January 2018, Vol. 245, No. 1
Features
China Expanding its Oil and Gas Pipeline Network
China has vowed to further strengthen its oil and gas pipeline network during the next decade, in an attempt to further boost the clean fuel’s share in the country’s energy mix.
By 2025, the country’s oil and gas pipeline network is expected to reach 240,000 kms, with natural gas pipelines reaching 123,000 km, according to the nation’s top economic regulator. According to the National Development and Reform Commission, China now has 112,000 km of oil and gas pipelines, which means the country will need to build another 128,000 km of pipeline in the next few years.
The commission said expanding the energy reach is in accordance with the country’s rapid growth in energy demand, as well as a shift towards the use of cleaner fuel like natural gas instead of coal to meet environmental protection goals.
“The expansion of China’s oil and gas pipelines will substantially boost the country’s energy security while ensuring its energy diversification,” said Zheng Jian, deputy head of the commission’s basic industries section.
“The newly constructed pipelines will help connect the south and north, east and west, while linking the sector’s upstream and downstream, meeting the emerging demand for cleaner energy and expanding the usage of natural gas.”
China’s expanding energy transportation network will also boost the development of sectors including advanced steel, equipment manufacturing and engineering technology, he added. Zheng said China’s oil and gas network has limited capacity, especially when compared with its counterparts in Russia and countries in the European Union.
In addition, the fragmented and dispersed networks, together with the lack of an overall pipeline network also pose a threat to future oil and gas transportation, and oil and natural gas imports are set to rise in the years ahead to cope with China’s growth in oil and gas demand for both consumer and industrial use.
According to the commission, the country’s pipeline network for natural gas in 2015 reached 64,000 km, and is expected to reach 163,000 km by 2025, a 9.8% annual increase. The pipeline networks for crude oil and refined oil, which respectively reached 27,000 kilometers and 21,000 kilometers, will also be expanded to 37,000 km and 40,000 km by 2025, a respective annual boost of 3.2% and 6.7%, it said.
Wang Lu, an Asia-Pacific oil and gas analyst at Bloomberg Intelligence, added that the biggest bottleneck currently is the underdeveloped pipeline network.
“The expected growth in pipeline length and total transmission capacity will help China raise the share of gas in the primary energy consumption mix,” she said.
However, Li Li, energy research director at ICIS China, a consulting company that provides analysis of China’s energy market, warned the future development of oil and gas pipelines may also slow down mostly due to financial concerns.
“Considering a project this big, the investment is intensive and the payoff period is too long, which could introduce many uncertainties to its development,” she said.
Recent Activities Raise Concerns
Recent activities involving China’s government and energy officials have energy officials in a quandary about the Asian superpower’s ultimate business strategy.
First, on Nov. 9 Cheniere Energy and China National Petroleum Corp. signed a memorandum of understanding during President Trump’s visit to China for the long-term sale and purchase of liquefied natural gas. The announcement at the signing ceremony said the deal was worth $11 billion, a figure neither company has disclosed, nor has either company provided details. Cheniere owns the only U.S. LNG export facility currently in operation, in Sabine Pass, LA, though several others are being built.
Cheniere has been trying to lock in buyers to build a sixth gas liquefaction train at its Sabine Pass terminal and a third unit at the Corpus Christi terminal being built in Texas. Also during Trump’s visit, Delfin LNG and China Gas Holdings signed a deal where details were not disclosed for the sale of up to 3 mtpa of LNG. Delfin has proposed an offshore gas liquefaction and shipping terminal in the Gulf of Mexico.
China has already signed deals with suppliers in Qatar, Australia and other nations for more than 40 mtpa of LNG through 2030, but still needs over 20 million tons to meet demand by 2030, according to Bloomberg New Energy Finance. Chinese LNG buyers have not yet signed any long-term agreements or investment deals with U.S. LNG exporters. The U.S. is more eager than China to sign long-term LNG contracts, said Vice Finance Minister Zhu Guangyao.
LNG Quandary
Meanwhile, there has been little good news to report from Canada on the LNG front, according to Business in Vancouver, which reported that British Columbia lost two projects with Chinese partners in recent months.
Just a few months after Malaysia’s Petronas and its partners pulled the plug on an LNG project in British Columbia, one of the partners has reappeared in Alaska. The state-owned Alaska Gasline Development Corp. announced a joint development agreement Nov. 8 for its proposed LNG project in Alaska. Among its potential partners is China Petrochemical Corp. (Sinopec), which held a 15% stake in the now-dead Petronas-led Pacific NorthWest LNG project.
Soon after Petronas abandoned its project, Nexen, owned by China National Offshore Oil Corp., announced that it was also done with B.C., and called a halt to the feasibility study on its Aurora LNG plant, also near Prince Rupert. Jihad Traya, manager of natural gas consulting for Solomon Associates, doesn’t think Canadian projects can compete with Alaska LNG because the Alaska project would have the state government as an equity partner, whereas in British Columbia the government’s main role has been as a would-be tax collector.
He said the former Liberal Party government made a fatal mistake when it signaled to the industry that it was viewed as a cash cow, and established a special LNG tax that LNG producers don’t face in other countries. But Blake Shaffer, a former director of energy trading for TransAlta Corp., said the Alaska agreement is far from a done deal. Although he agrees Alaska has some advantages, building its 800-mile pipeline would be costly.
Is Alaska Deal Possible?
This leads analysts to question whether a China-Alaska LNG deal will actually materialize. Kallanish Energy News reports that despite all the pomp and circumstance around the announcement by Chinese companies, including Sinopec, to help develop the Alaska LNG project, analysts suggest that the political alliance isn’t likely to commercially materialize.
“The main issue for the Alaska LNG project is its high cost. It’s a large project at 20 million tons of capacity, with an 800-mile pipeline,” said Kerry-Anne Shanks, head of Asia gas at consultancy Wood Mackenzie. “Sinopec may be able to secure cheaper LNG supply elsewhere.”
The five-party joint development agreement was signed during Trump’s visit to China but little detail has been disclosed though much has to be done before the project can progress, including gas purchase agreements with Alaska oil and gas producers such as BP and ExxonMobil. “The Alaska LNG project is at an early stage of development. Wood Mackenzie classifies it as speculative, which means the commercial structure and marketing plan are not yet clear,” Shanks said.
“It is likely to take a few years before the project is ready for final investment decision,” she said. Hugo Brennan, Asia analyst at global risk consultancy Verisk Maplecroft, is unconvinced the deal will materialize. “This kind of commercial agreement allows Trump to portray himself as a master dealmaker,” Brennan said, “while distracting from a lack of progress on structural reforms to the bilateral trade relationship. … The deal is politically expedient, yet its non-binding nature gives Sinopec the flexibility to quietly back away.”
Prospects in West Virginia
Analysts also question the seriousness of Chinese investment plans for West Virginia gas that were discussed during the Trump visit. A Chinese energy company pledged to spend almost $84 billion helping West Virginia build an entire supply chain that would bring the benefits of America’s shale gas boom to bear. But much of it will probably never materialize, reports Bloomberg. China Energy Investment Corp. and West Virginia have grand – albeit non-binding – plans to build gas-fired power plants, along with complexes to store the fuel and chemical plants to turn it into plastics, according to Bloomberg.
West Virginia’s Department of Commerce said China Energy Investment would spend $83.7 billion over 20 years. China Energy Investment was formed from the combination of Shenhua Group, the nation’s largest coal miner, and China Guodian, one of its top-five power generators. But as Bloomberg Intelligence analyst Michael Kay points out, not even U.S. pipeline giant Kinder Morgan budgets that much for growth projects.
There just are not enough infrastructure opportunities in Appalachia with high enough returns to make it worthwhile, Kay said. One reason is that the Gulf Coast is an easier and often cheaper option with existing pipelines to power plants, chemical plants and storage tanks.
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