As China's burgeoning gas market is beginning to take off, the country's coastal provinces and oil companies are rushing to invest billions of dollars to build dozens of liquefied natural gas (LNG) import projects to feed power generators and private stoves.

But experts warn officials of many of those potential projects are proceeding without fully considering the possible risks.

The LNG business is an integrated trade that involves a whole value chain of energy supply, infrastructure construction and gas-market development. Many local governments and oil companies, however, recklessly put pen to paper before solving each part of the value chain, suggest critics.

Risks such as failing to secure enough supplies, high LNG prices, lack of LNG tankers and lack of customers will eventually lead to losses, they suggest.

"It seems the oil companies rush to the projects just to forestall their competitors," says Zhang Kang, a veteran energy industry researcher with the consulting institute affiliated with Sinopec, China's second-largest oil company.

"Few efforts have been made to assess the risks of the whole value chain, and many of (the firms) have not yet realized the risks," Zhang ssya during a telephone interview.

"If it is not heeded, it will be a big problem."

A typical LNG project imports 2-3 million tons of super-cool liquids a year, for at least 25 years, to supply a terminal. At the terminal, the LNG will be transformed back into natural gas and delivered to local power plants, households and industrial users. The investment runs into the billions of yuan.

China now has two LNG projects in Guangdong and Fujian provinces under construction. Those projects, led by China National Offshore Oil Corp (CNOOC), China's third-largest oil company, have a combined capacity of 6.3 million tons a year.

At least 13 more terminals are planned. They will be situated in every province along China's eastern coastline and the municipalities of Shanghai and Tianjin.

Officials in Hebei Province, in China's hinterland, are also considering launching an LNG project, to supply clean energy to Beijing.

In the past two years, local governments have signed preliminary agreements on all those projects with either PetroChina, Sinopec or CNOOC.

Yet, they have to wait for final approval from the Chinese Government before they begin construction.

The 15 terminals will have a combined capacity of 47 million tons a year.

If all are approved, China will become Asia's second-largest LNG importer, after Japan, by 2010.

In last month alone, CNOOC signed three preliminary agreements to build LNG projects in Hainan Province, Wenzhou in Zhejiang Province and Qinhuangdao in Hebei Province.

The gas terminal and power plant in Hainan will cost 7.5 billion yuan (US$906 million).

The terminal will be designed to handle 2 million tons of LNG per year by 2012. It will increase to 3 million tons by 2015.

The one in Qinghuangdao will have a capacity of 2 million tons a year once it is completed by 2010.

CNOOC did not specify the details of the Wenzhou project.

Coastal areas, where there are few coal, gas or oil reserves, hope imported LNG will help satisfy their demand for energy to fuel their brisk economies.

Local governments intend, gradually, to replace coal with clean natural gas for power generation to reduce air pollution and traffic congestion caused by coal transportation.

More important, local governments welcome the LNG projects because they can attract huge investments in infrastructure construction, promote related businesses, provide hefty tax revenues, and create many job opportunities.

Oil companies are also jostling for a share of the embryonic LNG market to take advantage of China's move to increase natural gas consumption. The government plans to increase gas consumption to 8 per cent in the total energy consumption mix by 2010, up from less than 3 per cent at present.

"Demand for LNG is increasing in China, and we expect significant growth in the coming two years," Fu Chengyu, president of CNOOC, says.

The LNG projects also allow China's oil companies to take stakes in supply gas fields in other countries to raise their reserves.

CNOOC Ltd has acquired stakes in a Northwest Shelf joint venture and Gorgon project in Australia, as well as in Indonesia's Tangguh field, after the parent CNOOC committed itself to LNG purchase contracts with those fields.

So far, CNOOC has the lead over its two domestic rivals. Besides the two projects, in Guangdong Dapeng Bay and Fujian, the company has another eight projects under study including the two in Shanghai and Zhejiang, which are nearing government approval.

PetroChina has three, while Sinopec holds two in Shandong and Jiangsu.

Each of the three companies has planned an LNG terminal in Jiangsu, at different sites. But insiders say PetroChina is most likely to build first.

Still, experts warn risks in building LNG projects are looming.

"It is developing too fast," says a senior executive of a foreign oil company's Chinese branch. "There is over-competition among oil companies."

Many other issues such as the fluctuation of foreign exchange rates and international relations, transportation and security of supplies should also be heeded.

"It should take years to complete the evaluation process. But now it only takes a month to announce a deal," says the executive.

Pricing is another risk. Since early last year, the global LNG market has been shifting from a buyer's market to a seller's market. Prices are going up as many countries including the United States, India, Mexico and China move into the market.

The riskiest element, experts suggest, is the power industry, which consumes half of the LNG imports.

The Chinese Government has yet to provide incentives for gas-fired power plants. Without favourable electricity rates, the profitability of gas-fired power plants remains in doubt, as their costs are much higher than those of coal-fired power plants. Also, gas-fired plants tend to generate less electricity.

Meanwhile, the power plants have to sign long-term "take-or-pay" contracts to commit to purchase gas. But they cannot sign long-term power-purchase contracts with customers to lock the power generation.

"Once there is an electricity glut, the survival of gas-fired power plants will become a question mark," says a manager from a foreign oil company's branch in Beijing.

"If this is the case, the LNG project will post losses."

The manager, who spoke on condition of anonymity, also indicates the government's lack of uniform planning, to co-ordinate the markets and pipelines for LNG and traditional natural gas, poses a problem.

(China Daily 05/09/2005 page7)