The LNG industry is trapped in a situation of high costs and low profits

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“Deepening efforts in the transportation sector is key to breaking through this situation. In the face of the continuous decline in international oil prices, not only oil companies but also the natural gas industry has been affected; furthermore, the viability of the liquefied natural gas industry, as an alternative energy source, has been further reduced. Liquefied Natural Gas, abbreviated as LNG, saw the beginning of its development in China at the end of the 1980s. Over the course of several decades, China has made progress and achievements in every aspect of the LNG industry, and has continuously invested in the construction of more than a dozen LNG projects, which has led to rapid development of small liquefaction plants and satellite gasification stations in the country. When liquefied natural gas is cooled, for **, the LNG industry represents an excellent alternative to coal, which is used in industrial production and household activities. Being clean and efficient when burned, it makes it one of the most suitable new energy sources for widespread use at present. In the decades that followed, the LNG industry entered a period of rapid growth. Starting from its basic use as a raw material and progressing to driving the development of related industries, LNG quickly replaced coal as an energy source due to its low cost, high energy output, and environmental friendliness. It thus became a game-changer in the energy sector, and LNG companies experienced unprecedented rapid development over the past decade or so since 2000. In recent years, the LNG industry has gradually moved away from its previous period of high profits; there has been a relative surplus in supply in the market, growth rates have declined, and the industry is now entering a phase of capacity optimization. The overall decline in the market has had a certain impact on LNG companies. Currently, natural gas prices are gradually losing their economic advantage, and the LNG market is showing an overall downward trend. Due to excessive investment in LNG production capacity in the past, insufficient development of related infrastructure downstream, there is a mismatch between upstream and downstream developments, leading to a reshuffling within the industry. Since 2014, there has been an oversupply of LNG capacity; with slowing growth in downstream demand, the LNG industry will inevitably undergo a transformation akin to a phoenix rising from the ashes over the next two years, eliminating outdated production capacities. Currently, it is the off-season for the LNG industry; especially since the second half of this year, a downward trend in LNG prices has become increasingly evident. During the off-season in the LNG industry, demand from end-users decreases significantly. Coupled with the fact that overall demand does not increase substantially, new production capacity keeps entering the market, putting pressure on existing markets. As a result, the situation of oversupply in the LNG market remains severe and not optimistic. After resuming operations, some LNG plants sold their products at low prices in an effort to find buyers, which led to continuous downward pressure on market prices; in some cases, these prices even dropped below the plants’ own cost thresholds, creating a difficult situation for them. The market still features an oversupply situation; although our country is the fourth largest natural gas consumer in the world, liquefied natural gas is no longer an advantage in terms of supply. This has led to unprecedented challenges for the LNG industry as it develops, and only by making changes promptly can this industry be prevented from continuing to decline. Enterprise development has hit a deadlock due to high costs. Since 2012, affected by industries such as coal and steel, the operating conditions of vehicles have been poor, which has led to a decline in the demand for gas at gas stations. It is understood that in China, downstream consumption of LNG is primarily focused on use in vehicles and ships, urban gas supply, industry, and power generation. Among these sectors, the market for vehicle use faces obstacles; coupled with a continuous decline in oil prices and an improvement in the economic viability of other alternative energy sources, demand for LNG in the market hardly sees any increase. In our country, vehicles and ships account for 38% of LNG consumption; due to the continuous decline in crude oil prices, the economic viability of LNG will continue to be affected. The slowdown in the development of the LNG industry is evident in several aspects: first, there is poor promotion in downstream markets, with demand remaining weak ； Secondly, the profits of upstream manufacturers have plummeted, with some even operating at a loss ； Third, equipment manufacturers suffer reduced profits as orders decline and shipments are hindered. For manufacturing enterprises, due to the sharp drop in LNG profits, some of them are operating at break-even or even selling at a loss, which leads to problems in their cash flow and poses certain risks for investors. For equipment manufacturers, as market demand slows down, the pace of project commissioning also slows, resulting in a decrease in the number of new equipment installations. These companies then face issues such as failing to meet orders and difficulty in recovering unpaid debts. For LNG logistics and trading companies, the industry downturn has led to a sharp drop in profits, and the logistics sector is not spared by this situation; freight rates keep falling, making it difficult for vehicles to operate properly. As a result, many companies choose to transform their business models and sell their logistics vehicles. As of the first half of 2015, **statistics from relevant departments showed that the total number of LNG buses sold in China was 5,296, while the number of LNG trucks sold during the same period was only 8,469, indicating a significant decline. To this end, industry experts say that in 2015, the number of LNG-powered vehicles in China was expected to be 205,000, representing a year-on-year decline of 20.82%. This shows that, in terms of growth rate, LNG vehicles have experienced a decline of around 20% for two consecutive years, which is highly unfavorable to the development of LNG-related companies. As demand for LNG continues to weaken, domestic LNG plants have faced rising costs on several occasions, which objectively accelerates the process of companies shutting down. The era of high profits in the LNG industry is gone forever; the growth rate of downstream LNG consumption is now significantly lower than that of supply. This imbalance has led to a restructuring of China’s LNG industry, and there is a risk that it may be eliminated by the market. Therefore, it is essential to issue warnings and take precautions. Applications in the transportation sector represent a key breakthrough point. In order to curb the further expansion of this phenomenon, alleviate the pressures on the development of the LNG industry, promote balanced growth within China’s LNG sector, and foster a healthy competitive environment, China has been continuously exploring ways to transform the LNG industry over the past few years. To ensure the domestic demand for natural gas, China is also continuously investing in the development of natural gas infrastructure, and making great efforts to build coastal-based natural gas receiving stations. To date, more than a dozen LNG projects have been launched and built across the country, including those in Shenzhen, Putian, Yangshan, Nantong, Dalian, and others. In the coming period, the development of the LNG industry will be widely applied in transportation sectors such as vehicle and ship fuel. Industry experts have done some calculations: at present, there are around 20,000 LNG buses in China. Assuming a 20% increase, by 2015 the annual gas consumption will reach 2.49 billion cubic meters. There are approximately 5.5 million heavy trucks nationwide; at an annual growth rate of 10%, this figure will reach 6.655 million by 2015. Once these trucks are converted to use natural gas as fuel, their annual gas consumption will exceed 50 billion cubic meters. In addition, the fuel used for inland waterway transportation – that is, after ships are modified to use oil and gas as fuel – will reach 21.33 million tons by 2015, at an annual growth rate of 15%. Compared to compressed natural gas, liquefied natural gas is purer and safer. Therefore, experts predict that its use in transportation sectors such as vehicles and ships is the long-term direction for the future development of the LNG industry. Data shows that China’s LNG industry is still significantly behind that of developed countries. The United States took 140 years to build a pipeline network of 500,000 kilometers, while China’s LNG industry only began to develop at the end of the last century; to date, the length of pipelines built in China is less than 50,000 kilometers. This means that LNG represents a huge potential market in the future. From this perspective, in the future development of the energy market, LNG will play an even greater role in energy strategy. However, analysts point out that **the policies do not provide adequate support for the LNG market, and the infrastructure for LNG refueling is not well-developed; there are few road-based LNG refueling stations between provinces. As a result, the downstream LNG market cannot be effectively expanded in terms of transportation. For **, it is appropriate to provide support to the LNG industry; after all, this industry has grown to a considerable size – with a total national production capacity of over 70 million cubic meters per day. Its annual consumption accounts for around 6% of China’s total natural gas consumption, making it an important source for regulating and supplementing natural gas supply in the country. If an industry of this kind is left unregulated, it could lead to massive unemployment, as well as disruptions in the flow of resources in certain areas, potentially even resulting in another energy shortage. First, the current oversupply in the LNG industry needs to be addressed by supporting corporate consolidation and phasing out outdated production capacity. At the same time, strict scrutiny is applied to newly launched LNG projects, with corresponding entry requirements established. Secondly, reduce the overall price of natural gas, or establish appropriate substitution ratios for alternative energy sources and take proactive measures to restore the economic viability of natural gas prices, thereby boosting demand in the downstream markets for natural gas. Furthermore, to create new demand in the domestic LNG market, driven by policies such as the Belt and Road Initiative, support for the export of domestically produced LNG could be considered. In fact, apart from China, all major LNG production projects in the world are being developed for export purposes. Finally, subsidy policies for related industries should be continued and intensified, and development plans for downstream LNG applications should be actively promoted, such as the market for modifying vehicles and ships, as well as the market for building infrastructure.