China is desperate for gas – buying high price LNG imports

By Meagan Evans. Published at Jul 18, 2019, in Energy

Air pollution in China is a critical issue. Thankfully, it isn’t one that’s being ignored with the country taking steps to reduce its particulate and carbon dioxide emissions and its reliance on coal. At the same time, China’s rising reliance on crude oil imports is worrying too, as geopolitical tensions heat up in the Gulf and the South China Sea.

In response, the country has turned to gas. Specifically LNG imports, as domestic and regional gas producers can’t keep up with the rising demand.

LNG is produced when gas is converted into a super-cooled and liquified form so that it can be shipped to its customer. But LNG is not China’s preferred type of gas.

Converting gas to LNG and shipping it raises the price, and brings geopolitical risk into the picture as ships need to travel through various international and possibly dangerous waters. Just recently insurance premiums of ships travelling in the Gulf region are seeing sharp and sudden price hikes.

China has tried to secure local supply — upping its pipeline gas imports and lifting domestic gas production, but LNG imports to China are still expected to rise by another 30% from ~73 billion cubic meters (bcm) in 2018 to ~95 bcm in 2020, say The Oxford Institute for Energy Studies (OIES).

Of course, a gas pipeline transporting gas through the Gobi Desert has no such risks. This is exactly what Elixir Energy (ASX:EXR) has in mind.

The company has a giant seven million acre Production Sharing Contract issued by the Mongolian government. This Nomgon IX coalbed methane PSC, is located on Mongolia’s border with China. It has an independently certified 40Tcf (best case) unrisked recoverable prospective resource and a huge 7.6Tcf risked prospective resource.

The PSC is just over 400 kilometres from China’s West East Pipeline, meaning it can deliver a low cost local gas supply, and reduce China’s reliance on expensive LNG imports. Avoiding the costs of liquefaction, gas from this area will be highly cost competitive with e.g. similarly produced CBM from Australia that has to be pipelined 400 km to Gladstone, liquefied, shipped to the Chinese coast, re-gasified, then delivered to the domestic Chinese market.

Rio & Oyu Tolgoi

Like China, Rio Tinto (ASX:RIO) is also seeking a reliable — and ideally low emission — energy supply – across its global operations. To power its massive Oyu Tolgoi Copper mine in southern Mongolia the Mongolian government has specified that RIO must secure a local energy source to replace electricity current imported from China.

Rio has now finally committed to construct a power plant in Mongolia to fuel its Oyu Tolgoi mine with a locally sourced energy supply. Analysts estimate that Rio and its partners will spend $1 billion to construct a power station to run the Oyu Tolgoi copper mine, yet it looks like that plant will be coal-fired.

This is in stark contrast to Rio’s global intention to play a part in supporting clean energy. They seem to have simply acquiesced in order to get the project up and running.

A more environmentally friendly choice would be to use Elixir Energy’s (ASX:EXR) coal bed methane (CBM) gas from the Nomgon IX Production Sharing Contract (PSC). Oyu Tolgoi is conveniently located within EXR’s PSC area.

While Elixir’s PSC is not yet in production, neither is the large underground part of Rio’s Oyu Tolgoi. But by the time Oyu Tolgoi is finally fully up and running, the Nomgon IX PSC could well have a ready supply of gas available — assuming all goes to plan. Originally scheduled for early 2021, Rio now says first production could now come between May 2022 and June 2023.

The economic benefits of a gas-fired power plant stack up for Rio too.

Natural gas-fired power plants are much cheaper to build than coal-fired plants. The US Energy Information Administration states that a gas-fired power plant costs roughly a third of a coal fired plant. This is because coal needs all sorts of equipment to transport it, crush it, prep it and collect the ash and dust.

The gas from Elixir’s Nomgon PSC will be low cost itself. Given that its primary customers will be local — in Mongolia (including Oyu Tolgoi), China’s energy grid (gas and electrical), and possibly other Asian nations — Elixir won’t need to convert its gas to liquefied natural gas (LNG).

Gas from Elixir’s Nomgon PSC could be a real option for Rio. A combination of delays to get Oyu Tolgoi up and running, along with RIO’s intention to take a cleaner-energy stance, plus the cheaper price of gas when compared to coal — especially if locally sourced, make Elixir’s gas an attractive option to supply power to the mine.

And locally sourced gas can help the development of local renewables — by “firming up” their supply — an aim that would likely not only be supported by Rio, but also by the regional Governments who are promoting a massive “Asian Super Grid” to help deliver renewables from the Gobi region to as far afield as japan.

Petro Matad

Also of interest in the trending Mongolian energy space is Petro Matad (LON:MATD). The company is seeking to deliver a Mongolian oil discovery in the next few months. Its spud must be due fairly soon, at least as is suggested by the company’s share price this year...

Elixir draws another step closer to drilling Nomgon IX

Like that of Petro Matad, Elixir shareholders have done well recently, driving the ASX junior’s share price up as much as 66% in just the last week, to hit 52-week highs.

ASX:EXR share price chart
ASX:EXR share price chart

Hot on the heels of receiving final environmental approval to commence its exploration program at the Nomgon IX CBM PSC, Elixir has awarded a tender for its upcoming drilling program.

It awarded the contract to Mongolia’s Erdenesdrilling LLC, and Elixir and the company are now finalising a binding drilling services contract with a view to executing this within the next few weeks — paving the way for the company to commence its exploration program.

The company’s ability to quickly progress the project can be attributed to the extensive executive experience behind the board which includes former managing director of Queensland Gas Company (QGC) Richard Cottee as non-executive chairman.

Cottee steered QGC from a $20 million junior to a $5.7 billion takeover, and he also has a comprehensive knowledge of doing business outside Australia (e.g. in Europe) having injected his vast corporate and operational experience into companies operating in that region.

Erdenes brings local knowledge and operational expertise

Erdenes has the optimal combination of operational expertise, fit-for-purpose equipment, cost effectiveness, suitable HSES standards in place and experienced personnel to effectively undertake Elixir’s CBM core hole program.

The spudding of the first well will closely follow the commencement 2D seismic acquisition, which will start in the next few weeks — a much anticipated development, as indicated by the group’s recent share price performance.

Elixir will provide Australian expertise to supervise the drilling and testing of the exploration wells to ensure they meet the highest standards of CBM drilling practices, which have been built up in Australia over thousands of wells in recent decades.

The world class potential of the Elixir’s Nomgon CBM PSC in Mongolia has been independently validated by ERC Equipoise Pte Ltd (ERCE) — one of the largest petroleum Reserves and Resource auditors globally. Reflecting the credibility of ERCE, Carnarvon Petroleum (ASX:CVN) just announced that it too has engaged the international energy expert to independently review its recently discovered Dorado resource located off the North of Western Australia.

If Elixir is able to prove up its ERCE-validated resources, and follow through to production, it has a ready market to serve in China, plus potentially Rio’s Mongolian operations too.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

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