Piped Gas Faces Rivalry with Off-Grid LNG in Shandong

China’s oil and gas grid reform is still on the way, however, breakthrough measures taken in some regions have already put great pressure on the current system. According to sources, Shandong has already issued several documents successively to explicitly encourage industrial gas users to make choices freely among pipeline gas, CNG and LNG sources based on marketization. This breakthrough proposal means the opening up of the market access and the allowance of the competition between off-grid LNG supply and piped gas.

The Initiative Opening up of Off-Grid LNG Supply in Shandong

The off-grid LNG supply mode means to construct small-scale LNG regasification stations that are among one or more adjacent end users in optimized locations. Then the local area pipeline network will be laid down to enable gas supply and consumption in small local areas.

Shandong was the first province to explicitly open up the off-grid LNG supply in China. Housing and Construction Department of Shandong provincial government recently issued an implementation plan in coal clean utilization, of which encouraged the use of LNG or CNG gas stations as the transition mode so as to establish and improve the natural gas peak-shaving reserve station. Afterwards, Shandong Provincial Development and Reform Commission issued the guidance indicating that Shandong shall strive to reach 25 bcm natural gas consumption by 2020, accounting for more than 7% in the energy mix. It is specially mentioned to encourage industrial gas users to choose piped gas, CNG or LNG as gas sources freely.

The off-grid LNG supply mode had been legally ambiguous all the time in the past. Therefore, many regions took cautious attitudes towards this mode due to safety or other concerns. In this respect, Shandong was the first to create a breakthrough at the provincial level.      

Aiming to Reduce Gas Consumption Cost

According to the sources, the allowance of the off-grid LNG supply in Shandong was related to the distribution and investment structure of the unique pipe network in Shandong. Shandong itself had abundant independent refineries and gas consumption enterprises, and the two oil giants, Sinopec and PetroChina, already had entered this region early. Thus, various local investors of natural gas pipelines existed. The high density of pipeline network and the crossing and overlapping of those pipelines forced the provincial government to adopt the calculation method of pipeline transportation costs based on the network instead of as per pipe.

According to Shandong Price Bureau, a provincial subsidiary of NDRC, the ceiling settlement price for natural gas transmission trunk pipelines in Shandong was the total of the provincial hub fixed ceiling price plus the pipeline transmission price within provinces. Thus, in practice, the city gate non-residential natural gas ceiling price inside Shandong equaled the provincial hub fixed ceiling price plus the subline transmission price. Therefore, the final retail price of the natural gas in Shandong was higher than that in Shanghai and Guangzhou.

Under the above circumstances, Shandong opened up the off-grid LNG supply in order to reduce gas consumption costs within the province and enhance the competitiveness of the natural gas in end markets. Some enterprises with LNG resources could directly deliver the natural gas to customers through LNG tank trucks. Moreover, more and more industrial projects in some regions were relocated from urban areas to rural areas in the coal-to-gas reform. Therefore, it was also necessary to ensure the gas supply source through the off-grid LNG supply mode.

Great Potential of Off-Grid LNG Supply Mode

In the past, the off-grid LNG supply mode usually did not exist in the franchised regions, so the competition was inexistent. However, in recent years, with the expansion of the natural gas market, all market players were grabbing the market shares, thus contradiction intensified subsequently. Traditional gas distribution network began to infiltrate into the previous off-grid LNG supply regions, and vice versa. The supervision on off-grid LNG supply was relatively weak, and no related supporting measure was implemented before. Therefore, many problems existed in off-grid LNG supply, such as various qualities, safety and short-term interests, which needed to be standardized urgently. For instance, recently, the municipal government of Shandong’s Zibo City issued a document related to setting safety regulations for the off-grid LNG industrial users and infrastructure construction.

Although the off-grid LNG supply mode accounted for a very small share in the entire natural gas market, its great development potential should not be underestimated. When the off-grid LNG supply mode expanded its supply scale and enriched its supply contents and forms in the domestic natural gas retail market, it may eventually squeeze the market shares of the state-owned oil enterprises.