CITIC rides China’s LNG wave

This is one part of the infrastructure required to accommodate rising demand for LNG, which alongside compressed natural gas (CNG) and liquefied petroleum gas (LPG) is expected to account for 8% of the country's energy mix by 2015, up from 5% today. The other part is downstream distribution: according to Citi, in 2009 China had 18 LNG refueling stations; as of year-end 2012, there were 368 in operation.

"One of the key applications for LNG is long-haul trucking," says Boon Chew, managing director at CITIC Capital Partners. "In the US, few LNG trucks on the road and lack of LNG stations create a chicken-and-egg scenario. China has been able to circumvent that issue by pushing both agendas concurrently, which has generated tremendous growth across the LNG value chain."

This featured prominently in the thesis for CITIC and Windjammer Capital's acquisition of Engineered Controls International (ECI), a US-based manufacturer of valves used in the transportation and storage of LPG and LNG. The price was not disclosed but when the asset was put up for sale in October, it was reportedly expected to fetch around $400 million.

CITIC is investing through its third international fund, where the typical strategy is to acquire Western companies that are underachieving or underpenetrated in China. ECI is already performing strongly in the country - it has a more than 50% share in the LNG space - but more capital and support will be required as the local LNG infrastructure is built out.

China National Petroleum Corporation said there were 1.48 million natural gas-fueled vehicles on the roads in 2012, up 48% year-on-year, including 70,000 LNG vehicles. Kunlun Energy, the company's gas distribution subsidiary, is targeting 140,000 LNG vehicle customers by 2015, or 30-40% of the overall projected market.

Government incentives play a role in this transition but the fall in global gas prices is equally significant. According to natural gas distributor ENN, it costs approximately RMB80,000 ($13,000) to convert a large diesel commercial truck to LNG. Based on per liter prices of RMB7.5 for diesel and RMB4.6 for LNG, the investment starts paying off in10 months.

"Expanding infrastructure, government incentives, and environmental considerations all drive LNG adoption, but ultimately people will continue to use LNG because it is economical," says Chew.

Before ECI entered China 3-4 years ago, North American LPG customers accounted for 100% of revenue. The LNG share - most of which is driven by China - has since risen to one fifth of revenue.

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