China's gas needs
China's market is growing quickly again, spurring more enthusiasm for domestic shale and attracting exporters as far away as the US
If nothing else, Donald Trump's extraction of a promise from China to consider buying liquefied natural gas from the US is a good sign for other gas exporters such as Australia, Qatar, Indonesia and Malaysia. As China embarks on the wholesale replacement of coal by cleaner fuels including renewables, its interest in imported LNG illustrates a determination to plug the energy gap in any way that it can.
Suddenly, its market is burgeoning once again. In April, China's gas demand grew at a year-on-year rate of 22%, says consultancy Wood Mackenzie. "This dynamic, emerging market is becoming more attractive to gas exporters," it said in a report, also citing the prospective deal with the US and a $5bn gas agreement signed with Uzbekistan in May.
It's not so much whether China will buy gas, but how much. In 2016, China was the third largest LNG-importing nation after Japan and South Korea, landing 27.4m tonnes (a 36.9% rise for the full year, according to the International Group of LNG Importers (GIIGNL). And as the GIIGNL's research indicates, the likelihood is that demand will stay high in the foreseeable future because of a continuing growth in gas-fired power generation as well as from heavy industry.
The steep decline in LNG prices has boosted demand after some lacklustre years and forecasters expect that to continue. According to a recent report from Japan's Institute of Energy Economics, China is developing a voracious appetite for LNG. "Future Chinese gas demand and LNG imports are likely to exert great influences not only on the Chinese energy mix, but also on the supply-demand environment for the global gas market, particularly the Asian LNG market," it said.
To help meet its shortage, China has embarked on a medium-term plan to boost domestic production. Earlier this year the National Energy Administration set state-owned producers an output target for shale gas of 30bn cubic metres a year, to be reached as soon as 2020. That goal has spurred state-run PetroChina and Sinopec to invest more heavily in shale gas this year. But there's some way to go before China hits the target. In March, China's shale gas output rose by 8.2% from January and February levels, according to the National Bureau of Statistics, reaching 1.15bn cm.
Sinopec's main source (and China's sixth-biggest) is the Yakela condensate gasfield in the north of the Tarim Basin, supplying Xinjiang and the west-to-east gas transmission project. In 12 years of activity, Yakela has produced 10bn cm of gas as well as 2.2m tonnes of oil, but Sinopec says it will boost output from the field this year. The group adds that it is "progressing according to plan for the development of phase two of the Fuling shale gas project". Sinopec also has high hopes for two discoveries made in the first quarter of 2017 in the Sichuan Basin.
Opening up the market
But in an implicit recognition that state-owned producers won't meet the targets on their own, Beijing took a landmark step in late May when it announced the upstream and downstream gas industry would be opened up to the private sector. One of the first public-private joint ventures off the mark is the $435m development of a shale block in the Chengdu area, north-west of Sinopec's Fuling block in the Chongqing region adjacent to Sichuan. Working with PetroChina are Sichuan Energy, China Huadian Clean Energy, Beijing Gas, Neijiang Investment, and Zigong State Asset Energy. And in what's been hailed as a watershed moment for private LNG downstream operators, a few weeks ago gas distributor Guanghui Energy commissioned its first LNG-import terminal, to be located in Xinjiang.
Beijing is already seeing the fruits of its ambitious gas targets. Between January and April, gas production jumped by 7.1% on a year-on-year basis, hitting 50.6bn cm.
But back to the Trump initiative. Despite the chorus of approval it won from US suppliers, it's unlikely this is the start of a windfall in China. That's mainly because the US suffers from a geographic disadvantage compared with Australia, China's biggest supplier, and Qatar, Indonesia and Malaysia, all of which are virtually on the doorstep.
Also, as analysts point out, at present American suppliers lack sufficient capacity to satisfy anything more than a small amount of China's requirements. The only current exporter is Cheniere Energy's Sabine Pass operation in the Gulf of Mexico and most of that is going elsewhere, primarily to Latin America (58%), elsewhere in Asia (19%) and the Middle East (14%). As Wood Mackenzie's head of global gas and LNG research, Massimo Di-Odoardo, points out, just nine of the 117 cargoes shipped out of Sabine Pass since February 2016 went to China. That's just 8% of the total.
However, in the longer term the US Department of Energy, which approves LNG-export licences for countries such as China that don't fall under free-trade agreements, may look kindly on issuing more licences for exports to China. As Di-Odoardo added in a statement recently, the Trump initiative could spark a second wave of investment by American suppliers through joint ventures: "Developers will now be able to target Chinese buyers directly, potentially supporting project financing. It could also support direct Chinese investment into liquefaction and upstream developments on US soil."
If that happens, US suppliers would be late to the party. BP has just signed a 20-year deal with Cnooc to supply 1.5m tonnes a year of LNG from 2019.