China has aggressive plans to increase the role of natural gas in meeting its burgeoning energy needs. Estimates suggest that the country may as much as quadruple its gas consumption levels last year by 2020 and is looking to meet this demand from a number of sources including LNG. [1]

The opportunity has prompted oil majors like Chevron and ConocoPhillips to start work on multibillion dollar LNG projects in Australia to target demand from Asian markets and in particular from China. Chevron is presently involved in two giant LNG projects in Australia – Wheatstone and Gorgon. However, LNG imports suffer from a cost disadvantage over domestically produced gas or gas imported through pipelines.

China is presently pushing ahead with plans to develop its own unconventional gas reserves, including efforts to explore its substantial coal bed methane and shale resources, [2] prompting questions over the future placement of LNG produced from Australia.

Australian rush

Energy companies have committed to about $200 billion on LNG export projects in Australia, [1] placing massive bets on the growing demand for natural gas from Asian markets. In particular, the companies are targeting the expected explosion in Chinese demand as the country looks away from coal to cleaner burning natural gas. The rush to develop gas reserves in Australia has resulted in a scarcity of resources and skills, prompting cost escalations.

Chevron is presently involved with the $45 billion Gorgon and the $29 billion Wheatstone project. These producers are targeting Asian markets such as Japan, South Korea, China and India, where demand is expected to grow in the future. LNG is generally sold in long term contracts and prices in the Asia are linked to crude oil benchmarks.

Rising competition

Over the past few years, new technology has helped in unlocking unconventional reserves of natural gas, transforming the production scenario in markets such as North America. The gas glut in the U.S. has prompted players to explore options to export the gas to Asian markets at prices linked to American gas benchmarks, which are considerably lower than gas prices in Asia. (See: U.S. LNG Exports May Impact Chevron?s Australian Gas Pricing)

China is also exploring options to import gas through pipelines from Russia and from Central Asian producers. [1] The most major threat to LNG however comes from local production. The Chinese government is actively encouraging production from local unconventional CBM sources and has already invited players to explore some of its shale reserves.