[NGW Magazine] Editorial: China - Belt and Braces
The US president’s visit to Asia yielded the obligatory big headlines about business deals. This usefully distracted attention away from the seemingly insoluble problem of North Korea’s weapons tests, which China is considered best placed to put a stop to; or even the lower-profile matter of China’s expansionist policy of island-building in the South China Sea. Donald Trump drew a blank in those cases.
But among the 'deals’ was a startling, if unbinding, memorandum of understanding to invest in Alaska LNG, which would revive the otherwise moribund project. China would not merely be the buyer of the LNG but would have a position upstream with the potential to kick-start it.
This is an entirely different proposition from earlier plans for LNG in Alaska. Sinopec’s shareholder has a longer-term view of energy supply, and values its security more highly, than the present owner-occupiers of North Slope gas fields. Without the need to go through the Panama Canal, shipping equity LNG westwards to Asia across the secure waters of the Pacific would be a relatively short and straightforward matter, compared with other routes.
China is not going to commit yet to buying some of the more expensive options for LNG just in the name of realpolitik, especially when its vast shale gas reserves remain unexploited.
It will want to see how the global LNG supply-demand balance works out. After all, this project is going anywhere else in a hurry but getting a foot in the door could be of value next decade.
But if the majors BP, ExxonMobil and ConocoPhillips pulled out when the oil price fell, a new entrant representing unquestioned gas demand growth and a good credit rating could persuade them to reconsider, or even to part with some of their idle equity.
The transfer of power downstream is moving quickly, partly because the US has shown that cheap production of feedstock is no longer the asset it once was: if feedstock gas from the Marcellus shale – in practically limitless volumes – at $3/mn Btu is a given and liquefaction technology can be bought off the shelf, sellers like Tellurian will have to offer more than LNG at the ship’s rail. They can no longer argue that it shoulders the geological risk while also passing price risk to the customer.
China’s other similarly non-committal deal, between China Energy Investment and West Virginia’s commerce department, is for a potentially much bigger sum – $83.7bn – but despite that it has better chances of leading somewhere sooner.
It involves shale gas development locally, partly in order to produce chemicals for domestic and export markets, giving China access to very cheap feedstock, with almost no midstream to worry about. It was heralded as being a vital shot in the arm for a US state that used to rely on so heavily on now unfashionable coal, and the planned investment is fixed at 20 years, which might assuage the fears of any protectionists who might feel that this was just the thin end of the wedge. They would see China as parking its tanks on their lawn.
These two different plans both fit with China’s plans to go diversify its energy supplies as far as economically sensible while expanding its foot print abroad, and send the signal that almost no scheme is too ambitious to merit consideration.
The size of its market coupled with its own reserves give it strength rather than – as could have happened under different leadership – exposing it to the so-called Asia premium that other, import-dependent countries have to pay.
This bargaining strength is a reflection of the growing power of the premier, Xi Jinping, who was last month elevated to the same status as the founder of modern China, Mao Zedong and whose unchallengeable rule looks set to last for another decade or so. His opinions on the need to replace coal with gas have significance because of the expected longevity of his premiership and the size of the demand he represents. Then again, China is also investing in renewable energy, and has driven down the cost of manufacturing renewable capacity. Maybe memorandums of understanding are all that gas can hope for these days.
As an aside, it is Russia, in the person of Gazprom and Rosneft, that is doing more to provoke China in the South China Sea: it has made much of its relations with Vietnam, including plans for offshore blocks.
Gazprom CEO Alexei Miller declared Vietnam one of “Gazprom’s key partners in southeast Asia,” both as customer for its LNG and as its partner in offshore gas production and onshore marketing in the power generation and natural gas vehicle sectors.
But Vietnam is too vibrant to be content simply with Russian-only investment. So this month’s Asia-Pacific Economic Co-operation Summit in Vietnam, also attended by Donald Trump, saw agreements inked by PetroVietnam: with UK producer Premier Oil to appraise and probably develop Indonesian gas from its new ‘Tuna’ discovery and pipe it to landfall near southern Vietnam’s Ho Chi Minh City by 2023; and separately with US generator AES to develop a 3mn mt/yr LNG import terminal; and also with the Alaska state’s AGDC on potential LNG supply from that same possible Alaskan LNG export venture involving Sinopec.
That’s on top of PetroVietnam’s ongoing plans to buy gas from Zarubezhneft from Vietnam’s offshore Rong project and from ExxonMobil’s Blue Whale gasfield, subject to final investment decisions.