China Warned Against LNG Investment Risks – Analysis

By Michael Lelyveld

As China raises its reliance on liquefied natural gas (LNG), environmental advocates are warning about the risks of promoting consumption of the imported fuel.

In a report released this month, researchers at the Global Energy Monitor highlighted the environmental and economic consequences of the worldwide investment in LNG infrastructure and development.

The warnings may have particular relevance for China, which is poised to become the world’s leading LNG buyer after imports soared 40.9 percent last year.

The environmental objections to the growth of LNG may add to concerns about China’s energy policies at a time of rising risks to petroleum supplies from the Persian Gulf.

In its 21-page report, the U.S.-based energy research group outlined two main concerns with the U.S. $1.3-trillion (8.9-trillion yuan) global investment in the super-cooled fuel.

On environmental grounds, the report said that large volumes of methane, the major component of natural gas, are likely to leak into the atmosphere from shale gas extraction and the processes of transforming it into LNG for transport to distant terminals for regasification at normal temperatures.

Although methane may persist in the atmosphere for only a decade, its effect on global warming during that period could be 100 times greater than that of carbon dioxide (CO2), the report said, citing the United Nations’ Intergovernmental Panel on Climate Change (IPCC).

The methane leakage issue undercuts the value of LNG and natural gas generally as a transitional fuel between coal and renewable energy sources including wind and solar power, the advocates argued.

World growth of gas consumption also runs counter to the IPCC’s warning that gas use must drop by 15 percent between 2020 and 2030, and 43 percent by 2050, to keep warming within the 1.5-degree Centigrade (3.6-degree Fahrenheit) limit to avoid the worst climate consequences by the end of the century, the report said.

On the economic side of the case, the report warned that the operation of LNG infrastructure and gas-fired power plants will become uncompetitive and fail to pay back their investments as the cost of renewables comes down.

Newly-built LNG export and import terminals are in danger of becoming “stranded assets,” to be essentially abandoned, the report said.

It concluded that “a sensible approach to the question of LNG terminal expansion would be a moratorium on further construction.”

“We know that LNG is not a good answer climate-wise,” Ted Nace, director of Global Energy Monitor, told CNN Money in an interview. “It might even be pretty foolish financially — for all the reasons that coal turned out to be a bad investment 10 years ago.”

Exposure could be substantial

The paper noted that the costs of potentially short-lived terminal projects will fall more heavily on exporting countries, including those in North America, than on importers like China, in part because liquefaction processes are more expensive than import terminals and regasification facilities.

But China’s exposure could be substantial. The report estimates that the country has U.S. $24 billion (165 billion yuan) in capital outlays committed to terminal development.

In March, Reuters reported that China had 21 import terminals in operation. The Ministry of Transport has proposed a total of 34 terminals by 2035, Bloomberg News said.

“These are 40-year investments from an industry standpoint,” Nace told The Guardian. “Natural gas infrastructure may be competitive in three, four or five years, but do people expect it to be competitive with renewables in 15 years?”

Energy analysts have made much the same argument about stranded assets with regard to China’s continuation of coal-fired power projects despite growing competition with non-fossil energy sources.

In 2018, non-fossil power accounted for 38.3 percent of total installed generating capacity in China, an increase of 1.7 percentage points from a year earlier, according to the National Energy Administration (NEA).

China’s power generation from renewable energy sources rose 14 percent from a year earlier in the first half of this year, the NEA said.

“It is not just physical assets (e.g., power stations, coal processing facilities, and coal mines) that will become stranded, but also financial assets … natural assets … and labor assets connected to the coal industry,” said a paper by the Oxford Smith School of Enterprise and the Environment in 2017.

China’s unrecoverable costs could reach 4.5 trillion yuan (U.S. $655 billion) if all the planned or partially-built coal-fired projects in 2016 were halted after five years, the study said.

Despite the risks, China seems unlikely to back away from making more investments in LNG, said energy expert Philip Andrews-Speed at the National University of Singapore’s Energy Studies Institute.

“I cannot see that China will change its strategy of boosting LNG imports in the short term,” Andrews-Speed said by email.

One reason is that China’s main motivation for substituting natural gas for coal is to cut down on urban smog, said Andrews-Speed. The goal of reducing visible pollution seems to have taken precedence over climate change targets.

China’s state-owned enterprises (SOEs) have also appeared to be oblivious to the longer-term risks of energy investment.

“Chinese SOEs do not seem to worry about potential future stranded costs — the continuing construction of coal-fired plants, for example,” Andrews-Speed said.

‘Prices in a freefall’

The government has pushed China’s national oil companies (NOCs) into making heavy investments in infrastructure both for pipeline gas and LNG ever since the winter of 2017-2018, when incomplete projects and supply problems led to cutoffs in northern factories, schools, and homes.

But long-term energy planning seems to have suffered as the government pushes ahead on all fronts at once. In the near term, the authorities seem to be having enough trouble managing available LNG infrastructure with fluctuations in supply and demand as Asian prices drop to multiyear lows.

Earlier this month, S&P Global Platts energy news reported that Guangdong Energy Group was forced to unload an inbound LNG tanker from Malaysia at two separate southern terminals as weaker demand left available storage near full.

Market sources have noted “a significant decline” in LNG growth rates since the start of the year, Platts said.

LNG imports of 28.3 million metric tons rose 19.3 percent in the first half, the General Administration of Customs (GAC) said. That compared with a gain of nearly 50 percent in the year-earlier period, according to Platts’ estimates.

Variations in the LNG market have whipsawed planners just as new projects and pipeline supplies from Russia are expected to come on line.

“Asia’s LNG prices have been in freefall since September 2018, as ample supply, sluggish demand and robust early stockpiling by China’s SOEs largely capped prices over the winter months,” said Fitch Solutions Macro Research in a commentary provided to Rigzone, an online resource for news about the oil and gas industry.

“These factors, next to elevated growth headwinds and a forecast cooler summer, look set to keep a lid on prices over what should typically be a stronger season for gas demand,” the analysts said.