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Chinese 'gas king' bets big on Toshiba's troubled LNG business

National pivot to gas expected to ignite ENN and Wang's dreams of expansion

ENN Group started up its first LNG terminal in the Chinese port city of Zhoushan in October.

SHANGHAI/BEIJING -- ENN Group, the private Chinese gas supplier founded by multibillionaire Chairman Wang Yusuo, believes that it has the tools to turn Toshiba's long-struggling liquefied natural gas operations into a golden goose.

Once ENN finalizes the takeover of the assets by next March, it will leverage its expertise in the gas industry and its vast domestic sales network -- two weapons Toshiba never had in its arsenal. The Chinese group will also inherit the risks that have plagued the operation throughout its life.

"Twenty-five years after we started supplying gas in Hebei Province, we have arrived at starting up an LNG terminal," Wang said at an Oct. 18 ceremony marking the completion of the group's first terminal, in Zhoushan. "Further development awaits us in the next 20 years."

China is home to only 20 or so intake terminals, but ENN's facility ranks among the largest. Shortly after Wang made his remarks, the Zhejiang Province terminal took in an LNG carrier from Qatar with no problems reported.

Up to that point, ENN simply procured LNG from other terminal operators while focusing on city gas distribution. Now the company plans to extend its terminal capacity and circumvent the middlemen. ENN has inked purchasing deals with Chevron of the U.S. and France's Total.

Wang established ENN in 1989. Within a generation, it grew into an enterprise that serves households and businesses in about 180 Chinese cities. Shanghai-listed core unit ENN Ecological Holdings turned in sales of 9.7 billion yuan ($1.4 billion) for the three quarters ended September, up 39% on the year. Net profit jumped 160% to 1 billion yuan.

Such state-owned enterprises as PetroChina and Sinopec used to command a virtual oligopoly in China's oil and gas industry. But Wang, dubbed the "king of gas" in Chinese media, managed to successfully encroach on their domain.

His life story resembles that of Jack Ma Yun, the founder of Chinese e-commerce leader Alibaba Group Holding. Both failed college entrance exams and had abortive startups before finding their niches. But while Ma struck it rich with the internet, Wang hit the jackpot with gas.

Now Wang is looking to expand the business using Toshiba's Texas-based LNG business as a springboard. The acquisition was announced in November, with ENN Ecological beating out about 10 potential buyers.

The business comes with the right to sell an annual 2.2 million tons or so of LNG for two decades starting next year. The LNG will be processed from American shale gas. With control of an operation upstream in the supply chain, ENN is poised to expand annual LNG sales volume by around 60% compared with 2017.

Toshiba will walk away from a negative legacy whose losses could reach up to 1 trillion yen ($9 billion). The Japanese technology group lacked in-house expertise in running an LNG operation.

ENN possesses broad sales channels, and China is switching from coal to gas under an environmental push. At a recent gathering of Communist Party officials and corporate executives, President Xi Jinping pledged to "bring back the blue skies" by improving the energy landscape.

China's natural gas consumption amounted to 240 billion cu. meters last year and is expected to be 2.5 times that in 2030. China supplied slightly more than 60% of its own natural gas in 2017 but cannot keep up with demand despite official orders to domestic majors to expand production. While the goal is a domestic supply ratio of 50% in 2030, there are fears of it falling as low as 30%.

China is on track to become the world's largest importer of natural gas this year, dethroning Japan. For ENN, Toshiba's LNG business seemed like a can't-miss opportunity.

"To respond to domestic demand for gas, successive large-scale investments, such as the purchase of Toshiba's LNG operation, have become necessary," an ENN executive told a Chinese media outlet. The declaration signals a readiness to buy out similar businesses later.

But aggressive investment naturally comes with risks. In 2016, ENN announced a $750 million deal to purchase an 11.7% stake in Australian energy concern Santos. But Santos posted red ink for 2016 and 2017, and ENN likely suffered associated losses in the tens of millions of dollars.

Though ENN is spending 1.7 billion yen on Toshiba's LNG business, part of the agreement entails a 93 billion yen one-time payment from Toshiba to defray potential losses stemming from LNG market fluctuations during the 20-year period. The peculiar stipulation underscores the risk of sour market conditions upending ENN's plans.

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