At The Wellhead: China looks to diversify its gas supplies, and Myanmar can help

A new project bringing natural gas to China from Myanmar is another step that Beijing is taking to not be so dependent upon Turkmenistan for its supplies. Song Yen Ling reviews the Chinese position in this week’s Oilgram News column, At the Wellhead.

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Myanmar last month turned on the taps at its Shwe gas project and is set to deliver its first gas supplies to China early this month.

State-owned China National Petroleum Corp. has contracted to receive 400,000 Mcf/day of gas from the deepwater Shwe project in the Bay of Bengal off western Myanmar’s Rahkine state. This will be delivered via the 12 billion cubic meters/year Myanmar-China gas pipeline.

While the Myanmar volumes will only account for under 10% of China’s total natural gas imports, it presents a strategic option that provides diversification from China’s existing sources.

Turkmenistan is now China’s biggest supplier of foreign gas.

In the first half of this year, pipeline imports from Turkmenistan rose 40.9% year on year to 8.61 million mt (11.88 Bcm) while Uzbekistan imports totaled 817,425 mt, bringing total Central Asian imports to 9.43 million mt, a 52.3% rise year on year.

LNG imports over the same period were up 25% year on year to 8.34 million mt, with Qatari volumes accounting for 3.36 million mt.

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As consumption increases exponentially however, China’s appetite for gas will continue to grow. Apparent demand—total gas imports plus domestic production minus exports to Hong Kong and Macau — expanded by some 14.1% year on year during the first half to 79.73 Bcm, according to Platts’ calculations. This put China’s gas import dependence at 30% of total demand, compared with just 8% in 2009.

And more imports are expected, particularly given that total gas demand is forecast to reach 230 Bcm by 2015, according to official projections.

An analysis of customs data shows that China has steadily paid more for its imported gas over the years. Average delivered LNG prices — excluding regasification costs — were just $4.39/MMBtu in 2009, according to customs data. As more LNG terminals were built and Chinese state companies expanded their pool of LNG suppliers, the average import price rose to $6.20/MMBtu in 2010 and reached $11.13/MMBtu in the first half of this year, with Qatari cargoes costing some $17.96/MMBtu on average.

Pipeline imports from Turkmenistan, like LNG, are also linked to oil prices, started at an average $7.36/MMBtu in 2010 and hit $9.84/MMBtu in this year.

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The new gas supplies from Myanmar will not be cheap either. According to sources at state-owned Myanma Oil and Gas Enterprise, the wellhead price for Shwe gas is $7.46/MMBtu, excluding a $1.13/MMBtu offshore tariff to bring it to the main pipeline, which starts in Kyaukphyu in western Myanmar.

The gas then travels about 800 kilometers onshore, across Myanmar to the Chinese border at Ruili in southern Yunnan province.

The delivered price will largely be in line with what China pays for Turkmenistan volumes, said Gavin Thompson, head of China research at Wood Mackenzie.

He added however that Yunnan and the surrounding area is still fairly rural with limited gas infrastructure so it will be a challenge for CNPC to sign up customers to long-term, take-or-pay contracts.

The start of Myanmar gas imports comes just weeks after China raised domestic natural gas prices and introduced a new pricing mechanism for non-residential users.

From July 10, Beijing raised prices for non-residential consumers about 15.4% to an average Yuan 1.95/cu m, or about $8.90/MMBtu.

It also divided gas supplies into tiers of pricing: one encompassing 91% of supply using 2012 consumption as the base, and another tier affecting incremental supply volumes to non-residential users, estimated to be 11 Bcm this year. The price of existing supply volumes will be set by the government while incremental supply prices have been set at an 85% correlation to the average H2 2012 price of imported fuel oil and LPG.

The implication for upstream producers and gas importers is significant as average netbacked wellhead prices—citygate prices less transport tariffs — have increased by some 20%, Bernstein Research said last month. Over the next three years, CNPC’s average wellhead gas prices will likely increase from Yuan 1.1/cu m to Yuan 1.8/cu m, a 63.6% jump, the bank said.

Bernstein said that from its discussions with CNPC, the company “appears increasingly confident” that a deal will be struck with Russia over gas supplies over the next 12 months.

“For PetroChina, the key objectives are a reasonable import gas price and a position upstream,” Bernstein said, adding that the company does not want to be losing money on imports, as it currently does with Turkmen volumes.

The pricing range for Russian gas Gazprom and CNPC are negotiating “should be around $9-$11/Mcf”, which Bernstein says is not an insurmountable gap to close following the price reforms in China.

–Song Yen Ling in Singapore


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