China turns to trucks for LNG trans­port in thriv­ing gas mar­ket

Daily Southtown - - BUSINESS - By Dan Mur­taugh

Gas is in such hot de­mand in China right now it’s al­low­ing a quirky mar­ket to flour­ish: trans­port­ing the fuel on trucks.

The coun­try’s top sup­pli­ers are load­ing liq­ue­fied nat­u­ral gas onto tanker trucks and de­liv­er­ing it to users to make up for in­suf­fi­cient pipe­line cov­er­age in­land. The method is so ef­fec­tive, ENN Group is us­ing it as a pri­mary way to move LNG from its new ter­mi­nal.

This new kind of gas mar­ket has thrived in China over the past few years as the govern­ment’s blue-sky poli­cies boosted de­mand for the cleaner-burn­ing fuel faster than pipe­lines can be built to sup­port them. It’s also un­reg­u­lated, al­low­ing nim­ble sell­ers to ben­e­fit from ris­ing prices dur­ing peak con­sump­tion sea­sons, while the city-gate bench­mark re­mains at govern­ment-set rates.

“We haven’t seen this kind of vol­ume in trucked LNG any­where else in the world” said Xizhou Zhou, head of China en­ergy re­search for IHS Markit. “This mar­ket in China is a re­flec­tion of the mar­ket dis­tor­tion caused by reg­u­lated city-gate prices, in­creas­ing sup­ply and de­mand, and price volatil­ity.”

ENN is bet­ting this method of trans­port­ing LNG will en­dure. The dis­trib­u­tor’s new ter­mi­nal in Zhoushan, a tiny is­land at the mouth of the Yangtze River, is the first in the world built to load the ma­jor­ity of its im­ports onto trucks in­stead of re­heat­ing them to their gaseous state for pipe­lines or power plants.

The fa­cil­ity is de­signed to im­port about 3 mil­lion tons of LNG a year, with 2 mil­lion des­tined for trucks and the rest for pipe­lines. But truck­ing the fuel is ex­pen­sive. It costs nearly six times more than pip­ing it, ac­cord­ing to a study by the King Ab­dul­lah Petroleum Stud­ies & Re­search Cen­ter in Saudi Ara­bia.

Com­pa­nies in­clud­ing ENN are happy to take this pricier route be­cause it can be more lu­cra­tive. Trucked LNG sells for about $650 a ton. That’s two-thirds higher than bench­mark Shang­hai city-gate rates. Last win­ter, trucked LNG prices jumped to about $1,070 amid a na­tion­wide gas short­age.

The rise of this free­wheel­ing mar­ket shows how China’s nat­u­ral gas in­dus­try, long un­der the con­trol of the govern­ment, is mov­ing to­ward lib­er­al­iza­tion. The na­tion has taken steps to­ward a free mar­ket by auc­tion­ing off gas and im­port ter­mi­nal space on ex­changes, grant­ing third par­ties ac­cess to as­sets op­er­ated mainly by state-owned giants, and re­vis­ing its pric­ing mech­a­nism.

Those ef­forts are also aimed at im­prov­ing sup­ply ef­fi­ciency to meet the roughly 20 per­cent surge in de­mand. China’s un­prece­dented crack­down on its nox­ious smog by re­plac­ing coal fur­naces with gas burn­ers has be­come one of the most im­por­tant fac­tors shap­ing the global en­ergy mar­ket.

Trucks car­ried about 19 mil­lion tons of LNG to customers last year, ac­count­ing for 12 per­cent of China’s to­tal use, Wood Macken­zie Ltd. es­ti­mates. For gas users with lim­ited pipe­line cov­er­age, truck­ing al­lows them to get hold of sup­ply and meet govern­ment’s switch­ing tar­gets, said Wen Wang, an an­a­lyst at the con­sul­tancy firm.

Given its size, the trucked mar­ket could aid China’s tran­si­tion to­ward a more mar­ket-ori­ented sys­tem. Elim­i­nat­ing gas pric­ing con­trols could help save as much as $2.2 bil­lion a year, in part by re­duc­ing the use of more ex­pen­sive truck­ing, Saudi Ara­bia’s KAPSARC re­searchers said in a May re­port.

“Trucked LNG is help­ing set the stage for fur­ther price dereg­u­la­tion,” Wang said. “As this slice of mar­ket grows, more and more users are ex­posed to mar­ket prices in­stead of reg­u­lated prices.”

QILAI SHEN/BLOOMBERG

LNG tanker trucks sit out­side an ENN En­ergy ter­mi­nal on Zhoushan Is­land, China.

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