BP Looks To Tap China’s Growing Natural Gas Demand With A $20 Billion LNG Deal
BP Plc. (NYSE:BP) is set to sign a $20 billion liquefied natural gas (LNG) deal with China National Offshore Oil Corporation (CNOOC). Through this 20-year LNG supply contract, the London-based energy giant plans to tap into the fast-growing demand for natural gas in China. The company is expected to source LNG from the Freeport LNG project in the U.S. In February last year, BP entered into a 20-year natural gas liquefaction tolling contract for 4.4 million tons per annum (MTPA) capacity at the upcoming LNG plant on Quintana Island, Texas. [1]
BP is one of the world’s leading oil & gas multinationals with operations in more than 80 countries. As a vertically integrated oil and gas major, it has both upstream and downstream operations. The upstream division primarily includes exploration and production activities for oil and gas, while the downstream division focuses on producing refined petroleum products such as gasoline.
We currently have a $53.5/share price estimate for BP, which is almost in line with its current market price.
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The U.S. Energy Information Administration (EIA) expects the global natural gas demand to grow by 64% from 113 trillion cubic feet in 2010 to 185 trillion cubic feet in 2040, primarily due to its growing use in electricity generation, industrial operations and transportation. This is partly driven by the fact that it has much lower carbon intensity compared to coal, for which, it is favored by governments of most countries planning to reduce greenhouse gas emissions. The EIA estimates industrial and utilities sectors to account for 77% of the projected increase in global natural gas consumption. [2]
Most of the growth in industrial and utility sectors is expected to come from emerging markets in the Asia-Pacific region, which holds just around 8% of global proved natural gas reserves and accounts for almost one-fifth of the total natural gas consumption globally. With a rather concentrated supply growth and emerging demand from Asia-Pacific countries, the world natural gas trade, especially LNG trade, is poised to grow higher in the coming years.
The share of LNG in global natural gas trade has grown steadily over the past few years from around 28% in 2008 to 31.5% in 2013. This is primarily due to the fact that natural gas imports by the Asia-Pacific countries that rely mostly on LNG (~80%) are growing much faster than the rest of the world. The global natural gas demand is estimated to have grown by about 2.5% per year since 2000; however, global LNG demand has risen by more than 7% per year over the same period, almost three times faster. [3]
Currently, most of the LNG demand in the Asia-Pacific region comes from two industrialized countries, Japan and South Korea. Although these two countries together account for just 5% of the global natural gas consumption, they import more than 50% of the total LNG traded worldwide. This is because of negligible domestic supply, and a huge demand form industrial and utilities sectors in these countries.
However, most of the LNG demand growth in the Asia-Pacific region is expected to come from China. Government policy aimed at reducing greenhouse gas emissions to deliver cleaner economic growth is the key factor driving higher natural gas demand in the country. Although the fuel represents just around 5% of the country’s total energy consumption currently, the government expects to double it to 10% by 2020. China is not only planning to replace huge amounts of coal used in the generation of electric power with natural gas, but it also plans to replace as much as one-tenth of its oil demand by shifting toward natural gas fueled vehicles. [4]
While China is trying hard to boost its domestic natural gas supply through shale drilling, consumption is growing at such a rate that the country is becoming increasingly reliant on imports. Recently, China signed a $400 billion long-term natural gas deal with Russia. [5] Its state oil giants have also struck long-term deals with the global LNG suppliers to meet their future demand. [6] CNOOC plans to double its total LNG receiving capacity to 35-40 MTPA by 2015, as it expects LNG imports to play a bigger role in meeting China’s growing energy needs going forward. [7] The chart below depicts how China’s share of the global LNG demand has grown over the past few years.
Data Source: BP Statistical Review of World Energy 2014
BP plans to tap into China’s surging demand for natural gas by signing a $20 billion LNG supply agreement with CNOOC. However, first LNG sales under the agreement could be at least 4-5 years away since the company is expected to source LNG from an upcoming liquefaction facility in Texas, U.S. Last year, BP entered into a 20-year natural gas liquefaction tolling contract for 4.4 MTPA capacity at the Freeport LNG project. The project received authorization from the U.S. Department of Energy last year, to export up to the equivalent of 657 billion cubic feet per year of LNG to countries not in free trade agreements with the U.S. Construction on the project is expected to begin by the third quarter of this year, and the first liquefaction train is expected to come online in 2018. However, the second liquefaction train for which BP entered into a tolling contract with Freeport LNG is expected to come online in 2019. [8]
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Notes:- BP Makes $20 Billion Gas Deal With China, wsj.com [↩]
- Natural gas Outlook 2013, eia.gov [↩]
- Statistical Review of World Energy 2014, bp.com [↩]
- China’s Natural Gas Drive may Cut Oil Demand By A Tenth, reuters.com [↩]
- China and Russia Sign Natural Gas Deal, wsj.com [↩]
- Global LNG, ey.com [↩]
- China’s CNOOC Plans To Double LNG Import Capacity By 2015, reuters.com [↩]
- Freeport LNG Project Status and Schedule, freeportlng.com [↩]