Major Chinese energy companies are in advanced talks with US exporters to secure long-term liquefied natural gas (LNG) supplies as rising gas prices and domestic power shortages raise concerns about the country’s fuel security, several sources said.
At least five Chinese companies, including the head of state Sinopec Corp and China National Offshore Oil Company (CNOOC) and local government-backed energy distributors such as Zhejiang Energy, are in talks with US exporters, mainly Cheniere Energy and Venture Global, the sources told Reuters .
The discussions could lead to deals worth tens of billions of dollars that would see a surge in China’s LNG imports from the United States in the coming years. At the height of a Sino-US trade war in 2019, gas trade came to a halt. It can take years to build LNG export facilities, and several projects in North America are in the works that are not expected to start exporting until the mid-decade.
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Talks with US suppliers began early this year but accelerated in recent months amid one of the worst power generation crisis in decades. Natural gas prices in Asia have more than quintupled this year, sparking fears of winter power shortages.
“Businesses faced a supply shortage (before the winter) and rising prices. Talks really got going since August, when spot prices hit $15/mmbtu,” said a senior industry source in Beijing, who spoke about the discussions.
Another source in Beijing said: “After experiencing the recent massive market volatility, some buyers regretted not signing enough long-term stocks.”
Sources expected new deals to be announced in the coming months, after the privately controlled ENN Natural Gas Co, led by the ex-LNG chief of China’s largest buyer, CNOOC, announced a 13-year deal with Cheniere on Monday.
It was the first major LNG deal between the US and China since 2018.
The new purchases will also bolster China’s position as the world’s largest LNG buyer, taking over from Japan this year.
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“As state-owned enterprises, all companies are under pressure to maintain security of supply and the recent price trend has profoundly changed the image of long-term supply in the spirit of leadership,” the Beijing first trader said.
“People may have taken the spot (market) as the key in the past, but are now realizing that long-term loads are the backbone.”
CHEAPER OUR GAS
The sources did not want to be identified because the negotiations are private.
Sinopec declined to comment. CNOOC and Zhejiang Energy did not immediately respond to requests for comment.
Venture Global and Cheniere both declined comment.
“We expect more deals to be signed before the end of the year. It is mainly driven by the global energy crisis and the prices we are seeing now… US deliveries are now standing out as attractive,” a third source said in a statement. Beijing who inquired about the talks.
US cargo used to be expensive compared to oil-related supplies from Qatar and Australia, for example, but are now cheaper.
A $2.50 + 115% deal of Henry Hub futures, similar to ENN’s deal according to traders, would roughly be about $9-$10 per million British thermal units (mmBtu) based on delivery in Northeast Asia. This includes an average shipping cost of $2 per mmBtu for the US-China route.
Jason Feer, global head of business intelligence at consultancy Poten & Partners, said Chinese companies are highly exposed to Brent-related prices for LNG and that US purchases provide some pricing diversity.
Asian spot gas prices
Traders expect prices to move higher in the winter, when demand tends to rise.
Chinese buyers are looking for both short-term supplies to meet demand this winter and long-term imports, as demand for gas, seen by Beijing as an important bridging fuel before reaching its carbon-neutral target for 2060, rises to 2035 will show steady growth.
It’s difficult to estimate the total volume of deals under discussion, sources said, but Sinopec alone could be looking at 4 million tons per year as the company is most exposed to the spot market versus domestic rivals. PetroChina and CNOOC, a third source said.
Traders said Sinopec is in final negotiations with 3 to 4 companies to buy 1 million tons per year for 10 years, starting 2023, and is looking for US volumes as part of the requirement.
Delays in LNG export projects in Canada, in which PetroChina has a stake, and Mozambique, where both PetroChina and CNOOC have invested, also made US supplies attractive, sources said.
North American LNG exporters have increased their capacity due to demand in major Asian economies.
Cheniere, the largest exporter from the United States, said in late September that it expects to announce “a number of other transactions” that will help them move forward with the Corpus Stage 3 expansion next year.
Venture Global is building or developing more than 50 million tons of LNG production capacity per year (MTPA) in Louisiana, including the 10-MTPA Calcasieu, expected to cost approximately $4.5 billion and begin LNG production in test mode by the end of 2021 .
However, some buyers remained cautious.
“There is a lot of hype in the market and no one knows for sure how long this supply crisis will last. For companies that do not have fresh demand in the next two years, it is better to wait,” said a separate Chinese importer.
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