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China Expands their LNG Operations but the Reasons are Unclear

The China National Petroleum Corp (CNPC) are increasing their investments in LNG exploration, production and pipelines to nearly double their annual output to around 180 billion cubic metres (bcm) by 2020.  This comes against a backdrop of low oil and gas prices, a cut in overall investment in the industry and losses recorded so far this year.  Whether the move away from oil towards gas is driven by environmental or economic factors is unclear.

A Shift from Oil to Gas

The start of this year, to June, saw China’s gas consumption rise by 9.8% to 99.5bcm with production up by 2.9% to 67.5bcm.  Oil output fell by 4.8% and both of China’s major oil companies have announced plans to reduce oil production further this year.  As such, CNPC stated that 70% of their total budget is spent on gas production and 10% on pipelines.  In addition, the company’s head of planning, Hou Qijun, is quoted as saying that gas is now, “our top priority with high potential for profit growth”.  China’s second ranked oil and gas company, Sinopec, have also reported an increased focus on gas production and plan to double their annual gas production to 40bpm by 2020.

Economic Factors

As gas is a cleaner burning energy source than coal, a shift in that direction for environmental purposes is uncomplicated.  However, the economic factors are not so straight forward.  Senior fellow for energy and national security at the Centre for Strategic and International Studies in Washington, Edward Chow, posed the question, “Is the increase in the gas share of the budget a reflection of a big increase in capital spending or a reflection of an overall decrease with oil taking most of the hit?”  Figures from the National Bureau of Statistics (NBS) show a fall in fixed-asset investment in petroleum and natural gas extraction fell by 18% in the first half of the year along with profits which dropped by 26.5 in the same period.  They reported losses of 38.9 billion yuan during this period compared to profits of 62.9 billion yuan in the same period last year.  As the NBS does not separate the figures for petroleum and gas, it is impossible to know which showed the greatest loss but as gas prices are so closely linked to oil prices worldwide, the shift towards gas is unlikely to have a significant impact on those figures.

The Future for LNG in China

Going forward, government incentives to encourage the use of LNG as a fuel and the lifting of price controls could boost profits but a planned cut in overall investment of 40% by CNPC over the next five years suggests the outlook is not optimistic.  However, the shift towards LNG over oil is a certainty in China, even if the motivations for doing so are not.  As a supplier of measurement equipment for the LNG industry, Ex~i-Flow are well placed to help any companies looking to take advantage of the rise in LNG use.  To find out how we can help you, call 01243 554920.