Will China Import Liquefied Natural Gas from West Virginia?
Posted on 03-14-2018
By Huiru (Ruth) Kang
In November, China Energy Investment Corporation signed a non-binding agreement with West Virginia. The agreement laid out a plan to invest $84 billion in shale gas development，underground storage of natural gas liquids and derivatives, and chemical manufacturing in the state over the next 20 years. Since signing the agreement, the Chinese state-owned enterprise has made no further announcements, nor have they explicitly expressed their rationale for these investments. Given the China’s increasing demand for natural gas, it is likely that these investments are intended to facilitate imports of natural gas from Appalachia.
Three factors could promote imports of liquefied natural gas（LNG）produced in West Virginia to China. First, China’s rising demand for natural gas necessitates increased LNG imports. China is expected to continue to import LNG due to a massive government program pushing to heat millions of homes and power thousands of factories with natural gas instead of coal. Further, the International Energy Agency predicts that China's natural gas demand will triple by 2040. Meanwhile, China Energy is eager to ramp up investment in gas-fired electricity generation. As China’s top coal miner and the largest power utility, China Energy remains under pressure to clean up its energy mix. In fact, the possibility of imports from West Virginia has been ostensibly confirmed by Chinese media reports, which emphasize imports as a main driver for China Energy’s planned investments.
Second, the US LNG import price is now cheaper when compared with Australia and Qatar, China’s top two LNG suppliers. Chinese companies often sign long-term contracts with suppliers from Australia and Qatar. Such contracts are typically for 15-20 years or more. The most recent data available show that the prices in contracts between Chinese companies and Qatari suppliers remain high, varying from $15/MMBtu to $20/MMBtu between 2008 and 2011. In 2013, the import prices of LNG from Australia and Qatar were $3.5/MMBtu and $17.9/MMBtu. According to Platts, the price of Australian imports will likely reach $7.2/MMBtu during 2018 and 2019. In December 2017, the average landed price of LNG in China was $10/MMbtu, while the landed price of LNG imported from the US was $6 to $7/MMBtu. China Energy could take advantage of relatively less expensive long-term contracts with natural gas companies in West Virginia, where the average industrial price of natural gas was $2.59/MMBtu in 2017.
Finally, imports from the US would be a key part of China’s efforts to diversify the gas supply mix to strengthen its national security. Turkmenistan, China’s top pipeline gas supplier, has reduced its supply by nearly 50% since January 30. This came at a time of peak demand during a severe winter. According to Chinese media reports, Turkmenistan has violated the terms of its contract with China because it wants to raise prices. Under such circumstances, more reliable imports from the US would be a desirable option for China.
A lack of available export infrastructure and the significant costs associated with transporting LNG from the US’s east coast to China are two major impediments to imports from West Virginia. Despite these barriers, West Virginia enjoys a price advantage compared with Australia and Qatar, and even many other states in the US. For example, the average industrial price of natural gas in West Virginia was $2.59/MMBtu, which is lower than $3.40/MMBtu in Texas. Furthermore, the overall natural gas price is expected to remain flat in the US, and the price in West Virginia may even fall if local production grows faster than demand.
At the same time, there is some good news concerning West Virginia’s infrastructure. The federal government issued a certificate for Mountaineer XPress and Gulf Xpress pipelines last month, signifying the removal of some regulatory obstacles. Those pipelines are partly designed to move gas from shale producing regions in West Virginia to the LNG export terminals on the Gulf Coast. Moreover, the Appalachia Development Group has been invited by the Department of Energy to submit an application for a $1.9 billion loan guarantee under a federal government program. If approved, it would support the development of infrastructure for the Appalachia Storage & Trading Hub, which is one of the key projects related to China Energy’s deal.
Indeed, a persistent price advantage and progress on infrastructure would reassure China Energy to move forward with its investment plan. To lure China Energy to West Virginia though, local governments may have to make substantial concessions, such as the billions of dollars in tax breaks provided by state and local governments near Shell’s cracker plant in Pennsylvania. What will it take for China Energy to export LNG from West Virginia? The answer may depend on what incentives the state and local governments can offer.
Huiru (Ruth) Kang is a Master of Public Administration student at the University of Pittsburgh, Graduate School of Public and International Affairs. Her research interests include international cooperation on clean energy, energy poverty alleviation, and climate change.
About the blog: The GSPIA Energy and Environment blog provides commentary and analysis that furthers understanding of E&E issues of public interest. Its primary contributors are GSPIA faculty and students.