transition will be far from smooth as key emerging markets
intended to accelerate demand show weakness instead.
Several reasons explain China's lackluster LNG demand.
Government-regulated gas prices are proving too expensive, sparking
conflict between government and industry in some areas. Meanwhile
bloated sectors are cutting capacity, which lowers energy needs.
China is also importing more gas via Central Asia pipelines and has
plans for big Russian shipments.
Australia's Arrow Energy Pty Ltd., a joint venture between Royal
Dutch Shell PLC and state-controlled PetroChina Co., typifies LNG
projects whose economics soured. The pair bought Arrow--which
produces gas from underground coal seams--in 2010 for 3.5 billion
Australian dollars ($2.49 billion), planning to liquefy the gas for
export.
But the Arrow venture lost about A$1.5 billion last year,
including an impairment charge of A$700 million, amid what it
called a poor "economic environment." Shell announced this year it
was shelving the planned export terminal.
Write-downs have stung others. The U.K.'s BG Group took a $4.1
billion pretax charge on its huge LNG export facility in Australia
due to lower oil-and-gas prices.
"The issue is: What kind of returns are we going be making on
these projects now?" said OIES's Mr. Rogers. "Yes, these things
have a 25-year-plus operating life, but you kind of want some nice
cash flows during the first five to six years."
Signs that China may buy less LNG emerged last year. In May
2014, China and Russia signed a massive gas-delivery deal which
will eventually supply China some 38 billion cubic meters of gas
annually--about 20% of total Chinese demand last year. The
countries are negotiating a second pipeline to bring even more
Russian gas to China.
China wants to expand energy ties with its neighbors--including
Turkmenistan and Kazakhstan--to curtail reliance on far-flung
imports. Moscow and Beijing see mutual benefit in cooperation as
Russia cuts dependence on shipments to Europe and China secures a
large, new supply source.
Still, slack gas demand poses problems for Chinese companies.
Sinopec Corp., the state-controlled refining giant, is contracted
to take some 7.6 million tons of LNG annually from a project coming
online later this year in Australia, called Australia Pacific,
where it is invested with ConocoPhillips Co. and Sydney-based
Origin Energy Ltd. But with the Chinese market well supplied,
Sinopec will likely be forced to sell some of that gas on the spot
market, potentially for a loss, industry analysts say.
Sinopec said it would decide how to use Australia Pacific gas
based on market conditions and the company's needs. ConocoPhillips
Chief Executive Officer Ryan Lance said the company was discussing
with Sinopec how much gas it could take in the next two years.
No doubt, Chinese oil-and-gas demand will grow over time. The
problem with stumbling demand now is that it hits energy companies'
profits just as they also struggle with low crude prices.
Lower Chinese gas demands are partly the result of
government-regulated pricing that is discouraging its use. Despite
falling prices globally, authorities have been slow to lower
domestic gas tariffs.
When crude prices fell over the past year, petroleum-based
products that compete with natural gas as fuels for industry got
cheaper. Coal is also a cheaper option in China.
The reluctance of companies to pay more for LNG can be seen in
Jinjiang, a city on China's east coast that has made ceramics for
centuries. Today, producers are locked in a dispute with
authorities.
A government program designed to cut pollution ordered
ceramics-makers to switch from coal to using natural gas. An LNG
terminal nearby would supply the fuel.
But some companies reported production costs with gas were
triple those of coal.
Business leaders have taken to the streets to protest. Wu
Shengtuan, the 48-year-old chairman of a local building-tile maker,
said his sales would slide roughly half this year, after suspending
two production lines. He says he fears high gas prices could
bankrupt Jinjiang ceramics-makers.
Lowering prices in the coming months--as many expect economic
planners to do--would help. But lower demand also reflects a
slowing Chinese economy.
"You always wanted to be able to count on China as a backstop
because Chinese growth was always there," said Mr. Thompson, of
Wood Mackenzie. "Companies are having to re-evaluate what the
Chinese market ultimately offers."
Kersten Zhang and Yang Jie contributed to this article.
Write to Brian Spegele at brian.spegele@wsj.com
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(END) Dow Jones Newswires
October 05, 2015 15:14 ET (19:14 GMT)
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