China has a massive problem…
In an effort to reduce pollution, the country is slowing its crude oil consumption and switching to natural gas instead.
But if the current trend holds, China will be forced to pay a heavy price for its newfound environmental conscience.
Why? Simple supply and demand…
China’s natural gas production has fallen well short of its projections. And consumption is far exceeding its production rate.
Needless to say, that’s a recipe for energy disaster… for China, at least.
It means the country will need to import more natural gas.
But this huge new energy boom from one of the world’s largest energy consumers will create a whole new environment for the natural gas industry.
And suppliers are clamoring for a slice of this very lucrative pie…
China’s Natural Gas Drive Hits a Speed Bump
I may have stretched the truth a bit when I said that China has grown a more-environmentally friendly conscience.
China actually has very little choice but to switch over to natural gas as a major fuel source.
Pollution from fossil fuels (mostly from its primary energy source, coal) is out of control. Each time I visit the country, it seems the air quality has degraded even more.
For example, the recent Shanghai Marathon took place just one day before the air quality level was described as life-threatening!
China has its public image to worry about – and statistics like that are highly damaging.
In addition, quality of life concerns and rising costs from pollution-related illnesses are forcing the government to make the shift to natural gas.
This transition won’t occur overnight, but China’s ability to provide its own natural gas isn’t panning out the way the country expected.
China’s Supply-Demand Gap is Swelling
China’s natural gas reserves aren’t the problem here. The country boasts vast amounts of the stuff underground.
However, it still doesn’t have the ability to fully extract these reserves, due to inadequate technology and the location of the reserves. Plus, China’s pipeline infrastructure is weak.
On top of that, the supply-demand gap continues to grow.
Last year, Chinese natural gas consumption hit five trillion cubic feet (Tcf). But the country only produced 3.3 Tcf to replenish supplies.
What’s more, an Exxon Mobil (XOM) study says China’s natural gas consumption will almost triple this decade, to 14 Tcf.
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By 2020, it’s estimated that natural gas will provide 10% of all the energy used in China. But there’s a massive shortfall on the horizon.
Some of that will be made up from more internal and offshore production. But the majority of it will have to come from imports.
And that’s where the opportunity lies…
Russia and Australia in the Box Seat
China’s vast quantities of natural gas imports will come through both pipelines and in the form of liquefied natural gas (LNG).
There’s a beneficiary in each area here…
Pipeline: The major winner will be Russia’s Gazprom (OGZPY). The company recently inked a $400-billion, 30-year deal to supply China with 1.3 Tcf of natural gas per year, beginning in 2019. Initially, the gas will come from Gazprom’s prolific fields in Siberia. Construction of the Power of Siberia pipeline began on September 1, and the pipeline is expected to cover some 2,500 miles, including a distribution point on China’s northern border.
LNG Supplier: On this side of supply, the logical choices are companies close to China that have LNG operations already up and running. That means the Chinese will likely deal with the Australians. The top play will be Woodside Petroleum (WOPEY), which has significant operations on Australia’s West Coast. In addition, after investing over $200 billion in LNG operations over the past few years, Australia is expected to unseat the current LNG leader, Qatar, in the next three years.
And “the chase” continues,