Oil-to-gas switch in transportation
Comment of the Day

November 11 2013

Commentary by Eoin Treacy

Oil-to-gas switch in transportation

Thanks to a subscriber for this fascinating report from Deutsche Bank highlighting the point that while US natural gas exports will not take place until 2015, the adoption of technology that promotes the use of the commodity is already occurring. The full report is posted in the Subscriber's Area but here is a section
Economic benefits of gas as an oil substitute stay intact
We believe the impact of the gas tariff hike in July 2013 on vehicle fuel switching to natural gas is limited as the lengthened payback period is still economically attractive for conversion. The planned diesel/petro upgrade as a move to reduce emission will enhance the cost competitiveness of natural gas as a fuel substitute and offset the negative impact from rising natural gas price. There is also downside potential for natural gas price in China in the long term on increasing supply from unconventional gas and US LNG exports.

Environmental benefits and improving infrastructure/supply
Compared with gasoline and diesel, CNG and LNG are much cleaner and can significantly reduce transportation-related emissions. Many local governments have laid out aggressive plans to roll out natural gas applications in public transportation, as an important part of raising gas usage in the total energy consumption mix. Accelerating construction of the gas refuelling station and strong growth in LNG imports will support continued growth in oil-to-gas switch in transportation.

Natural gas application in vessel and other areas; export market potential
LNG conversion in vessels could be another big growth driver with national development guidelines and target just released. Moreover, great potential exists in LNG-fuelled construction, drilling and mining machinery markets. As China is a pioneer in LNG vehicle application, domestic equipment players are well positioned to exploit overseas markets, especially the US market where gas price is most competitive vs. oil.

Eoin Treacy's view It has been our view at FT Money since at least 2010 that the development of unconventional oil and gas resources represents a game changer for the energy sector and the wider global economy. This is now reasonably well understood by governments less encumbered by climate ideology. China’s policy makers have committed themselves to working out how they can best make this change in global energy dynamic work to their advantage. The obvious answer is to do whatever they can to produce more gas and consume more of it in preference to coal and oil.

As a manufacturer of natural gas engines, CIMC Enric falls into the same sector as US listed Cummins. The share accelerated to a July peak near $HK12 and has been ranging below it since. It found at least near-term support above HK$10 today and a sustained move below the 200-day MA, currently near HK$9.25, would be required to question medium-term scope for additional higher to lateral ranging.

Kunlun Energy is a subsidiary of China National Petroleum Corp which is one of the country’s largest state owned enterprises. The share rallied to break a six-month progression of lower rally highs from early this month and has now closed its overextension relative to the 200-day MA. A sustained move below HK$11 would be required to question medium-term scope for continued higher to lateral ranging.

ENN Energy operates natural gas pipelines and distributes bottled gas and piped gas to consumers. Following an impressive advance from the 2009 lows, the share has paused mostly below HK$45 since May and is currently pulling back from that level. It will need to hold above HK$40 if medium-term upside is to continue to be given the benefit of the doubt.

Back to top