China Doesn't Need Your LNG

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It seems like every time a new energy resource is discovered, producers expect China to consume it. Heck, even when energy companies plan to sell to other customers, if anything goes wrong they sheepishly turn to Asia (see Keystone XL) to save their tails. The liquefied natural gas industry is especially counting on China and the rest of Asia to drive demand. But what if they don't need it?

LNG is too expensive
A failure to reform gas prices in China has kept the price of LNG much higher than that of gas coming in through pipelines. As a result, analysts have dropped China's expected LNG demand from 33 million metric tons by 2015 to 31 million tons. Doesn't seem like a big difference, but if the price of LNG doesn't come down, there's no reason that number won't continue to shrink. Make no mistake, it is not China's demand for natural gas that is declining -- it remains high -- it is the demand for LNG that is receding.

The LNG export picture
There are several LNG export terminal projects in the works right now, at varying stages of development. Here is a brief rundown of the situation:

Partners

Location

Status

Anadarko (NYSE: APC)
KBR (NYSE: KBR)
East AfricaConcept-only
Apache (NYSE: APA)
EOG Resources (NYSE: EOG)
Encana (NYSE: ECA)
Kitimat, British ColumbiaPermitting process; no customers
Royal Dutch Shell (NYSE: RDS-A)
Mitsubishi
Korea Gas
China National Petroleum
Kitimat, British ColumbiaSite purchased
LNG PartnersKitimat, British ColumbiaPermitting process; no customers
Cheniere (AMEX: LNG) LouisianaPermitting process;
secured one customer contract
Dominion Resources (NYSE: D) MarylandPermitting process; no customers
Noble Energy (NYSE: NBL) Mediterranean SeaConcept-only

Source: Company press releases.

Many of these companies, especially the ones in British Columbia, are banking on Asia to drive demand. Increased competition can drive down the price of LNG, but the first of these projects to come online is still three to four years away. If Asian economies establish contracts to cheaper gas in the interim, there could be trouble ahead.

Asia is more than just China
Obviously, China isn't the only country in Asia. Countries from India to Japan also need natural gas. But India is getting its gas from the same place China is looking at: Turkmenistan.

Turkmenistan is on the verge of inking a deal with Afghanistan, Pakistan, and India to lock in gas prices for a transcontinental pipeline. Turkmenistan ranked 23rd in the world for natural gas production last year, but the country is sitting on the world's 12th largest reserves and has no problem doling it out to whoever is willing to pay. And that includes China; the country's WE2 pipeline will be fully operational by the end of 2011, bringing more than 353 bcf of gas into the country per year. Plans for yet another pipeline are already under way.

Foolish takeaway
Though China will continue to buy LNG in the near term, natural gas discoveries in Central Asia could pose a serious threat to LNG exporting in the future.  Keep tabs on all things LNG by clicking here to add the above companies to My Watchlist.

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