Trouble in China for U.S. LNG Exports?

Given the sheer abundance of shale gas in North America, the idea of exporting some of our bounty has gained steam recently among energy firms and market pundits. We've highlighted the opportunity in liquefied natural gas (LNG) at InvestorPlace. Overall, it'll take billions of dollars worth of investment in new infrastructure, ships, pipelines and other facilities to make the idea come true.

Yet, most of these ambitious and costly LNG exporting plans hinge on one major customer: China.

China's energy use has surged over the last few years as it continues its modernization programs. That makes it the prime destination for the output from all of those new and proposed North American LNG plants. However, some recent data could throw a wrench into those carefully laid export plans and imperil many of the facilities' prospects.

For natural gas and LNG investors, China's growing use of another form of fuel could be cause for concern.

China's torrid economic growth has caused it to require more and more natural resources. Asia's Dragon often accounts for the most demand for many commodities, and the energy sector is no different. China accounted for 22% of Asia-Pacific gas consumption last year and 4% of global demand. However, how it's meeting that demand could be a cause concern for  U.S. natural gas suppliers — especially the firms looking export some or all of their production.

It seems that China has begun to ramp its imports of piped natural gas from Eurasia.

Cheaper, Closer Supplies
According to recent customs data, China for the first time is importing more natural gas overland via pipeline than it is by sea via LNG tanker. The country increased pipeline shipments from Turkmenistan by more than 55% to 9.85 million metric tons in the first eight months of the year. The ex-Soviet nation is home to one of the largest non-shale natural gas reserves on the planet, and it provides of almost all China's piped-in supplies.

The reason comes down to cost. Even before the expense of re-gasification, LNG imports cost about 3% more on average than straight pipeline imports. So far this year through August, China has spent roughly $5.4 billion, an average cost of $547 a ton, for piped natural gas from Turkmenistan. That contrasts to the $562 a ton it paid for LNG imports from places like Australia and Qatar. Back in 2008, China was paying an average price of just $282 a ton for LNG.

With LNG cargoes costing roughly $19.33 per million Btu from Qatar — China's biggest supplier — the shift toward more piped gas could be on. Already, China is extending its pipeline network to allow Turkmenistan's gas to be delivered to the more heavily populated provinces in the south and east. According to the IEA, talks between the two nations are under way to increase the imports to 65 billion cubic meters a year.

At the same time, a host of nations, including Uzbekistan, Kazakhstan, Myanmar and energy kingpin Russia, have all begun increasing pipeline capacity and shipments into China.

Unpleasant Surprise
Given China's growing thirst for cheaper piped natural gas, as many as 12 U.S. projects that have applied for an LNG export license — including Cheniere's (NYSE:LNG) Sabine Pass facility in Louisiana — could be thrown for a loop. At the same time, more $100 billion worth of LNG projects in Australia, such as Exxon Mobil‘s (NYSE:XOM) and BHP Billiton‘s () Scarborough gas field and Hess's (NYSE:HES) Equus project could be canceled if China continues to expand its usage of piped natural gas.

All things considered, demand from China and Asia factors considerably into the LNG export equation. Any real drop in LNG demand from the nation could seriously hurt the growth of these facilities and the prices domestic E&P firms see for their production. For investors, China's decision to pipe in more natural gas shouldn't be taken lightly.

Yet, it isn't the projects' death-knell either.

Outside China, LNG demand is still set to rise. As Japan continues to replace its reliance on nuclear power with other sources of energy, the country's utilities imported a record 5.31 million tons of LNG in August. Likewise, South Korea continues to sign deals with Cheniere for access to the fuel, and various utilities in Europe have also chomped at the bit to tap the facility's exports. So, some demand is still out there, but perhaps just not much.

That's key. Focusing on facilities that are already built or are currently under construction will be critical, as will be focusing on firms that have already signed long-term contracts for delivery. Those firms that haven't really started their LNG operations could be in for a rude awakening when some of predicted demand doesn't happen.

For investors and portfolios, that means sticking to Cheniere's Sabine Pass or Apache's (NYSE:APA) and EnCana's (NYSE:ECA) Kitimat LNG facility. Overall, those two plants' first-mover advantage has allowed them to secured contracts with various other Asian nations outside of China. Those supply contracts will be the key to their long-term success as China's new-found love of piped gas takes hold.