China can't get enough
The East Asian country is hungry for LNG and is on course to become one of the world's top importers
For global liquefied natural gas observers, perhaps one of the most significant developments over the past 18 months has been the strong and not entirely anticipated upswing in demand for LNG from China.
The share of LNG imports in China's overall gas mix has been steadily rising, from a low of 0.8m tonnes in early 2012 to over 3.6m tonnes, and climbing, in early 2017. More pronounced spikes in LNG imports were seen in the winter of 2016-17, when China leant more heavily on spot cargoes to meet its heating, power and transport needs. This year, new clean air policies are pushing up demand for LNG to unprecedented levels.
The upward trend is a sign of China's growing appetite for LNG, which looks set to continue well into next decade. This will cement its position as one of the world's major gas developing economies, alongside India, Egypt and Pakistan. By 2018, China is projected to surpass South Korea as the world's second-largest LNG importer and by 2040 is expected to import as much as Japan, the world's current dominant LNG consumer.
Unlike Japan, which relies on imports for all its gas needs, China has a diversified gas sourcing strategy comprising indigenous production, piped imports from Myanmar and Central Asia (and from Russia next year), and LNG from Australia, Indonesia, Malaysia and Qatar. Recently, spot LNG cargoes have been sourced from the US, Norway and other providers.
While Chinese LNG demand tends to fluctuate depending on seasonal needs, the trajectory has been upwards and, at times, significantly so. This is particularly the case during the shoulder months, when temperatures rise or fall and there's more draw on gas for power, heating and transport use.
What happens in China influences the global LNG market as a whole and Asia in particular. With 1.4bn people and counting, any rise in LNG consumption tends to be significant, especially when it involves spot cargoes intended to fill a gap in soaring demand.
16% - China's share of global LNG demand 2030
Such is China's forecast gas demand growth that there's reason to believe the glut in global LNG supply could be short-lived, particularly if China continues to soak up spot LNG cargoes, as it's doing with increasing frequency. According to the US Energy Information Administration, China's prolonged projected growth in natural gas consumption is driven by environmental policies, the relative cost competitiveness of natural gas in the industrial and transportation sectors, and relatively high economic growth.
In power generation alone, China is seeing a significant shift from coal to gas as it attempts to improve air quality. The magnitude of the transition is evident from China's move to suspend progress on more than 100 coal-fired plants either approved or under construction.
This year, China mandated that households, factories, hotels, hospitals and other facilities in city hubs such as Beijing swap coal-fired boilers for gas-fired ones from this year. This is leading to a surge in demand for gas and a run on imported LNG as winter temperatures bite.
Shell's LNG Outlook 2017 sees China's 13th Five-Year Plan targeting 45bn cubic metres (33m t) of incremental gas consumption by 2020. Further out, natural gas is forecast to account for 11% of China's total primary energy demand by 2030, compared to 5% in 2015, with LNG imports responsible for over 100bn cm of China's gas supply by 2030. Conservative estimates see China accounting for 16% of global LNG demand by 2030, compared to just 4% in 2015.
This year, the step-up in Chinese-contracted LNG purchases results from dominant LNG importers Cnooc and Sinopec absorbing large contractual commitments from new export projects, Australia Pacific LNG and Queensland Curtis LNG in eastern Australia. Based on current long-term contracts, ICIS Consulting expects Australia to supply at least 20m tonnes a year of LNG to China in the years ahead. Australian LNG could increase in importance for China if Browse LNG—in which PetroChina has a stake—is sanctioned and/or if export facilities can be expanded to allow gas to be exported at internationally-competitive rates.
Alongside contracted LNG imports from Qatar and elsewhere, China is also stepping up investments in Russian liquefaction plants as a means of diversifying supply for the long term. China National Petroleum Corporation and China's Silk Road Fund have taken 20% and 9.9% stakes respectively in Novatek's 16.5m-t/y Yamal LNG export facility in the Arctic, which was to begin shipping first cargoes in November.
In general, it's clear that LNG will be significant in China's gas supply needs for years to come, with large suppliers such as Australia, Russia, Qatar and the US set to have a rising role to play. The Council of the International Gas Union recently selected China to take over the organisation's presidency from 2021-24, a sign that Beijing's influence over the global LNG market may have only just begun.