New Area in International Energy Cooperation----LNG Project
----- David Jin

As the economy of China develops rapidly, China has been continuously consuming an increasingly larger amount of resources. Since 1995, the petroleum consumption in China has outstripped its production capacity. It's forecast the gap between consumption and production will reach as many as 500, 000 barrels per day by 2010. Therefore, China is now faced with a critical situation to ravel out the resources issue.

Against such context, we must solve the problems of increased demand for resources through international cooperation, and because of the production falling short of demanding, continuous increase in resources price and intensified competition, we need to explore and strengthen new international cooperation in the field of resources. Natural gas is being viewed as an alternative energy resource with high combustion value, less pollution and rich reserves, which has a broad potential yet to explore for international cooperation.

Natural gas is an odorless, colorless, gaseous hydrocarbon mixture made up of methane. Although natural gas was first discovered as early as in 1659 in UK, it was not commonly applied for commercial purpose because of its huge cubage and untransportable nature, especially in the field of international cooperation, which has been confined in some limited areas.

Since the 50's of last century, with the development of Liquefied Natural Gas (hereinafter as “LNG”) technology, those abovementioned defects are not insurmountable any longer. According to statistics by Gas Technology Institute, the international trade volume of LNG has been growing at an annual rate of 8% since 1980. In 1997, the international LNG trade volume recorded a historic high with 1110 hundred million cubic meters or a 12.6% growth. In a word, LNG project will attract more and more attention from the global resources market as a newly developed area for international cooperation of resources.

LNG project is a typical Chain Industry, which connects with the upstream exploitation, production, liquefaction, transportation, re-gasification and downstream electric power generation, urban gas utilization, and to this point it forms a complete industry chain. Because of complicated technology and huge investment, LNG project is commonly cooperated by the way of setting up a Chinese holding Sino-foreign joint venture. In the cooperation process, many legal problems would be involved, such as the establishment of a joint venture, international bids for LNG purchase, LNG sales and purchase agreements (hereinafter as “SPA”), LNG project financing, bids for LNG vessels, LNG transportation agreements, LNG receiving station, bids for pipelines designing and construction, sales agreement for LNG end-users etc. With regard to the abovementioned, there will be an extensive space for Sino-foreign legal services market in the field of LNG international cooperation.

There are usually three stages in a LNG project:

First, the upstream stage which includes proposing a project, setting up a joint venture and entering into a SPA.

As LNG forms part of the State's resources strategy, first of all, it shall secure the approval from the State Council. For a LNG projects would need a substantial amount of investment while our country is not very experienced in this field, we have to seek partners for cooperation, to execute related principal agreements for Sino-foreign joint venture, to make feasibility research and then submit general project feasibility research report to National Planning Commission and National Development and Reform Commission for approval. International bids is often adopted in the process of identifying a foreign partner, in the meantime we shall take consideration of other elements as a whole, such as capitals and technology, while making such decision of selecting a partner.

There are usually lots of choices before a buyer when signing a SPA, since we are still trading in a buyer's market. After the tender of purchase is issued, buyers would often hold international bids to select a satisfied LNG supplier from various companies. Generally speaking, for the purpose of maintaining a long-term steady gas supply, buyers usually prefer to purchase LNG from those who would like to sell part of shares of their gas field in accompany with the LNG sales.

Second, the middle stream stage includes project financing, LNG receiving station, pipelines project, gas plant project and urban gas network construction.

Transportation will have to be arranged once a gas supplier is selected. Since most gas suppliers are of long distance from end-consumers, building pipelines is often too expensive to achieve the cost-effective purpose. Hence, the most frequently used approach is: firstly gas field companies explore natural gas from well, and then transport the liquefied gas by pipeline to an onshore gas plant for further processing.

A LNG vessel usually costs about 2 to 3 hundred million US dollars. When entering into a SPA the party who is responsible for transportation will determine the size and design of the vessel and to build a special LNG vessel in accordance with the SPA.

At the meantime, other plant facilities, consisting of LNG receiving station, pipelines, gas power plant and urban gas networks, will start to move ahead on schedule. A LNG project needs huge investment, so it is necessary to have financing negotiations and to conclude relating agreements. Furthermore, setting up a Chinese holding Sino-foreign joint venture is a common way in operating a LNG project.

Finally, the downstream stage is about selling gas to consumers at the LNG terminals.

At this stage LNG would be re-gasified and then transported by means of pipelines to every LNG dealers, and the main task herein is to enter into LNG sales agreements to ensure the consumption of end-users.

In reality, the signing of those sales agreements between the gas power plant and those gas consumers is often viewed as the most significant step in a LNG project cycle, which stands the fulfillment of gas consumption market and the guarantee of capital flow into the whole chain industry, and thus they are also important premises for the execution of those upstream resources purchasing agreements and financing agreements.

Xing Yun, Wang Kuanjing, “International Petroleum Investment Environment Analysis”, “China Offshore Petroleum and Oil”, 1996 Volume 10, Issue 6

While this author is working on this article, the price of crude oil future has exceeded US$53 per barrel in NYMEX. Such price hit a historic high since the crude oil future was first launched by NYMEX in 1983.

According to the data released by “Oil and Gas Magazine” of US, the global explored reserves of natural gas is 145.7 thousand billion cubic meters. The global natural gas can be exploited for about 62 years in term of the annual production of 2.35 thousand billion cubic meters in 1999. Furthermore, the present global explored reserves of natural gas are continuously increasing with the exploration activities.

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