China's Deadly Smog Problem Could Finally Force A Natural Gas Revolution

Beijing's smog problems have existed for decades, but in recent weeks the situation seems to have gone into overdrive.

According to the South China Morning Post, the air quality is 40x healthy levels in some parts of the country right now and people are going to hospital. A tweet from one CNN producer reveals that it's practically impossible to see Beijing's skyline right now.

A report published last year suggested that air pollution could be behind at least 8,572 deaths in four major cities during 2012. Even China's state media have begun complaining, and the movement for reform is growing.

If China's government does respond with regulation, it seems likely the huge Chinese energy market will change. China currently gets 70% of its energy from coal, according to analysis from the EIA, and only 4% from natural gas. In countries like the US, natural gas accounts for around 40% of energy consumption.

A BI reader writes in to say that he believes regulation could lead to an increase in Liquefied Natural Gas (LNG) imports into China — and in a LNG market that is already tight, this could result in significant benefits for LNG producers:

Cheniere (LNG) could be a beneficiary in the US, as it owns a liquefaction terminal.  

InterOil (IOC) and Oil Search (OSH.AU) are two low cost LNG producers in Papua New Guinea, which is in close proximity to Japan, South Korea and China, the world's biggest importers of LNG.  InterOil recently received project approval for a world class LNG project and 22% of its outstanding shares are short, and Oil Search owns a significant stake in XOM's PNG LNG Project.  

Following the Fukushima disaster in Japan, nuclear appears to be an unlikely prospect. Likewise, while China is believed to have as much as 25 trillion cubic meters of shale gas reserves, technological and environmental concerns mean that this is unlikely to change the market anytime soon.

Smog has resulted in regulation before. Following a London smog during the winter of 1952 that resulted in 4,500 deaths and 15,000 illnesses, the UK eventually passed the Clean Air Act of 1956. A Global Times editorial earlier this week called on China's leaders to learn from the UK's example.



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