China is investing tens of billions of dollars every year into renewable energy deployment and supply chains. Its motivations are simple: The country wants to improve its environmental footprint and air quality, develop a leadership position in global markets, and increase national security and energy independence (you don't have to import renewable energy).
These plans are also longer-term than many headlines would lead investors to believe. For instance, China isn't using renewable energy to immediately replace coal-fired power plants, which supplied 72% of the country's electricity in 2015 -- more than double the share of coal in the electric grids of the United States.
That's because renewable energy is one of the least efficient ways to go about replacing coal consumption in a short period of time. Instead, China is hurriedly building natural gas and liquefied natural gas (LNG) import infrastructure to replace coal in the near-term. In fact, the country is single-handedly shifting global markets, having imported 58% more LNG in the first four months of 2018 than in the year-ago period, with American supply playing a central role. Energy investors shouldn't overlook the opportunities this creates.
Image source: Getty Images.
Natural gas replacing and displacing coal
China can't use renewable energy to replace coal overnight, because wind and solar power are much less efficient. For instance, Chinese coal-fired power plants boasted capacity factors (the rate at which a generation asset produces at its installed capacity) of 48% in 2017. That's very low, hinting at a glut of coal capacity, but it's significantly better than the country's renewables. In 2017 Chinese wind and solar had capacity factors of just 21.3% and 10.7%, respectively.
What that means is simple: Replacing the electricity generation provided by 1 gigawatt of coal in China would require the installation of 2.3 GW of wind or 4.5 GW of solar. Natural gas, on the other hand, is on par with coal when it comes to capacity factor, making it a more efficient use of capital for time-constrained direct replacement of coal-fired power in the grid and industrial base. And that's exactly what China is doing.
Nearly 90% of China's year-over-year growth in gas consumption last year went to industrial and residential heating applications. That trend will sweep through electricity generation in the coming years as more natural gas transportation, storage, and power infrastructure is added. Consider several statistics that summarize the incredible trend underlying the country's preparations for a gas-heavy future:
- Growth has come quickly. In 2010 China imported 10 million metric tons (mtpa) of LNG. That grew to 20 mtpa in 2015, and just shy of 40 mtpa last year. In the first four months of 2018 imports hit 15.75 million metric tons.
- Growth will continue. The country has 17 LNG import terminals, boasting a combined capacity of 7.4 billion cubic feet per day (Bcf/d), which is expected to grow to 11.2 Bcf/d by 2021 according to the U.S. Energy Information Administration.
- We ain't seen nothing yet. By 2035 the nation is expected to import a staggering 200 mtpa. Last year the entire global LNG trade amounted to 294 mtpa.
It's all part of the government's mandate to quickly replace coal throughout the economy, in everything from residential heating to steel manufacturing to electricity generation. It couldn't come at a better time for American natural gas producers, which are increasingly relying on exports to shuttle away excess supply.
Image source: Getty Images.
American energy exports to China are booming
In February 2018, leading American LNG supplier Cheniere Energy (NYSEMKT: LNG) signed its first major long-term deal with a Chinese customer, China National Petroleum Corporation. It was relatively small in terms of the total market opportunity at just 1.2 mtpa, but it was an important foot in the door for both the company and other companies with export capacity along the coasts of the United States.
It makes sense Cheniere Energy would be among the first to sling LNG China's way, as it was the first American company to export sizable quantities of product. The first cargoes only left shores in 2016, but the United States is already a leading LNG exporter and will soon become the third-largest supplier behind Australia and Qatar. China will play a critical role in that ascension to the top.
In 2017 fully 15% of American LNG exports ended up in China through spot market purchases, but that will increase as more export capacity comes online in the next several years and formal supply deals are signed. By 2020 the United States will boast 9.5 Bcf/d of export capacity -- and Cheniere Energy could own half of that with its Sabine Pass and Corpus Christi terminals. Others will be close behind.
Consider the number of proposed and approved LNG export terminals in the United States, as reported by the Federal Energy Regulatory Commission as of April 2018:
LNG Export Terminal Type
Approved, under construction
Approved, not yet under construction
That's a massive amount of capacity that could come online by 2030 from a diverse set of companies, but investors don't have to wait that long.
In 2019 shipments will begin from the Cameron LNG export facility, which includes a 16.6% equity stake from leading LNG trader and French energy giant Total SA and a 50% stake from Sempra Energy (NYSE: SRE). The Gulf Coast facility will bring three production units online by the early 2020's capable of exporting 15 mtpa, or a little over 2 Bcf/d, valued at over $10 billion. An additional two production units could increase the facility's total export volume to 25 mtpa, or 3.5 Bcf/d.
The West Coast, which offers an easier shipping path to Asian markets than the Gulf Coast, could also get in on the action. Canadian pipeline operator Pembina Pipeline (NYSE: PBA) acquired the Jordon Cove LNG project in Oregon when it purchased Veresen in late 2017. While investment and regulatory decisions remain uncertain (ironically due to fears in early 2016 of an oversupplied LNG market), investors could know the project's fate by the end of 2018. Increased demand in China and Japan might ensure the 1 Bcf/d project is built after all.
There's even diversity in approaches: Delfin LNG recently had a floating LNG facility in the Gulf of Mexico approved by regulators, which could boast 13 mtpa (1.8 Bcf/d) of LNG export capacity and start shipments by 2022, and would deal almost exclusively with Chinese customers. As CEO Greg Vesey recently told Reuters, "[F]or us, it's strictly been about marketing to China." For energy investors, that's a key theme that shouldn't be overlooked.
Image source: Getty Images.
LNG is the key to displacing coal
Despite investing billions upon billions of dollars in renewable energy infrastructure and supply chains, it remains a long-term play for a country as large as China. The nation is much too large, power-hungry, and industrious to switch its power generation to renewables overnight. That, combined with low capacity factors for Chinese wind and solar, explains why the government is prioritizing the switch to natural gas from domestic production and imports to displace coal more quickly. It also creates a huge opportunity for energy investors, especially as more American export terminals come online in the coming years.
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