Avoid natural gas players? Not those in China

Analyst Commentary, Miller Chu: China is one of the largest energy consuming nations in the world and recently began stepping up its domestic natural gas development and investments by tapping into its domestic shale gas reserves to meet the growing domestic demand and support its energy policy. China is aiming to increase shale gas production from 0 to 6.5 billion cubic meters by 2015 (about 6% of the total domestic gas production) according to China’s National Energy Administration (NEA). In addition, the country is boosting its overall natural gas consumption as a percentage of total energy consumption to 10% by 2020 compared to 3% in 2008. The graph below shows the breakdown of China’s energy consumption in 2008.

China energy consumption 2008


In support of its energy policy, China has started to tap into its shale gas reserves. A similar development path has contributed to the natural gas boom in the U.S. In June 2011, China awarded its first shale gas tender (a four block shale gas property) to Sinopec Group (HKDR: 0386, NYSE: SHI) and Henan Provincial Coal Seam Gas Development & Utilization Co. Sinopec later launched its first shale gas project in May 2012 to develop the shale gas asset and expects to reach 300 to 500 million cubic meters of production capacity by the end of 2012. The second tender offer was opened for submission in May 2012. 

China’s steady progress to unlock its shale gas reserves has created strong growth prospects for domestic natural gas players. The margins for these domestic gas players have been tight and sometimes negative due to government-controlled gas price. PetroChina (HKSE: 0857, NYSE: PTR), for instance, showed in its filings that it lost more than US$3.0 billion from importing natural gas at international market prices and selling domestically. The domestic production of shale gas will eventually increases the supply, which will reduce the reliance on imported natural gas and boost margins for these gas players. In addition, recent M&A activities such as Sinopec’s US$2.2 billion cash bid for China Gas Holdings (HKSE: 0384, OTC: CGHOF) also demonstrates the strength of the sector. 

References: Wall Street Journal (20 May 2012); Reuters (09 May 2012, 15 May 2012)

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