DNV - China LNG Final Report

Commercial and Strategic Opportunities for LNG in China
Date of first issue: 14 October 2011 Summary
Project No: PP018148
Project Sponsor Bjorn Tore Markussen
Organisational unit: PCGSG824
Clients: Innovation Norway / Ministry of Foreign Affairs
DNV, together with Innovation Norway and the Ministry of Foreign Affairs, have undertaken a qualitative study to identify possible opportunities for Norwegian companies in Chinas LNG sector. Furthermore, the study aims to identify some key barriers and enablers for these opportunities.
Report No: CTC-R-2011032 Report title:
Subject Group: Indexing terms: Key words: LNG, China, LNG, regasification, small scale LNG, market opportunities, receiving terminals, ship-to-ship, LNG bunkering
Det Norske Veritas Pte Ltd

Clean Technology Centre DNV Clean Technology Centre 10 Science Park Drive Singapore 118224 Tel: +65 6508 3750 Fax: +65 6602 3801 http://www.dnv.com
Commercial and Strategic Opportunities for LNG in China

Work carried out by:
Valerie Choy, Consultant, Raunak Kabra, Consultant, Ong Geok Hoon, Senior Consultant, Anissa Suharsono, Consultant, Sanjay Kuttan, Director
Work verified by:
No distribution without permission from the client or responsible organisational unit Strictly confidential Unrestricted distribution
Lars Petter Blikom Segment Director, LNG
Commercial and Strategic Opportunities for LNG in China Det Norske Veritas AS. All rights reserved. 2
Executive Summary
Chinas 12th Five Year Plan maps a path for the use of cleaner energy sources to mitigate the effects of rapidly rising energy demand, aggressively aiming for natural gas to reach an 8.3% share in the primary energy mix in 2015 from 4% in 2010 To reach this target, China would need to import approximately 50 60 bcm of natural gas in 2015, similar to the current import level of the European Union It seems China will overshoot this target, as 14 LNG receiving terminals with a combined capacity sufficient to import more than 120 bcm of natural gas per annum by 2015 It is estimated that 65 LNG carriers are needed to support Chinas planned import growth in the same time period Higher priced LNG imports against regulated and low priced domestic gas prices adds pressure on importers Faster than expected development of unconventional gas resources may reduce demand for LNG imports beyond 2020 The rapidly growing LNG industry in China is expected to support an ecosystem of stakeholders and with limited local competences, there should be opportunities for foreign companies Opportunities for Norwegian LNG-related companies in China are centred on LNG transportation, distribution, and engineering activities: 1) Regasification solutions, 2) Small scale LNG distribution, 3) LNG as marine fuel, 4) LNG bunkering and ship-toship transfer, 5) Maritime technologies, 6) Rules, standards and regulations Challenges to Norwegian companies entering Chinas LNG sector may be overcome by strategies to gain long term local presence and differentiating against other foreign companies
Chinas Energy and Natural Gas Outlook
Chinas 12th Five Year Plan highlights the increase in use of natural gas to reduce carbon intensity from rising energy demand
Chinas 12th Five Year Plan maps a path for the use of cleaner energy sources to mitigate the effects of rapidly rising energy demand The plan set a target for reducing carbon intensity to 40% - 45% below 2005 levels by 2020, in line with Chinas Copenhagen pledge To achieve this target, the plan establishes that natural gas has to be aggressively promoted, targeting an 8.3% share in the primary energy mix in 2015 To reach this target, China would need to import approximately 50 60 bcm of natural gas in 2015, similar to the current import level of the European Union Corresponding to the increase in share of natural gas, the share of coal in the primary energy mix is expected to drop from 70% in 2010 to 63% in 2015.
%
Primary Energy Mix in China (2010-2015)

100 80 60 40 20 0 2010 Coal
2015 Oil Natural Gas Hydro Nuclear Wind/Solar/Bio
Figure 1: Primary energy mix forecast in China according to the 12th 5 year plan
Source: IEA, APCO (2011), DNV Analysis

China has become the fourth largest gas consuming nation in the world
Natural gas is prioritized for use as city gas to replace LPG, biomass and coal for cooking and water heating to increase energy efficiency and reduce environmental pollution Driven by the use of gas to meet peak load power demand, gas consumption in the power sector will make up more than 20% of total gas consumption by 2015 Gas consumption in the chemical sector will halve between 2010 to 2030 from 22% to 11% of total natural gas consumption, due largely to a slowdown of the use of gas as a feedstock in fertilizer production In the transportation sector, natural gas vehicles are being promoted in both private and public transportation with more than 750,000 gas fuelled cars, transit buses and taxis
Natural gas consumption in China by sector

120 100 80
60 40 20 0 1995 2000 2005 2006 2007 2008 2010 2015 2020 2025 2030
City gas Industrial fuel Chemical sector Power generation
Figure 2: Natural gas consumption in China by sector
Sources: IEA, CNPC (2010)

Chinas Natural Gas and LNG Supply Chain
China needs to leverage multiple sources of gas to meet growing demand

1
Supply
Transport
Demand
1a: Conventional gas 85 bcm of gas per year is produced from conventional resources 1b: CBM China has vast CBM resources but only a small fraction are currently considered as technically recoverable 1c: Shale gas Shale gas reserves in China are larger than that in the United States and is expected to reach commercial extraction by 2015 1d: Pipeline gas imports Pipeline gas imports from the surrounding region are expected to increase 1e: LNG imports Chinas LNG imports rose 40% in 2011 from 2010 and is expected to increase 3.5 fold from 2011 to 2020
2a: Pipeline
Rapid development of long-distance pipeline infrastructure since the 1990s has succeeded in connecting inland gas fields to major consumer cities. 2b: LNG trucks LNG produced in the north-western and central provinces is increasingly being trucked to and consumed at neighbouring regions instead of major coastal cities 2c: LNG carriers 14 LNG terminals and 65 LNG carriers will be needed in China by 2015 to support planned import growth
3a: Residential
Rapid growth of city gas demand in China requires more natural gas storage facilities for daily and seasonal peak shaving
3b: Power generation

Gas-fired power generation capacity has increased rapidly especially at key economic regions
3c: Gas fuelled ships and road vehicles

More than 750 000 road vehicles are already running on natural gas and the shipping sector is looking to convert
1a: 85 bcm of gas per year is produced from conventional resources

China has more than 5950 bcm of technically recoverable reserves producing approximately 85 bcm of gas a year These gas fields are mostly located inland and in the western and central parts of the country The main natural gas producing regions comprising the Sichuan, Tarim, Junggar, Qaidam and Ordos basins combined make up 65% of Chinas natural gas production The newly discovered Yuanba gas field in the Sichuan basin represents one of the biggest gas fields ever found in China with 160 bcm of proven gas reserves About 7% of total gas produced in China, mostly those obtained from marginal gas fields, is turned into LNG and transported to major cities by trucks to fuel heavy load trucks, city buses and river fleets
Figure 3: Conventional gas resources in China
These small to mid scale LNG projects have grown in the last 5 years with the joint team of Black and Veatch and Chemtex winning 13 small to mid scale LNG plant design, engineering and construction projects in e.g. Inner Mongolia, Sichuan and Shaanxi provinces
Sources: IEA, CNPC (2009), EIA, Platts, Black and Veatch (2011)
1b: China has vast CBM resources but only a small fraction are currently considered as technically recoverable
China is estimated to have 31.5 tcm of geological CBM resources but only 185 bcm are currently considered as technically recoverable CBM is being produced into LNG at several locations, one of which is at the Qinshui basin in Shanxi province with a total production capacity of 0.36 bcm and supplied to industries at major cities CNPC plans to produce 4.5 bcm of CBM by 2015 Currently, a RMB0.2 subsidy is offered for each cubic metre of CBM production To facilitate CBM exploration, import tariffs and VATs will be lifted from CBM exploratory equipment, parts and specialized machinery till 2016
Figure 4: Coal bed methane resources in China
Sources: Oil Online (2010), Ministry of Finance PRC, CDMC (2011)

1c: Shale gas reserves in China are larger than the US and is expected to reach commercial extraction by 2015
The Ministry of Land and Resources estimates the size of technically recoverable shale gas reserves at 26000 bcm, larger than 24400 bcm in the United States By 2020, shale gas is expected to make up 12% of total gas supply In March 2011, CNPC, which produces 80% of Chinas gas output through its subsidiary PetroChina, brought its first shale gas well on stream Chinas progress in extracting shale gas is hindered by water shortages as the biggest deposits reside in the Turpan Basin in Xinjiang which is a desert To boost shale gas development, Chinese policy makers are now considering the possibility of excluding shale gas from policies affecting conventional gas resources to encourage private and foreign participation
Sources: Guardian, ICIS (2009)
Figure 5: Shale gas resources in China
1d: Pipeline gas imports from the surrounding region are expected to increase
Since the 1990s, China has been in discussions with Russia to procure gas through long distance pipelines but with little progress Russian gas giant Gazprom estimates that it could only start supplying gas to China in 2015 as both sides struggle to reach a consensus on price and volume In light of these challenges, China established a supply deal with Turkmenistan in 2006 to supply 30 bcm of gas per year over 30 years to be delivered through the Central Asia China pipeline In addition, a 763 km Sino-Myanmar pipeline is being constructed to be ready by 2013 to supply natural gas to the Southern part of China under a supply agreement for 10 bcm of gas per year
Figure 6: Pipelines transporting gas from Central Asia to China
Sources: Asia Times (2009)

1e: Chinas LNG imports rose 40% in 2011 from 2010 and is expected to increase 3.5 fold from 2011 to 2020
China received its first shipment of LNG in 2006 from Australia and its imports have risen quickly since then, importing 19% of Australias total export volume in 2009
bcm
China's LNG Imports in 2010 by Country

6 5 4 3 2 1 0
It is expected to import 18.1 bcm of LNG in 2011, up 40% from 12.8 bcm in 2010 Additionally, LNG demand is expected to increase 3.5 fold from 2011 levels, reaching 64 bcm in 2020 LNG procured through long term supply contracts is expected to make up 90% of total LNG imports by 2015 with the rest met through spot purchases Some of the overseas LNG production facilities exporting LNG to China such as QC LNG in Australia and Tangguh in Indonesia are coinvested by NOCs to ensure long-term sustainable supplies
Figure 7: Chinas LNG imports in 2010 by country (bcm)
Sources: FACTS Global Energy, JP Morgan, BP Statistical Review of World Energy (2011), LNG Journal, Wood Mackenzie (2010)
2a: Rapid development of long-distance pipelines has connected inland gas fields to major consumer cities
Up till the 1990s, gas pipeline infrastructure had been limited as gas was used primarily as a local fuel or feedstock Since then, with larger gas discoveries, the government has promoted the construction of inter-regional and cross country gas pipeline infrastructure with the most significant project being the 3900 km West-East pipeline linking the Tarim Basin in Western China to Shanghai The total length of the gas pipeline network is expected to reach 100,000 km by 2015, almost triple from 36,000 km at the end of 2010 The second West-East pipeline currently under construction will deliver imported gas from Turkmenistan to major economic zones in the Yangtze and Pearl River Deltas including Shanghai, Nanjing and Chengdu
Figure 8: Natural gas pipeline infrastructure in China
Sources: Petroleum Economist, CNPC, IEA, China Daily (2010)

2b: LNG produced in the north-western and central provinces is increasingly being trucked to neighbouring regions
LNG produced from small to mid scale LNG plants, located primarily in the north-western and central provinces Traditionally, these trucks traverse across the country from the western and central gas producing regions, with routes often more than 3,500 km long, to supply LNG satellite stations at major cities along the North-east and South coasts (see Figure 9) However, as more LNG import terminals come on stream along the East coast, LNG truck routes will become shorter These trucks and their satellite stations, supply natural gas to more than 750,000 gas-fuelled road vehicles
Figure 9: Example of traditional LNG truck tanker route: From Shan Shan LNG plant in Xinjiang to satellite stations along the coast
Sources: Linde, Black and Veatch

2c: 14 LNG terminals and 65 LNG carriers will be needed in China by 2015 to support planned import growth
14 LNG receiving terminals are expected to be operational by 2015 with a combined capacity sufficient to import more than 120 bcm of gas per annum There are more than 20 LNG receiving terminals in various phases of development, with more than 90% owned by the major NOCs, (CNOOC, CNPC, Sinopec) or their subsidiaries It is estimated that more than 65 LNG carriers* will be needed by 2015 to support planned import growth There are currently 5 Chinese LNG carriers that have been made domestically, all 147,000 m3 in size, with 5 more in the construction or planning phase Floating storage and regasification units (FSRU) are gaining interest in China, both because of increasing land constraints and because of shorter construction schedules
Figure 10: Existing and planned** LNG import terminals
* Refers to all LNG carriers importing LNG to China from overseas sources. These carriers may not be made domestically in China. ** Note that due to the rapid development of LNG terminals in China, not all planned import terminals may be represented
Sources: The California Energy Commission (2010), InterFax China (2008), China Shipbuilding Economic Research Centre (2011)
3a: Rapid growth of city gas demand requires more natural gas storage facilities for daily and seasonal peak shaving
With the continued expansion of city gas networks, city gas usage in China is expected to grow rapidly, reaching 121.2 bcm in 2030 This growth is dominated by the residential sector with a ratio of 6.5 : 1 between gas use in the residential and commercial sectors The increase in city gas usage raises the pressure of meeting daily and seasonal peaks. It is therefore more important now to develop LNG storage capacities
Figure 11: City gas consumption in China
Sources: CNPC (2010), Tokyo Gas (2009)

3b: Gas-fired power generation capacity has increased rapidly especially at key economic regions
The share of natural gas used in power generation over total gas consumption more than tripled from 5% in 2005 to 18% in 2010 and is expected to grow to 21% by 2015 Gas-fired peak load power generation is most prevalent in the Yangtze river delta economic zone and Southeast region (led by Shanghai and Guangzhou respectively) The faster growth of gas-fired peak load power generation in these areas compared to the rest of the country could be attributed to the following: 1) Higher levels of economic development 2) Larger proportion of high cost oil-fired to low cost coal-fired power plants, incentivizing the conversion to gas-fired power plants 3) More focus on reducing local emissions
Source: CNPC (2010)
Figure 12: Gas-fired power generation capacity by region in 2008
3c: More than 750 000 road vehicles are already running on natural gas and the shipping sector is looking to convert
China already has more than 750,000 NGVs including CNG- and LNG-fuelled cars, transit buses and taxis While NGVs in China are dominated by CNG-fuelled vehicles, there are plans to increase the number of LNG-fueled vehicles as LNG can be more energy efficient than CNG, especially for heavy duty vehicles A joint venture between two companies and the local government in Liaoning province plans to add 6000 LNG-fueled buses supported by 60 LNG refueling stations in the long term With the successful use of LNG-fuelled road vehicles, the shipping sector is now looking to emulate In 2010, a LNG-fuelled tugboat running on 70% LNG and 30% diesel was test navigated along the Yangtze River in Hubei province Following this development, eight LNG-fuelled demonstration ships are currently being built by a consortium of companies in China and will be launched simultaneously in the Yangtze River, BeijingHangzhou Grand Canal and the Pearl River By 2015, 55 LNG bunkering facilities are expected to be set up along these three major river waterways
Source: Fortune Oil, China Natural Gas (2010), NGV Journal, Kunlun Energy, Jovo (2011)
Limiting Factors to the Development of LNG in China
Higher priced LNG imports against regulated and low priced domestic gas prices adds pressure on importers
As regasified LNG fed into the gas transmission system has to be benchmarked to onshore wellhead gas prices, LNG importers such as PetroChina, Sinopec and CNOOC are making heavy losses on domestic gas sales from imported LNG Chinas NDRC regulates onshore wellhead gas prices at $4.46/mmbtu which is much lower than the price of LNG imports at an average of $8.28/mmbtu in July 2011 Consequently, in 2010, PetroChina made a loss of US$578 million on imported gas (comprising of LNG and piped gas from Central Asia) To reduce losses by gas importers, it was announced in August 2011 that China will grant tax rebates to importers from 2011 to 2020 It may be concluded that the historic strong demand growth for natural gas has been partly driven by artificially low domestic gas prices. It is uncertain how long such price levels can be sustained and what the consequence will be when prices are raised.
Sources: Reuters
Faster than expected development of unconventional gas resources may reduce demand for LNG imports beyond 2020
Chinas unconventional and hard-to-extract gas deposits may account for 75% of Chinas total reserves Production of unconventional gas may exceed 114 bcm/year, accounting for approximately a quarter of total forecasted gas demand Demand for LNG imports may go down if commercial unconventional gas production expands faster than expected The rapid expansion of shale gas production in the USA (shown in Figure 13), and the impact this development had on LNG markets could repeat itself in China.
Figure 13: Shale gas production in the U.S.
Currently, shale gas production may still take some time to develop in China up till 2020 when increased investment in exploration efforts coupled with improved know-how in drilling and extraction methods quickens the development pace
Source: Bloomberg, EIA (2010)
Opportunities for Norwegian LNG-related capabilities in China
Norwegian LNG-related companies are distributed across the LNG value chain
Source: DNV
Chinese LNG-related companies have complementary needs to products and services offered by Norwegian companies
Source: DNV
Other foreign LNG-related companies are active in specific parts of the LNG value chain in China
Source: DNV
Opportunities for Norwegian LNG-related companies in China are centred along two key areas
1
1a) Regasification solutions 1b) Small scale LNG distribution 1c) LNG as marine fuel 1d) LNG bunkering and ship to ship transfer
LNG Transportation and Distribution
2a) Maritime technologies Engineering Activities and Management 2b) Rules, standards and regulations
Further aspirations
Commercial and Strategic Opportunities for LNG in China Det Norske Veritas AS. All rights reserved.
3a) Supply LNG through North-East Passage
27
1a: Regasification solutions

Norwegian Capabilities
Norwegian expertise in regasification solutions are comprehensive and they include design, engineering, equipment provision, and operation Norwegian shipowning companies have been leading the development and design of the worlds first FSRUs Norwegian design and engineering companies have been instrumental in development of key LNG technologies, such as containment systems New concepts for regasification solutions are being developed, such as one that allows LNG receiving terminals to be located near shore, freeing up land onshore
Business opportunities in China

Existing activities Norwegian companies are candidates for FSRU development opportunities in the Bohai area and along the North-east coast in China Norwegian companies may get involvement in design of near shore gravity based terminal developments in China
Potential opportunities Provide safe and reliable long term time chartered operation of FSRU compliant with international standards Joint ventures for construction FSRUs in Chinese yards Supply of onboard regasification equipment
Chinas development and needs

Chinas first LNG FSRU in Tianjin is being planned in order to shorten time to first gas China would need to lease FSRUs from foreign operators at least till 2016 when they foresee knowledge transfer to domestic shipyards
Sources: DNV Analysis, Interviews

1b: Small Scale LNG distribution

In Norway, there is extensive experience in making LNG available to end-users through a small scale LNG supply chain A small scale LNG distribution network has been developed in Norway consisting of more than 32 LNG terminals and small scale LNG carriers as small as 1,100 m3

Existing activities Norwegian shipowning and shipbuilding companies are well positioned to be a part of a small scale LNG regional supply chain framework along the Yangtze river and originating from the North-east coast should it develop

In the future, LNG distribution in China is expected to be optimized to a hub and spoke mode whereby: 1) Foreign LNG imports are received at major regional hubs along the North-east coast 2) Distribution by small scale LNG carriers along the Yangtze 3) Most ship operations will take place on heavily congested waterways China would need:
1) 2)
Potential opportunities Supply of services and equipment for construction of small scale LNG carriers in Chinese shipyards Supply of onboard cargo gas handling equipment Provide advisory services on river waterway safety and environmental risks including ship collision risks
Experience and knowledge sharing Recommendations on river waterway safety and environmental risk management

1c: LNG as marine fuel

Norway currently has the largest fleet of LNG fuelled ships in the world, with 22 such vessels which are all built to DNV class and trading in congested, narrow waters and coastal regions. 18 more of such vessels are currently under order Norwegian companies and maritime research institutes have demonstrated the environmental benefits (reduction of SOx, NOx and CO2 emissions) of LNG over diesel engines through feasibility studies, research and innovation
Business Opportunities in China

Existing activities Cooperation between research institutes in the two countries has led to the development of a more environmentally friendly LNG fuelled engine Potential Opportunities Joint projects to develop advanced LNG engine technologies

The Chinese government has pledged to develop an environmentally friendly and safe river transport system within the next 10 years. Increasing the use of LNG as a marine fuel is recognized as key to achieving this goal A LNG fuelled vessel running on 70% LNG and 30% diesel has been tested along the Yangtze river in Hubei province China would require:
1)
Supply LNG engines and storage and supply systems Provide advisory services related to environment and safety hazards
Technical expertise to fully realize the energy savings potential of using LNG Identification of potential environmental and safety hazards
2)

1d: LNG bunkering and ship-to-ship transfer

Ship-to-ship transfer of LNG from one carrier to another while still at sea is an established technology in Norway and has been performed numerous times without incident The ability to perform ship-to-ship transfers effectively from large to small scale LNG carriers has been well demonstrated 13 LNG terminals are currently in operation for fuelling ships in Norway

Potential opportunities Share experience from ship-to-ship operations Conduct feasibility and safety studies for LNG ship-to-ship transfer at regional LNG hubs Supply equipment for LNG ship-to-ship transfer e.g. cryogenic hoses

Ship-to-ship transfer of LNG currently not allowed due to safety concerns but important in future to reduce jetty costs when transferring LNG from large to small scale carriers at regional hubs China would require:
1)
Technologies for safe and efficient cryogenic ship-to-ship transfer of LNG Advice on enacting international rules and regulations
2)

2a: Maritime technologies

Norway has a long history in developing cutting edge maritime technologies led both by research institutes and private companies, culminating in new product and service offerings for the LNG sector In 2010, the Norwegian maritime industry developed the Maritime 21 report which called for the government to allocate NOK 505 million/year in maritime research and innovation Research and development work related to LNG are centred on enhancing the energy efficiency improvements that may be made in the transportation and consumption of LNG
Opportunities & Possible Benefits to China

Existing activities Cooperation between research institutes in the two countries has led to the development of a more environmentally friendly LNG fuelled engine Potential Opportunities Transfer of knowledge through licensing agreements and /or joint ventures Strategic collaborations and partnerships between industry associations from Norway and China

Fast paced development of the LNG sector in China requires implementation of advanced maritime technologies in quick succession
Sources: DNV Analysis, Nortrade, Interviews

2b: Rules, standards and regulations

In an effort led by Norwegian companies, 20 companies from 9 countries including China are participating in the development of ISO standards for LNG bunkering equipment and procedures Norwegian companies have developed sets of class rules and recommendations for new developments in the LNG industry for e.g. gas fuelled engine installations and LNG ship-to-ship transfers
Opportunities & Possible Benefits to China

Existing activities Norwegian companies have been assisting companies and government bodies in adhering with industry best practices in various parts of the LNG supply chain which includes conducting pre-feasibility studies of LNG-fuelled ships in rivers Potential opportunities Advice on international rules, standards and regulations for onshore LNG terminals, FSRUs, small scale LNG carriers and ship-to-ship transfer Import best industry practices for the shipbuilding and marine industry Develop risk management framework for Chinese organizations fast expanding in the local LNG sector

14 LNG receiving terminals are expected to be operational by 2015 in China with 11 of these constructed at a rapid pace within 4 years Development of domestic standards and regulations is in its infancy. In 2011, authorities produced an inspection manual for gas-fuelled ships and a handbook for surveyors Recommendations on international standards, regulations and risk management are needed to secure a safe and reliable development of onshore LNG terminals and other new areas of development in the LNG sector

3a: LNG supply from Norway to China via North-East Passage

Benefits
Via the Arctic North-East Passage, Norway becomes the nearest European country to China (excluding Russia) This route would shorten the sailing distance from Norway to China by one-third compared to the Suez Canal alternative, saving up to USD 180,000 in fuel costs per trip It also circumvents the piracy threat that has grown off the coast of Somalia.
Challenges
There is a very short window of time during the year where this route is usable. Long term supply arrangements not feasible due to hazardous operational conditions in winter. May be considered for spot shipments in summer There is no significant market pattern for the insurance companies, and shipping companies are therefore subject to varying insurance rates on a case-to-case basis
Figure 14: Map of North-East passage route from Norway to China
Cargo from Kirkenes and Murmansk

Via Suez Canal Destination Distance (Nm) Shanghai, China
Source: Nortrade
Through Northern Sea Route Days Saved Days 37 Distance (Nm) 6500 Speed (Knots) 12.9* Days 21* 16
Speed (Knots) 14
12050
*Based on an actual voyage performed by MW Nordic Barents from Kirkenes to Lianyungang (China), September 2010
Norwegian competencies are adequate in filling key gaps in Chinas LNG sector
China Market need and urgency Regasification solutions LNG Equipment Maritime Technologies Relative size of market opportunity
Rules, Standards & Regulations/ Risk Management
Current and future attractiveness
Bunkering & Ship Small Scale to Ship Transfer LNG Competitive advantage for Norwegian stakeholders
Source: DNV Analysis
Future
Current
Gaining long term local presence and market differentiation are key for Norwegian LNG-related companies in China
Key Challenges Description of Challenges
New market entrants have low visibility at the beginning and find difficulty in establishing trust with local companies Norwegian companies are perceived as having high knowledge base but are very costly.
Opportunities for Resolution

Demonstrate long term local presence and ambitions in China Establish local commercial entity and engage the right local resources who have sufficient knowledge of and connections to major local players. Hire and train local managers Establish partnerships in developing new technologies for the Chinese LNG market
Commercial
Intense price competition with other foreign players in the LNG sector Tendency of local companies offer short medium term (<10 years) instead of long term (e.g. 20 years) time charter contracts, while foreign typically prefer longer term contracts
Differentiate against others Seek out and focus on targeting niche business areas displaying capabilities that Norwegian companies have a head-start in compared to other foreign companies e.g. LNG fuelled ships Market synergistic service/product offerings by teaming up with other Norwegian companies in the ecosystem Offer good after sales services
Regulatory
Chinese government policy to only make domestically operational LNG carriers in Chinese yards limits growth opportunities Limit on foreign shareholdings in Chinese shipyards to 49%.
Sources: Interviews, DNV Analysis

Commercial and Strategic Opportunities for LNG in China Det Norske Veritas AS. All rights reserved. 36 Slide 36
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References
LNG sector in China Guo J., China LNG Market Report, Intsok, 2011 Higashi N., Natural Gas in China Market evolution and strategy, International Energy Agency, June 2009 Country analysis brief China, Energy Information Administration, November 2010 Xu Y., Natural Gas Development in China: Status and Prospects, CNPC Research Institute of Economics and Technology, February 2011 Duan Z., Chinas Natural Gas Market Outlook, CNPC Research Institute of Economics and Technology, December 2010 Chinas 12th 5 year plan Casey J. et al., Backgrounder: Chinas 12th Five-Year Plan, US-China Economic and Security Review Commission, June 2011 Chinas 12th Five-Year Plan How it actually works and whats in store for the next five years, APCO Worldwide, December 2010 Natural gas/LNG production China: Sinopec Yuanba fields proven gas reserves at 159.25 Bcm: report, Platts, September 2011, extracted from: http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/8354868 Baseload LNG Production in Xin Jiang, The Linde Group, 2009 Watts J., China takes step towards tapping shale gas potential with first well, The Guardian, April 2011, extracted from: http://www.guardian.co.uk/environment/2011/apr/21/china-shale-gas-well Hariharan M., China outlines shale gas ambitions, ICIS, April 2011, extracted from: http://www.icis.com/blogs/asian-chemicalconnections/2011/04/china-outlines-shale-gas-ambit.html , Ministry of Finance Peoples Republic of China, 2011, extracted from: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201108/t20110822_588137.html
References (cont)
Natural gas pipeline networks in China and gas pipeline imports China to boost natural gas pipelines network, China Daily, October 2010, extracted from: http://www.chinadaily.com.cn/business/201010/20/content_11435212.htm Blagov S., Russia labors as neighbours do deals, Asia Times, December 2009, extracted from: http://www.atimes.com/atimes/Central_Asia/KL17Ag01.html LNG demand and imports in China Sethuraman D., Chinas LNG Demand Forecast for 2020 Raised by 48%, Wood Mackenzie Says, Bloomberg, July 2010, extracted from: http://www.bloomberg.com/news/2010-07-26/china-s-lng-demand-forecast-for-2020-raised-by-48-wood-mackenzie-says.html Maeda R., Bai J., China, Japan LNG imports hit record, may boost spot, Reuters, July 2011, extracted from: http://www.reuters.com/article/2011/07/21/us-energy-japan-mof-idUSTRE76K1ID20110721
Chinese push ahead with more LNG contracts and developments, LNG journal, April 2010
Priestley M., Chinas reliance on Australian LNG exports, Australian Parliamentary Library, January 2010 LNG for power generation and road transport Chun C.N., Chinas Natural Gas Industry and Gas to Power Generation, The Institute of Energy Economics Japan, July 2007 China to promote LNG in public transport, Commodity Online, November 2010, extracted from: http://www.commodityonline.com/news/China-to-promote-LNG-in-public-transport-33814-3-1.html Fortune Oil Enters into JV Agreement to Supply LNG to Public Transport (China), LNG World News, February 2011, extracted from: http://www.lngworldnews.com/fortune-oil-enters-into-jv-agreement-to-supply-lng-to-public-transport-china/ Worldwide NGV Statistics, NGV Journal, 2011, extracted from: http://www.ngvjournal.dreamhosters.com/en/statistics/item/911-worldwidengv-statistics
References (cont)
LNG carriers/LNG FSRU/LNG as marine fuel in China Chung O., China joins world LNG carrier market, Asia Times, July 2011, extracted from: http://www.atimes.com/atimes/China_Business/MG22Cb01.html Chinas CNOOC plans floating LNG terminal at Tianjin, Argus Media, March 2011, extracted from: http://www.argusmedia.com/pages/NewsBody.aspx?id=742899&menu=yes LNG-Powered Ship in Chinese Waterways, Marine Link, August 2010, extracted from: http://www.marinelink.com/news/lngpoweredwaterways335145.aspx Jichai LNG powered engine to be demonstrated and applied in inland rivers in China, Kunlun Energy, April 2011 Chinas Ship Builders Eye Growing LNG Market, Business China, April 2010, extracted from: http://en.21cbh.com/HTML/2010-48/zOMDAwMDE3MjAzOQ.html (LNG), , 2011 Norwegian LNG-related capabilities Dusch E., Carr J., Exclusive Report Promoting Norway-Chinese Trade Relations, Norwegian Shipowners Association, 2011 Rysst J., Bunkering and Operation of Gas Fuelled Ships, DNV, May 2011 Harris S., Gasnor goes large with small scale LNG, LNG World Shipping, pg. 49 51, Nov/Dec 2009 DNV involvement in LNG bunkering ship to ship project, DNV, March 2010
Criscione V., New Possibilities for the Northeast Passage, Nortrade, February 2007, extracted from: http://www.nortrade.com/index.php?cmd=show_article&id=583
List of Interviewees
Name Yu Baoshan Jakob Stampe Ragnar Wisloff Geir Hellum Dhritiman Hui Diego Yao Song Stone Zhang James Wu Vingkuen Kong Wim Knoester Harald Vartdal Blake Blackwell Ole Nustad Michael Jones Guo Jian
Organization CSSC GLS Hoegh LNG Hoegh LNG Hamworthy BW Ventures I.M. Skaugen DNV China DNV China DNV China Wartsila China Gravifloat Golar LNG Rolls Royce Fortune Oil Intsok

DNV - China LNG Final Report

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Commercial and Strategic Opportunities for LNG in China

Date of first issue: 14 October 2011 Summary

Project No: PP018148

Project Sponsor Bjorn Tore Markussen

Organisational unit: PCGSG824

Clients: Innovation Norway / Ministry of Foreign Affairs

Report No: CTC-R-2011032 Report title:

Det Norske Veritas Pte Ltd

Commercial and Strategic Opportunities for LNG in China

Lars Petter Blikom Segment Director, LNG

Chinas Energy and Natural Gas Outlook

Primary Energy Mix in China (2010-2015)

2015 Oil Natural Gas Hydro Nuclear Wind/Solar/Bio

Source: IEA, APCO (2011), DNV Analysis

Natural gas consumption in China by sector

Figure 2: Natural gas consumption in China by sector

Sources: IEA, CNPC (2010)

Chinas Natural Gas and LNG Supply Chain

China needs to leverage multiple sources of gas to meet growing demand

3b: Power generation

3c: Gas fuelled ships and road vehicles

1a: 85 bcm of gas per year is produced from conventional resources

Figure 4: Coal bed methane resources in China

Sources: Oil Online (2010), Ministry of Finance PRC, CDMC (2011)

Figure 5: Shale gas resources in China

Figure 6: Pipelines transporting gas from Central Asia to China

Sources: Asia Times (2009)

China's LNG Imports in 2010 by Country

Figure 7: Chinas LNG imports in 2010 by country (bcm)

Figure 8: Natural gas pipeline infrastructure in China

Sources: Petroleum Economist, CNPC, IEA, China Daily (2010)

Sources: Linde, Black and Veatch

Figure 10: Existing and planned** LNG import terminals

Sources: CNPC (2010), Tokyo Gas (2009)

Figure 12: Gas-fired power generation capacity by region in 2008

Limiting Factors to the Development of LNG in China

Opportunities for Norwegian LNG-related capabilities in China

LNG Transportation and Distribution

3a) Supply LNG through North-East Passage

1a: Regasification solutions

Business opportunities in China

Chinas development and needs

Sources: DNV Analysis, Interviews

1b: Small Scale LNG distribution

Business opportunities in China

Chinas development and needs

Sources: DNV Analysis, Interviews

1c: LNG as marine fuel

Business Opportunities in China

Chinas development and needs

Sources: DNV Analysis, Interviews

1d: LNG bunkering and ship-to-ship transfer

Business opportunities in China

Chinas development and needs

Sources: DNV Analysis, Interviews

2a: Maritime technologies

Opportunities & Possible Benefits to China

Chinas development and needs

Sources: DNV Analysis, Nortrade, Interviews

2b: Rules, standards and regulations

Opportunities & Possible Benefits to China

Chinas development and needs

Sources: DNV Analysis, Interviews