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China's Back-Door Natural Gas Supply

China's Back-Door Natural Gas Supply

One of the most critical changes in global energy flows we've seen for years happened this week.

China inaugurated one of its boldest pipeline projects in recent memory. A 2,500 kilometre pipe to carry natural gas and oil from the Indian Ocean across Myanmar in southeast Asia and into southwest Yunnan province.

The gas portion of the line became fully operational this week, according to China National Petroleum Corp (CNPC). The line is expected to carry over 1 billion cubic feet of gas per day into China. The twin oil line is expected to follow.

This massive development has several key implications for the global energy balance.

For one, it means that Myanmar's significant offshore natural gas reserves (and growing production) now have a "go-to" market.

This could mean less natgas supply for other consumers in the region. Possibly the reason why fellow Myanmar gas user Thailand said this week that it wants to make coal its official fuel of choice going forward, moving away from natural gas.

It also shows that China is committed to diversifying its natural gas import base. As one of the highest payers for LNG imports on the planet, China needs all the gas it can get. And "back door" supply options like the Burmese pipeline are going to be a focus.

Finally, the oil segment of the pipeline has the potential to re-make the crude shipping business. The line is expected to deliver over 22 million barrels yearly, or about 440,000 barrels per day into China. Most of this will be tanked oil, offloaded at Myanmar for transit through the pipe.

This means that major crude shippers like the Middle East will now have a much shorter journey to get supply to China. They will also be able to avoid traversing the perilous and congested Straits of Malacca, between Malaysia and Sumatra.

This gives China a leg up in the race to secure oil supply. Oil sellers around the Indian Ocean may start favouring the Chinese market over longer-distance routes like Japan and South Korea. Currently those buyers receive about 75% of their crude through Malacca.

We'll see what the final effects are. But this is a development that could cause all kinds of shake up.

Here's to coming in the back,

By. Dave Forest




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