Distribution and Chain Pattern of Liquefied Natural Gas Industry in China

Chinese Geographical Science 2007 17(3)203-209DOI:101007/s11769070203-xDistribution and Chain Pattern of liquefiedNatural Gas Industry in ChinaZHANG Yaoguang, ZHAO Yonghong, CHANG Hongwei, WANG Dan, MENG Zhaobin(Research Center of Sustainable Development and Marine Economy, LiaoningNormal University, Dalian 116029, ChinaAbstract: The production and consumption of natural gas in China has been developing rapidly in recent years. It isexpected that the annual growth rate of the demand for natural gas will reach 12% in the next 15 years, and the gasconsumption in the primary energy will increase from 0.3%to 10%or more by 2020. However, since the supply ofnatural gas cannot satisfy the requirements, China has begun to build liquefied natural gas (LNG) terminals in thecoastal regions such as Guangdong and Fujian, and solve this problem by importing LNG from foreign countries. LNGneeds to be transported by lnG ships from abroad. With the rapid growth of global gas production, the volume ofLNG trade also increases, and the interregional production increased from 0.3%in 1970 to 26.2% in 2004. So, we needLNG ships more than before. This article puts forward the distribution of LNG ships and the speculation of the futureof LNG transportation based on the studies on foreign LNG production, the LNG trade, the building of LNG ships, theLNG transportation, the chain model of LNG distribution, etcKeywords: liquefied natural gas(LNG); LNG industry; LNG ship; LNG transportation; LNG industry distribution;1 IntroductionLNG shipbuilding and LNG transportation, is becominga new rising industry in China. The tapped natural gas isThe utilization of natural gas will play an important role converted into liquid form, i.e., LNG, with low tem-increases. Using clean energy, such as natural gas, can production is the main body of the LNG indus.e. LNGin energy construction from now on as oil consumption perature( C)under atmosphreduce the extra dependence on other resources, such as LNG has the following advantages. 1)The volume ofpal and oil. It is predicted that the requirement for natu- LNG is 625 times(1/600)smaller than that of naturalral gas in China will increase at the rate of 12% in the gas with the same quality, and its weight is only 45% ofnext 15 years, which is twice more than the increase rate water, so it can be easily transported by automobiles andof GDP. It is also predicted that the proportion of natural ships. 2)With high storage efficiency, LNG occupiesgas to the primary energy consumption of China will in- smaller space and needs less investment. 3)The latentcrease from the 2.7% at present to more than 10%in 2020, energy released by gasification of LNG is high, and thewith an annual consumption of 160x10-210x10m. In cooling energy during the liquefying process can be re-2020, the 51% supply of natural gas in China will come cycled. 4)The density of gasified LNG is so low, half offrom the mining of domestic gas fields, and 39% will rely that of air, that it will spread out immediately, but noton importation(Ji and Yue, 2004). By that time, many explode when it slightly leaks out And 5)Its ingredientterminals will have been built in the coastal regions of the is purer than usual energy, and can burn fully. Afteburning, it becomes carbon dioxide and water. Therefore,The liquefied natural gas (LNG)industry, which it is ad nf clean fiel At the same time itshould be the combination of LNG LNG production, is adv中国煤化工 f the environmentCNMHGReceived date: 2006-08-04; accepted date: 2007-02-01Foundation item: Under the auspices of the National Natural Science Foundation of China(No, 40671052)Correspondingauthor:ZHANGYaoguang.E-mail:zhangyaoguang@163.comZHANG Yaoguang. ZHAO Yonghong, CHANG Hongwei et al.and reduction of urban pollution, etc.lia, and Brunei (Table 1). There are five LNG producingDeveloping the LNG industry can exploit more natu- countries in Africa and the Middle East, namely algeria,gas. Under the condition that more countries are de- Libya, Nigeria, Qatar and Abu dhabi. The main importpending on the importation of natural gas, the world ers of LNG are concentrated in a few regions or coun-market for natural gas is moving towards LNG The tries in Asia and Europe. The main importers in Asia aretechnical improvement of LNG makes cost cut down Japan, Korea and Taiwan of China, and in Europe aresignificantly, which gives a strong push to the develop- france, Turkey, Belgium, Spain and Italy. USA is bothment of the global LNG industry. Furthermore, most of an importer and exporter. The top three LNG importersthe unexploited gas fields are far away from the market in the world are Japan, Korea and France. Now, Chinaof developed countries. The political disagreements ex- has become one of the importers, tooisting between different countries block the project of The trade of LNG is becoming globalized. The vol-natural gas piping. However, the flexibility in the trans- ume of international trade increased to 131. 82x10t inportation of LNG plays a big role in linking up the pro- 2004 from 80x10't in 1964, with the average annualducing areas of natural gas and the market, and it easily growth rate of 20.34%. The ratio of the volume of LNGbreaks the regional restrictions of piping. The trade of trade to that of natural gas increased from 0. 3% in 1970LNG can distribute resources to markets where they can to 26. 2% in 2004( Zhang and Pang, 2005). By 2005, thebe sold at a high price, especially during the 10 years LNG productivity of the whole world has reachedfrom 1993 to 2003. The liquefying cost of natural gas 115x10t. It is expected that the productivity will in-decreased by 35%-50%, and the basic construction ex. crease to 315x10t in 2020(Zhang, 2005; Ranawakepense decreased from USS500 to US$200, whereas the 2004). According to the prospects from Poten& Partoutput of every production line increases from 1x10t to ners Co. Ltd, the trade volume of LNG will increase tomore than7×10 t every y375x10t in 2015 (Lou, 2006). The volume of exportThe LNG industry belongs to the typical chain of from the producers is listed in Table Iindustry pattern, which forms an entire chain, from theupstream exploitation of natural gas, through the trans-Table 1 Export volume of main LNG countries inportation, regasification, to the downstream generationthe world and their proportion in 2004of electricity, and the utilization of the urban burning Country (region)worid (%gases. The LNG industry can form applicable systemsSoutheast of Asia and Pacific AreaAs a clean fuel, LNG can be used by urban residentsIndonesiaafter gasification. As a freezing material source, it canbe used in producing quick freezing food. Besides, itAustralia1217can be used in industries such as plastic, rubber, chemi-950cal fertilizer etc. It can also be used as an industrial Middle east404.72406gaseousOman373.82 Development of LNG Industry in the WorldAfrica219257.5The production of LNG started about 40 years ago. Theworld's first LNG factory was built in Algeria on Sep-tember 27, 1964. In the same year, the first LNG ship Ameicsaad and Tobagoloaded 12,000t LNG and sailed to England. Five years399later, the device of Richard LNG was built in Alaska inUSA1996, and then started to export LNG to Japan. In 1970,中国煤化工sLibya became the first LNG producer and exporter inAfrica. Its target market was Spain. Brunei is the firstCNMHGLNG producer in Asia. In the Asia-Pacific region, themain exporters of LNG are Indonesia, Malaysia, AustraCurrently, 20 LNG factories are being built or rebuilt,Distribution and Chain Pattern of Liquefied Natural Gas Industry in Chinaand 75 assembly lines are being built, too. These facto-Table 2 LNG projects distribution of China in 2010ries are mainly distributed in Norway, Egypt, Russia and Region LNG scaleGuangdong First stage: 3.7enzhen3 Development of LNG industry in ChinafujianFirst stage: 2.6Second stage: 6.03.1 Emerging of LNG in ChinaFirst stage: 3.02008WenzhouDeveloping the LNG industry in China solves the prob-lem of the increasing consumption of energy. The origin ShanghaiFirst stage: 3.0of LNG in China relies on the production of domesticSecond stage: 6.0and overseas natural gas. Currently, the domestic LNG JiangsuFirst stage: 3.5factories are Henan Zhongyuan Luneng High-tech CoLtd, Xinjiang Guanghui Industry Investment(GROUP)First stage: 3.0Co, Ltd, the Guangxi Xin'ao Group, the Hainan FuHebeiFirst stage: 2.0shan Co,, Ltd, etc. The oil or gas resources used bythose enterprises separately are150×103m3d,1.5×10° Liaoning First stage:40Dalianm3d,150×10m3ld,and250×10m3 d in the Puyangoil-field in Henan, Tuha oil-field in Xinjiang, Weizhou The projects of LNG listed in Table 2, which are beingoil-field and Fushan gas-filed in Hainan, respectively. constructed or planned, will be constructed in two stages,The main resources are set to meet the demands of the and the scale is between 3x10t and 7x10t. Every LNGcities.China formulated a LNG import plan in 2004. It project has stations, ports and pipelines to receive theggested that several LNG harbors and the main path LNG Mostly, the LNG will be used to generate electrictransporting LNG should be built to receive LNG in the power, so there are many gas power stations under con-coastal regions of Guangdong, Fujian, Shandong, Tian- struction. As an example, the Guangdong LNG projectjin, Zhejiang, Shanghai, Jiangsu, Liaoning, Hebei and will have four LNG factories: the Huizhou LNG Co, LtdGuangxi. It would basically form a natural gas channel the Shenzhen Qianwan LNG Plant, the Shenzhen Eastthat would take LNG as the main body, and connect it Power Plant, and the Guangzhou Zhujiang LNG Powerwith the main paths in the future according to the llth Plant, while im Fujian Province, there will be three facto-Five-year Plan in 2006, it was suggested that the LNG ries, which are located separately in Putian, Jinjiang andimport project should be constructed moderately in Xiamen. The overseas sources of LNG terminalscoastal regions. According to the prospect of the Guang- Guangdong and Fujian(Indonesia, Australia), and do-dong Commercial League, the demand of LNG will in- metics sources from the gas field of the South China Sea,crease to 50x10t in China in 2015, which should be etc, lead the result that the output of natural gas is moreclose to or preponderated over the present value of the than 16x10m' Generally speaking, 65% ofLNG is usedapanese demand. So, the LNG industry of China has to generate power, while 35% is used as fuel gas for theentered a new period of comprehensive development(Li cityand Wang, 2005)From the progress of the LNG project in coastal pro-vinces, the key areas are Guangdong, Fujian, Zhejiang3.2 Distribution of LNG projects in coastal regionsand Shanghai. Especially, the key projects, which are theAccording to the economic development and the de- main gas line and the forerunner project of externalmand for LNG in China. the factories will be built in high-voltage wire of natural gas in Guangdong, havethree main areas: the Zhujiang (Pearl) River Delta been finished before June 2006. The main gas lines of(mainly Guangdong)and the Southeast Fujian, the the LI中国煤化工 from the LNgChangjiang(Yangtze) River DeltaCNMHZhejiang and Shanghai), and the Bohai Sea Rim Eco- zhou,the power stations,nomic Zone(mainly Shandong, Hebei and Liaoning) from which the LNG will be sent to the gas company(Table 2).and power station. The main line is 397km long, in-ZHANG Yaoguang, ZHAO Yonghong, CHANG Hongwei et al.cluding the subline in Huizhou Power Plant, the subline grated by the traditional pattems of integration fifteenin shenzhen and the subline in foshanyears ago(Fig. 1), and the suppliers were larger compre-hensive upstream blocs that are composed of some trans-4 Pattern of LNG Chainnational corporations and national oil and gas companiesThese enterprises were mainly engaged in all businessesThe natural gas begins with the exploitation of upstream including the production, liquefaction and transportationgas fields through many links, such as purification, of natural gas. Buyers were mostly downstream blocs thatstorage, liquefaction, loading, marine transportation, are composed of those natural gas or electric companiesunloading, regasification, storage and single selling of affiliated to governments. The purchasing and sellingpipeline network, and finally is sent downstreamcontract ofLNG was a kind of cost, insurance and freighters, such as power stations and urban gas users. These CiF), which had a general limit time of 20 years orinks between the upstream and the downstream are longer. This pattern was good for both buyers and sellersclosely connected and mutually influenced. They must To the buyers, this pattern could stabilize prices, keepingbe constructed coordinately, put into production simul- a long stable supply of LNG To the sellers, the lowesttaneously, and operated collaboratively in order to be an price could be beneficial to ensure the retum of theintegrated and complete supply chain ofLNG.long-term and low risk investment. At that time, contractswere relatively simpler, and the risk of releasing loan was4.1 Evolution of international supply chain of LNG lower, which made it casier for projects to raise money4.1.1 Pattern ofLNG chain in 1980sand get insuranceAll the international supply chains of LNG were inte-Purchasing and sellingcontracts oflNglling blocsPurchasing blocsGas Pipelines LiquefyingDistributingfactoriesfactories network of gauseSources: Wang, 2005; David, 2005Fig. 1 Traditional pattern of integrated LNG4.1.2 Pattern ofLNG chain in 1990s4.2 Chain of lNg in ChinaIn the 1990s, there appeared the non-complete inte- In the 1990s, with the construction of some new LNGgrated LNG supply chain and relatively independent projects, the phenomenon that participants mutuallypurchasing blocs that operated LNG transportation and purchase shares in the traditional places in the supplybought LNG in FOB(Free on Board) from the wharf of chains has been becoming more and more common(FigLNG Fig. 2). This change brought forward more flexi- 3). This trend has increasingly expanded in recent yearsbility for some long-term buyers, espccially in Japan China National Offshore Oil Corp (CNOOC) has si-and South Korea, in the sides of supply and manage- multaneously been a share holder of gasification termi-ment. It also provided opportunities for sharing trans- nal projects built in all of the coastal provinces, LNGporting benefits for the buyers, heightened their domi- projects in Australia and Indonesia, and the shippingnant statuses in building transporting ships of LNG, and companies that will undertake the responsibility toincreased their influences on the long-term renting trar中国煤化 Tn terminals in Chinabusiness related to the supply chain of LNG This kindof share right of shipping companies, which are rela- 5LNUCNMHGu ulG Transportationtively independent, usually involved those participantsof the upstream and the downstream blocsWith the significant increase in the demand of importedDistribution and Chain Pattern of Liquefied Natural Gas industry in ChinPurchasing and sellingcontracts ofLNGbartering shipsSellersOBBuyersfactoriships ofLNGactoresnetworkSources: Wang, 2005; David, 2005Fig 2 Relatively independent pattern of integrated LNG supply chain1970s to the mid 1980s, the production monopoly ofLNG ships was broken. There were 99 LNG ships infieldstotal all over the world in 1995. then 104 in 1997. InLNG factoryaddition to 157 LNG ships used by the global sea trans-Transporting ships ofLNGport market by 2004, there were a total of 191 LNGReceiving and gasifying terminals ofLNships in March 2006(Wang, 2006). The development ofLNG ships is related closely to the quantity of intemaLocal distributingtional LNG trade. Shipowners usually choose the suitFinal asers of gasable type and quantity of LNG ships according to theAlthough buyers are still at the down-stream andtrading quantity that has been ordered for the new LNGsellers the upper-stream, they all begin to get involved in the linkprojects and the demand of route before they decide toof transportation by shipbook new LNG shipsupper-stream; sellers further involved in down-stream by investUp to October 2004, the R O. Korean shipyards hasing on metastructurereceived 68 orders, which was 69.4%of the global LNGFig 3 Trend of trade of buyers and sellers in supply chainsship orders officially recognized(98 in total). Japaneseshipyards had done 24, sharing the market by 24.5%gas, there must be a rapid growth in the sea transporta- ranking No 2 (Table 5)(Zhang, 2004)tion market. As a result, most LNG have to be trans-ported by seaTable 3 Distribution of global LNG ship orderby november 20045.1 Development of international LNG shipQuan. Share ofNatural gas can be transported from the producer to theCountry Shipyardmarket with long distance pipelines, such as the"West RO. Daewoo Shipbuilding Corpto the East Pipeline Project", which must be at the range Korea Samsung Heavy Industriesof 1650km to 3300km to produce economic benefitsHyundai Heavy IndustriesHyundai TsakosAnother way is free from the limitation of distance. It isto liquefy the gas to LNG at low temperature, and thenJapan Mitsubishi Heavy Industriesto transport the LNG to those use areas by LNG shipsMitsui Engineering Shipbuilding Co. 3The second method needs a receiving terminal for theKawasaki Heavy Industriesregasification of the LNG in the use areas, and then theKoyo Dockyard Co. Ltdnatural gas will be transported to plants or other users Subtotal254through pipelines中国煤化工At present, 1/5 of the gas exploited all over the worldare sold in the form of intemational trade, in which 25% SubtotalCNMHG 4are transported by LNG ships. The developmental his- China Hudong-Zhonghua Shipbuilding Co,Ltdtory of LNG ships has been only 40 years. From the mid fotalZHANG Yaoguang, ZHAO Yonghong, CHANG Hongwei et al.5.2 Development of LNG ship in Chinaby others, China must develop her own tanker fleets,5.2. 1 Significance ofbuilding LNG ship in Chinaincluding LNG fleets. Presently, gas consumption inWith the development of the LNG industry in China, it China only accounts for 2% of the energy consumed,is necessary to build LNG ships according to the model and this figure is expected to increase to 4% in 2010in Fig. 3. Firstly, building LNG ships can fill the gaps of There will be a shortage of gas, equivalent to aboutLNG ships in China, link with the intemational LNG 50x10t oil in the Chinese market, which will conse-shipping industry, and raise the domestic productive rate quently demand much more domestic LNG ships. Ac-of LNG ships. Secondly, it can also advance the tech- cording to that prediction, by the year 2010, China'sthey development of domestic related subjects and imported LNG projects will demand about 15 LNGItional adjustment of the domestic energy structure. ships. Before 2015, China will possibly have builtAt the same time, it makes China have its own initia- 30-35 LNG ships, which will be equivalent to 1/6-1/5tive ability in the chain of LNG importation, which may of the amount of global LNG ships demanded in thebreak the market monopolized by a few advanced coun- same period ( Liu, 2004). This huge market will create atries in this industry.broad room to develop Lng shipbuilding in China5.2.2 Production ofLNG ship in ChinaChina is the third largest shipbuilder in the world and 6 suggestionsome larger shipbuilding enterprises should devotethemselves to studying LNG ships. China has not yet (1) To implement a strategy of globalization, marketbegun LNG sea transportation. However, with the ad- ability, diversification and systematization. For futurevancement of LNG projects in Guangdong, Fujian and development, importing LNG is of vital significance andother areas, and the implementation of LNG terminals, benefit for the development of Chinas economy, thethere appears an opportunity for Chinese shipbuilding adjustment of the energy structure, the improvement ofenterprises to enter the LNG ship-building market. Fi- environment quality, the advancement of living stan-nally, Shanghai Hudong-Zhonghua Shipbuilding[Group] dards, and the promotion of coordinating the economyCo. Ltd. was appointed for China to construct ships for and environhand, the internationale Guangdong and Fujian's LNG ship project. China's market has changed from the seller market to the buyerfirst LNG ship was completed and put to use on De- market, which has created the resources condition forcember 28, 2005, and the second LNG ship was put to China to import LNG The LNG industry must impleuse on June 12, 2006, which marked the Chinese LNG ment the developmental strategy of globalization, mar-anufacturing stage(Li, 2006). ketin order to5.2.3 Prospect for LNG ships demanddevelop LNG, pipelines and ocean natural gas jointlyAccording to the American Energy Research Institu- This kind of pattern that is mutually supplemented withtions prediction, by 2010, the amount of LNG trans- oil resources has improved the energy structure of Chinaported by sea will have doubled that in 2004, reaching and has safeguarded national petroleum security. At the240x10t( Zhang et al. 2004). As a result, by that time, same time, the development of the LNG industry alsothere must be an additional of 150 or more LNG ships to increases the production of LNG ships in the shipmeet the demand of LNG transportation. China has be- manufacturing industry, which enables China to havecome an oil-importing country in the world; at the same more possibilities in the strategy of being a powerfultime, the supply and price of international oil are both shipbuilding nation.unstable. That is to say, it is necessary to increase the(2)To supply areas lacking energy with LNG As theamount of LNG imported, instead of gas, in the future. new emerging industry in China, LNG development, atmported in China is trans- present and at a certain time in the future, will satisfyported by sea, which relies on affreightment with some thev凵中国煤化工 Zhujiang River DeltaCNMHGang river Delta andd mu ewouuuuy yue. which are in severeChina and controlled by domestic shipping companies. shortage of energyTo keep China oil transportation from being controlled (3) To form an integrated natural gas transportationDistribution and Chain Pattern of Liquefied Natural Gas Industry in Chinanetwork system. A 2100km of natural gas pipe network Ji Ming, Yue Lianguo, 2004. The importation of Liquefied Natu-has been formed in the southeastern coastal areas. This ral Gas will create huge opportunities. The People's Dailypipe network will transmit overseas gas sources of the verseas Edition ) 2004-05 -04(in Chinesewo LNG receiving terminals in Guangdong and fujia200601409.( in Chinese)as well as Yacheng13-1(in South China Sea oil-gas Li Wen, Wang Limin, 2005. China oil and gas summitfields-Hong Kong, Dongfang gas fields-Yangpu-Hai- ternational Petroleum Economics, 12(6: 14-27.(in Chikou, Pinghu gas fields(in East China Sea)-Ningbo and Liu Ying, 2004. Another peak of ship-building of ChinShanghai, BZ 34-2 oilfield-Longkou-Yantai and the Ship News. 2004-08-20(in Chinesecorresponding pipelines of Laizhou project. This pipeLou Cheng, 2006. The Risk of LNG industry in future. Interna-ional Petroleum Economics, 13(2): 42-43 (in Chinese)network links up with the " West to the East Pipeline Ranawake G 2004. Market price risk, the mew realities and LNGProject"in Shanghai and supplements each other, thus project finance structure. In: ME GAS and LNG Forum. Bah-forming an integrated Chinese natural gas transmit- rainsupply system, which will stably support the security of Wang Limin, 2006. On the"petroleum and gas transport in ChinaChinese energy(zhang, 2004)2006". international Petroleum Economics, 13(3): 20-27.(in(4)To stabilize LNG sources. The stabilization ofWang Yan, 2005. Opportunities, risk and challenges of the LNGLNG sources should be paid much attention to, At pre- sector. International Petroleum Economics, 12(6):39-46(insent, some areas stick to constructing the receiving sys- Chinese)tem of LNG(wharf storehouse, pipelines, fuel gas fac- Zhang Kang, Pang Mingli, 2005. Status quo and prospect oftory and so on), but many projects for LNG resources global LNG production. Intenational Petroleum Economics,cannot be carried out. The realization symbol is to sign a 12(10): 55-59.(in Chinesevalid contract with a deadline of 20-25 years, which can Zhang Qi, 2005. 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