China’s first blush of enthusiasm over liquefied natural gas (LNG) is fading in the face of rising prices, showing the world’s number two energy user is not ready to pursue environmental ideals at any cost.

Despite strong interest from the industrial heartland of Guangdong, tepid take-up from other consumers content to use cheaper but dirtier domestic coal has prompted China to quietly push back timelines for several of its LNG receiving terminal projects planned along its east coast, analysts say.
That means Beijing is unlikely to achieve its target of more than doubling its gas consumption to eight per cent of its energy mix by 2010, and that oil companies counting on strong Asian demand for their gas reserves may have to look elsewhere.
CNOOC Group, China’s leader in the nascent LNG market, brought this point home by putting on ice talks with US major Chevron Corp over long-term supplies from the Australian Gorgon project due to a disagreement over price, sources say.
“It’s not actually because the parties had a stand-off over Unocal,” one source close to the situation said, referring to this summer’s bidding war for the US oil firm. “It’s because of the discrepancy... on the price of LNG.”
China has not secured any new LNG contracts since two big deals in 2002, casting a cloud over the up to 18 new import terminals in the works or being considered.
Faced with a reluctant CNOOC, who Chevron had hoped would be its cornerstone customer, the US major last month sold a quarter of its share of Gorgon LNG to Tokyo Gas instead, at a price reportedly a third higher than CNOOC’s other deals.
“When CNOOC signed the terms for phase one, the timing was very good, oil prices were low. Pricing for other future LNG deals will be higher,” said Merrill Lynch analyst David Yip.
China’s first terminal in Shenzhen, 33 per cent owned by CNOOC and 30 per cent by BP Plc, is due to come onstream next year with a capacity of 3.7 million tonnes per year (tpy).
CNOOC has planned to expand its capacity to 10 million tpy by 2008 but has not yet sourced extra LNG supplies.
The urgency for more gas to boost electricity output has also eased since 2003, when China was on the brink of its worst power crunch in decades. Officials now fear a surplus of generation capacity will hit as soon as 2007, curbing demand for extra fuel.
Unlike the world’s biggest LNG buyer Japan, which is used to paying world prices and has few energy alternatives, most of China has the luxury of avoiding higher prices by using coal.
Guangdong is an exception because its energy mix is heavily skewed to oil, which has become expensive, and because it is better able to pass on costs.
“Much of the industrial gas use in Guangdong is used in export-driven industries, with additional fuel costs re-exported through their products and passed on that way,” said Gavin Thompson, China country manager for Wood Mackenzie.
XinAo Gas, which distributes gas in Dongguan, sees vast potential in the region and has promised early customers not to raise prices for a fixed period because it expects LNG secured for the second phase of the Shenzhen terminal will cost more.
“When we entered the market in 2003, Dongguan didn’t have any pipelines, not even one inch. Dongguan is a big blank, we start from zero,” Cheung Yip Sang, executive director at XinAo Gas said.