How Is China Securing Its LNG Needs? [GGP]
In 2017, China surpassed South Korea to become the world’s second-largest liquefied natural gas (LNG) importer. In a few years, it might overtake Japan. But how is China securing its LNG needs? This is an important question for several reasons. First, when Chinese companies go overseas, they often trigger geopolitical anxiety, so it is worth asking whether Chinese companies are going out more than before; and if so, where and doing what deals? Second, China is the main growth market for LNG, and so Chinese companies can set a tone for the market as a whole; is there a shift in buying behavior or risk? And third, some U.S. project developers worry that the trade war with China will hurt their ability to progress to final investment decision (FID), while others, like Alaska, place their hopes on China; how real are those hopes and concerns?
China’s foray into LNG started in the early 2000s. China National Offshore Oil Corporation (CNOOC) was the first national oil company (NOC) to venture into LNG buying an equity stake in two projects in Indonesia and Australia and contracting to purchase LNG on a long-term basis from those projects (for a full list of the deals used for this analysis, see appendix). From 2006 to 2009, China National Petroleum Corporation (CNPC) and Sinopec joined CNOOC to sign long-term contracts but without acquiring any equity. In 2008 CNOOC also signed the first portfolio deal, where the LNG is not tied to any source but is delivered by a company with multiple options. From 2010 to 2014, the NOCs signed one or two long-term contracts a year, while also acquiring equity stakes in Australia, Russia, Mozambique, and Canada. Other Chinese companies started to sign contracts in 2010, and, from 2015 to 2017, non-NOCs accounted for most of the contracts LNG into China but without buying equity stakes. The NOCs came back to the market for long-term contracts in 2018 but again with no equity positions. In short, there have been a few twists and turns in these 18 years, and while it is not easy to compress this story into a few paragraphs, some clear patterns can be observed in how Chinese companies have gone about securing LNG.
Chinese participation is no guarantee of success. In the public mind, the entry of a Chinese partner means higher probability of success for a project. This is not borne by the data. Of course, projects take a long time to develop, so it is unfair to call a project a failure just because it has not succeeded yet. But Chinese distributor ENN signed one of the first contracts to purchase LNG from Sabine Pass in 2010—a contract that lapsed. Sabine Pass then proceeded to FID without any Chinese buyers. Sinopec entered the Pacific Northwest project in Canada, which was later canceled. In Australia, PetroChina made a few big acquisitions starting in 2010, but without seeing any LNG yet. Projects move at their own pace, and Chinese partners can only do so much to accelerate them.
Chinese buyers are not essential for projects to succeed. Projects usually pre-sell much of their output before taking FID; thus, finding buyers is a paramount task for projects under development. But the last project where a Chinese buyer accounted for most of the contracted output was the Australia Pacific project, which took FID in 2011 and 2012 (two phases). Chinese buyers have since been foundational customers for a few projects since then, but rarely have they purchased more than 25 percent of a project’s output (18 percent for Yamal LNG, ~27 percent for Corpus Christi Train 3, and 15 percent for LNG Canada). In other words, most LNG projects since 2012 have advanced to FID either without Chinese customers at all, or with Chinese buyers accounting for a small share of long-term contracts—this despite China being a major LNG market. Chinese buyers are rarely acting as foundational customers for projects to advance, which means that taking FID does not, in practice, mean engaging directly with Chinese companies (although LNG might be resold and delivered to China eventually).
There is no visible trend towards acquiring equity in liquefaction projects. Buying LNG can be done at arm’s length through short or long-term contracts; but it can also involve equity, where buyers become partners who share in the upside and downside of a project. Whether to purchase equity is a complicated commercial decision, but it also has political undertones—there is greater linkage when there is physical ownership in an asset versus buying LNG at arm’s length. The first two long-term contracts that CNOOC signed in the early 2000s came with equity participation in the Northwest Shelf (Australia) and Tangguh (Indonesia) projects. The contracts signed from 2006 to 2009 came with no equity—with Qatargas, TOTAL, Gorgon (Australia), and Papua New Guinea LNG. Since 2010, the Chinese began to take equity again—in Australia, Canada, Russia, and Mozambique. But ever since the Silk Road Fund took a stake in Yamal LNG in 2015, there has been no major equity position taken in a gas resource directly tied to an LNG project. (More on why that might be later.)
When Chinese companies invest in a project, the LNG usually, but not always, goes to China. In most projects with a Chinese investor, a portion of the LNG is sold to a Chinese buyer. But there are exceptions. The expansion of the Tangguh project in Indonesia, in which CNOOC has a stake, went ahead in 2016 by selling its LNG to an Indonesian and a Japanese company. In Area 4 in Mozambique, where CNPC has a stake, the Coral South floating LNG project sold all its output to BP. The China Investment Corporation acquired a stake in Trinidad’s Atlantic LNG (Train 1) project but without any increase in LNG flows to China. That said, in Indonesia, CNOOC is already procuring LNG from the project’s first phase; in Mozambique, CNPC is likely to buy gas from the large, onshore project that will come later; and in Trinidad, the acquisition was part of a broader relationship. But it is important to underscore that having Chinese investors does not always mean that the LNG goes to China.
LNG is no longer about the major national oil companies (NOCs) only. Most of China’s LNG is contracted with or imported by CNPC, Sinopec, or CNOOC. But over time, other players have signed long-term contracts and/or built import terminals—companies like ENN, Huadian Corporation, Guanghui Energy, Beijing Gas Group, JOVO Group, and China Gas Holdings. This is a very competitive space, and it no longer the case that accessing the Chinese market means dealing with one of the three major NOCs.
The NOCs returned to the market in 2018 after a few quiet years. Chinese companies signed short- and long-term contracts in 2015-2017, but none of those contracts involved the major NOCs. The NOCs returned to the market in 2018 with several deals. There was a split between contracts from new projects—Corpus Christi Train 3, Woodfibre LNG, and LNG Canada—as well as projects and suppliers that exist or are under construction (Qatargas, Freeport, Papua New Guinea LNG, and PETRONAS). It is always hard to explain why a company chooses to sign on the dotted line at any given point, but this was likely a cyclical correction—after three years of inactivity, and with demand rising in China, the NOCs decided they needed to go back into the market and do deals.
Qatar and Australia dominate—but so do portfolio players. Qatar and Australia provided almost two- thirds of China’s LNG imports in 2017, and their importance is visible both in terms of contracts but also, in the case of Australia, in terms of equity participation. The other major source for China’s needs is portfolio players—companies that source LNG from various projects and deliver LNG from any of those places. Contracts with BG Group (now Shell), BP, Chevron, ENGIE (now TOTAL), PETRONAS, and TOTAL are constant fixtures since 2008 on the activity list. This allows Chinese customers an extra layer of insurance—the supplies are not tied to a location, insulating the buyer from turmoil in a given country.
Chinese firms work alongside Western firms. There is no China-led LNG project—in the sense of a Chinese company being the project lead or even the majority shareholder. This is not surprising. Japan has been importing LNG since 1969, and the first projects with a Japanese company as the lead came online only recently (the Mitsubishi-led Donggi Senoro project in Indonesia, and INPEX-led Ichthys project in Australia). So far, Chinese firms have worked closely with the Western majors, and Chinese financial institutions have lent money alongside Western, Japanese and Korean institutions (except in Yamal LNG, where the foreign financing came largely from China). Chinese companies are an integral part of the web of relationships that make up the LNG market.
China is not so different (yet). In the end, China looks no different than, say, Japan, or Korea. When it faced a buyers’ market in the early 2000s, it signed contracts for cheap gas. When the market turned, its NOCs contracted some of the most expensive LNG still in effect today—and honored those contracts despite earlier fears that Chinese investors were more likely to renegotiate contracts than other buyers. When Australia emerged as the supplier to be, all three major NOCs went into Australia, paid billions to take equity stakes, and signed up to purchase significant quantities of LNG. They went into East Africa, Western Canada, and the Arctic, just like Western firms did. They joined strong projects that moved forward, and they entered into projects that ultimately withered. They bought equity when equity was on the table, and they signed purchase contracts when equity was not an option. They bought gas from portfolio players and from Qatar—just like other emerging consumers. The one exception was the United States: no Chinese firm was an anchor customer for a project until 2018—a fact that inhibited neither the United States on its path to become the world’s third-largest LNG exporter, nor China’s path to become the world’s second-largest importer.
Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C. To DOWNLOAD the full report, How Is China Securing Its LNG Needs? (January 9, 2018), visit the Center for Strategic and International Studies HERE
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