Global Gas Perspectives: Is China the driving LNG demand engine?

lng china - illustration-purposes-only-image-courtesy-of-sinopecUntil late 2016 Chinese gas demand growth had been disappointing. A number of LNG suppliers around the world had counted on China importing growing amounts of LNG at a time when global LNG supplies were increasing rapidly. In June 2016 the spot price for LNG in northeast Asia was $4.90/mn Btu.

Prospective and actual LNG producers from Queensland, Australia to the west coast of Canada, from Yamal and Alaska to Mozambique, were understandably glum. Only those with low cost or depreciated liquefaction plants such as the Qatari could make any money and it was predicted a tsunami of new LNG production would be hitting the market in a few years’ time.

However, a colder than normal 2016/17 winter in northeast Asia came the LNG industry to the rescue. Not only did this push up gas demand and LNG imports throughout the region, but the cold weather caused severe pollution problems in industrial parts of China, including the capital Beijing and the government introduced policies to combat air pollution.

Making gas, not coal, the primary fuel for heating, industry and power generation was a central part of this policy: it was announced by the authorities in March 2017 that gas demand would be increased by the equivalent of 30bn m³/yr before the start of the 2017/18 winter. An aggressive programme of converting private housing in northeast China from coal to gas heating was undertaken, with nearly 4mn units heated by gas by the start of November 2017.

Last winter was also colder than normal. The gas supply situation became difficult by November. Central Asian countries contracted to supply China with up to 55bn m³/yr of pipeline gas experienced supply problems. During November and part of December it was reported they delivered some 7% less than contractual nominations. Severe gas shortages were experienced in northwest China. To make up for this shortfall, an additional 25 or more internationally sized LNGC cargoes would be needed. The international LNG market had been given a welcome boost.

The rapid increase in gas demand experienced during the 2017/18 winter highlighted a number of major growth problems in the Chinese gas industry. Geographically the country did not have a properly connected gas pipeline system. Areas with the most advanced gas infrastructure had poor co-ordination between local, regional and national pipeline operators. LNG import terminals had been built, but many of their operators experienced severe problems in connecting gas supplies from these terminals to centres of gas demand.

During winter the gas pipeline systems were pushed beyond their design limits; hence the popularity of the very lean LNG from Queensland in Australia. Lean LNG, nearly pure methane gas, would not produce condensation in the pipeline during periods of low temperatures and/or large pressure variations over the pipeline systems.

Gas storage was found to be woefully inadequate: For the country as a whole peak winter gas demand is roughly three and a half times the summer trough. However, peak winter gas demand in Beijing and surrounding industrial areas, the Beijing-Tianjin-Hebei or BTH zone in the country’s northeast, was, for the winter 2015/16, some 11 times the summer gas demand levels. This ratio is now likely to have increased substantially as a result of housing units being converted from coal to gas heating.

In an attempt to meet peak winter gas supply in the housing market, gas supply for industrial and commercial customers was rationed during most of the 2017/18 winter. Domestic gas production in 2017 was ramped up to 149.2bn m³, an increase of 8.5% over 2016. LNG import terminals operated at more than 120% of design capacity and LNG was trucked over distances of up to 2,000 km to try to overcome gas pipeline interconnection problems and the lack of gas storage facilities.

As a result of pushing the gas supply system, Chinese gas demand grew to 240.4bn m³ in 2017, an annual increase of 31bn m³, equivalent to some 22.5mn metric tons of LNG. Demand for imported LNG grew by a record 12mn mt in 2017 to reach 38mn mt. Thus, imported LNG supplied more than half the national demand growth.

China is drawing up plans to reduce smog further for the period to 2020. The Ministry of Environmental Protection is in the process of introducing tougher pollution curbs on major industrial regions such as the Beijing-Tianjin-Hebei zone in the country’s northeast and the Yangtze and Pearl River deltas further south.

To enable the country to meet stricter pollution curbs, China and its gas industry are in the process of introducing a number of programmes and changes to strengthen its energy industry in general and the gas industry in particular.

Surprisingly, China has not had an energy ministry at federal level. It is understood China plans to create a new energy ministry to facilitate improved and more efficient policymaking in the oil, natural gas, coal and power sectors.

The new ministry would replace existing regulator the National Energy Administration (NEA), and be independent from the powerful National Development and Reform Commission, the latter currently houses the NEA.

Reportedly energy regulators are working on plans to combine oil and gas pipeline assets owned by its three large state oil and gas companies, China National Petroleum Corporation (CNPC), the China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC), under a new national operator. The decision to launch the new national pipeline company is expected before winter 2018/19.

This would reinforce President Xi Jinping and his government’s commitment to use more natural gas as a primary fuel to cut pollution, by hopefully helping to overcome infrastructure problems including gas pipeline interconnectivity, the construction of gas storage projects and LNG satellite regasification plants in areas with high winter gas demand located away from gas supply sources.
A programme of rapid expansion of gas storage facilities is already under way. Led by PetroChina, the listed arm of China National Petroleum Corporation, China has started a 5 to 8 years programme of gas storage construction. The company is planning to invest in excess of $10 billion to achieve a near doubling of workable gas volumes in storage.

During the winter of 2017/18, the price for LNG purchased on the spot market and delivered ex-ship (DES) to Chinese terminals exceeded $10/mn Btu, while this summer the price for such deliveries could exceed $11/mn Btu. These LNG import prices have caused problems for gas importers in China’s price regulated gas market. To alleviate these difficulties and to facilitate increased LNG imports in the future, the authorities are in the process of adjusting end consumer prices to better reflect international gas supply costs.

China is importing gas by pipelines from Central Asian countries as well as Myanmar. In 2017 these imports totalled 39.4bn m³. Starting end 2019, China is due to start taking delivery of pipeline gas from Russia’s Gazprom through the Power of Siberia gas pipeline system, eventually at a rate of up to some 39bn m³. Efforts are also made to increase domestic gas production from both conventional reserves as well as from shale gas and coal bed sources.

The big question for the LNG industry is: How much LNG is China likely to import in the future?

Based on the latest LNG industry information, another 27mn mt of liquefaction capacity is due to be added globally in 2018, a number which currently due to increase to 41mn mt in 2019.
China’s LNG imports have continued increasing from 2017 into the first quarter of 2018 when it imported 12.7mn mt or 61% more LNG than in the same period of 2017. This LNG import level has continued in May. Provided spot LNG import prices remain below crude oil parity over the next couple of years, the capacity of LNG import terminals increase in line with demand growth and assuming normal or below winter temperatures, Chinese LNG imports could continue increasing at a rapid rate also in the near future.

Based on the above stated assumptions, demand for Chinese LNG imports could approach 50mn mt in 2018 and potentially reach 60mn mt in 2019. This represents incremental LNG import growth of some 12mn mt and 10mn mt in 2018 and 2019 respectively, growths well within projected increases in global LNG liquefaction capacity.

Large parts of China’s increased LNG imports would be sourced from the USA, both under existing LNG Sales Purchase Agreements (SPAs), short term and spot purchases. In the recent trade spat between the USA and China, LNG imports have been excluded from the Chinese government’s list of imports subject to 25 per cent tariff on US goods. This trade spat, should it persist, will therefore not disturb China’s sourcing of LNG imports.

In conclusion, China is working hard to address gas supply problems that emerged first during the 2016/17 winter that was not only magnified, but manifested itself during the 2017/18 winter. Gas demand is as a result forecast to make healthy increases in 2018 and 2019, giving rise to likely substantial increases in the level of imported LNG during both years. The projected growth in China’s LNG imports therefore likely will play an important part towards balancing the global LNG market over the next couple of years and beyond. But there are many uncertainties. Availability of sufficient LNG import terminal capacity and pipeline connectivity are in the short term among the largest unknown.

Based on LNG industry history, only time will tell! The international gas industry’s Chinese LNG fuelled engine after first starting and running smoothly, has been observed spluttering in the past.

Morten Frisch is the senior partner of Morten Frisch Consulting (www.mfcgas.com). He has been working with strategic and commercial oil, pipeline gas and LNG issues for more than forty years. Throughout his career he has followed and analyzed the global LNG market giving special emphasis to Asian LNG since the early 1990. The import and consumption of LNG in China has been part of this work since Guangdong LNG (GNLNG) as the first LNG importer in this country agreed to enter into an LNG Sales Purchase Agreement (SPA) with North West Shelf Australia LNG Venture in 2002.

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of  The Mozambique Resources Post.   

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