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Emerging suppliers are banking on China's gas needs

The country is poised to be a pivotal player in global gas markets as demand surges

China, with its ballooning demand for gas, is actively being courted by the world's largest gas exporters, particularly Russia, as a pivotal growth market for the future. 

Meeting surging demand should not be a problem with no shortage of would-be suppliers. Liquefied natural gas (LNG) import terminals are being built at such a rapid clip, that by the end of the decade China's total regasification capacity could exceed number one LNG buyer Japan, while mega pipeline deals with Russia are in the works too. But Beijing is keeping its options open as it aims to drive harder bargains.

And despite the pace of demand actually slowing last year for the first time in a decade, emerging suppliers are still banking on China's future gas needs, set to more than double by 2020.

Under pressure

A combination of cyclical factors, including, slower economic growth, higher domestic gas prices relative to falling oil prices, milder winter weather and higher hydro output, triggered the recent slowdown, explained Gavin Thompson an Asian-based gas specialist at energy research company Wood Mackenzie

Gas demand in China jumped by an average 16% per year between 2004 and 2013. But in 2014, it slowed considerably from over 13% in 2013 to around 8%. 

The nation consumed 183bn cubic metres (cm) of gas in 2014 making it the fourth-largest global consumer and the largest market in Asia. Roughly one-third of the gas was imported - 31.3bn cm from pipelines and 27bn cm (19.5m tonnes) from LNG.

LNG import growth, at 10% last year, was the slowest since 2006 when the first cargo arrived.  Similarly, although China imported some 15% more pipeline gas in 2014 than the year before, the expansion was the lowest since 2010 when pipeline gas began flowing to China.

But the contraction in demand growth is a temporary blip with China widely tipped to become the world's largest importer of gas in the coming decades.

Gas demand is expected to rebound in the longer run bolstered by rapid urbanisation, the need for cleaner power and the increasingly fungible nature of supplies as infrastructure is built up. 

Last year, China's gas demand in 2020 was projected at 420bn cm that would be more than double 2014 and the figure of 700bn cm in 2030 was introduced for the first time. 

Even conservative estimates - the International Energy Agency (IEA) predicts gas demand will hit 315bn cm in 2019 - see the market nearly doubling in five years. The IEA's latest projected number for 2030 was 471bn cm.

The extent, however, to which China will rely on its own natural gas resources versus imports is uncertain. China will increasingly need to count on piped gas and LNG imports as domestic production fails to keep pace with consumption.

While China is working to boost domestic supplies by unlocking its vast shale gas resources, it isn't having much luck yet. 

Ultimately LNG demand will continue to grow, but will plateau around 2025, as big deliveries of Russian piped gas arrives, while China should start getting some shale gas in to the market by mid next decade, says Thompson.

Many pipeline and LNG suppliers are targeting China for long-term sales, including producers in the Middle East, Australia, East Africa, and Canada. 

Of course, Russia is pushing hard too. It stole a march over its international competitors when it signed the historic $400bn Power of Siberia pipeline deal in May 2014 that will see it supply 38bn cubic metres per year (cm/y) of gas for 30 years starting 2018. 

If the Altai project, a second pipeline gas deal between the countries, comes off then China's total volume of pipeline gas imports by the mid-2020s could hit 165bn cm/y, Keun-Wook Paik, an expert on northeast Asia energy issues at the Oxford Institute for Energy Studies, wrote in a recent report.

Broken down, that is at least 85bn cm/y from Turkmenistan, Uzbekistan, and Kazakhstan, 68bn cm/y from Russia via the eastern Power of Siberia route and the Altai route in the west, and 12bn cm/y from Myanmar.

Thompson expects the Altai pipeline to happen, but not for at least another ten years.

Paik reckons a breakthrough in the Altai gas deal could be bad news for China's LNG expansion. But the buildup of LNG import capacity is a good bargaining chip and offers a necessary diversification strategy. The increasingly competitive global LNG market offers Beijing a plethora of supply options and more realistic alternatives to compensate for Russian gas in the unlikely instance that Moscow tries to use it as a political weapon.

China imported just under 20m tonnes of LNG in 2014, much less than its receiving capacity of 32.5m t/y. The LNG was too expensive, says Paik. 

That could be changing. Average city-gate prices in coastal areas of China are now $12-13/m British thermal units (Btu) while industrial prices can be as high as $23-24/m Btu. So LNG is looking increasingly competitive as international prices soften. The national oil companies should start pushing more into the market, reckons Thompson.

Market expansion

Wood Mackenzie expects LNG demand to rise to 60m t/y by early 2020, of which some 40m t/y is already contracted. The market will continue to expand after that, but not at the same pace, says Thompson. 

"With the economic slowdown, all suppliers now need to understand that they cannot sell gas in China unless their prices are competitive - both with the price of competing supplies (domestic and imported) and with the price that customers can afford to pay", said Paik. 

The Power of Siberia pipeline deal was sealed when oil prices stood over $100 per barrel giving an oil-linked price formula that offered gas delivered to the Chinese border for $11/m Btu, much less than Asian spot LNG prices at the time.

But falling oil prices mean the would-be border price for gas could be as low as $8/m Btu, said Fereidun Fesharaki, chairman of consultancy Facts Global Energy. 

Given the low oil price, the Chinese are probably pushing for better pricing, even using the negotiations for a second pipeline to incentivise something that meets their needs, said Thompson. Since all new projects, particularly LNG, are high-cost, China would rather maximise supplies of domestic gas (conventional and unconventional) than pay high prices to exporters, added Paik.

Still, China is hedging its bets. LNG import capacity is expected to jump nearly three-fold to 80 million t/y by 2018 - almost as much as Japan's, the world's biggest LNG buyer. And more terminals are on the cards. 

If China cannot boost its shale-gas production significantly by 2025 then its import dependency will rocket. 

Less than meets the eye for Russian gas pipelines

Policy makers and industry leaders have been closely monitoring the potential for expanding strategic energy ties between China and its producer neighbour, Russia.

Many worry that Russia, if it moves quickly and is flexible enough on price, could cement a deeper energy trade relationship with China on a scale that has grave strategic consequences. They cite similarities with the gas trade between Russia and Europe, which has often curbed European criticism of and action toward Moscow. But Beijing is unlikely to let the Kremlin get one over.

A paper China's energy hedging strategy: less than meets the eye for Russian Gas Pipelines from the US-based National Bureau of Asian Research (NBR) suggests China's growing energy relationship with Russia might best be understood as a hedging strategy to lock in multiple suppliers to cut Chinese exposure to supply disruptions and to leverage cheaper energy imports.

China's actions related to gas are typical consuming-country policies aimed at boosting diversity among gas imports and are driven by a desire for greater energy security, say the authors.

Indeed, when faced with liquefied natural gas (LNG) prices that have topped $20/m British thermal unit (Btu) in recent years, China clearly has an interest in seeking alternative sources of supply from low-cost providers. NBR's research shows that it will be commercially tricky for Russia to snatch a significant share of the Chinese gas market, especially if China is able to successfully develop its own large shale-gas resources. Moreover, any combined push by US and Canadian LNG developers to target the Chinese market would have a harmful effect on Russia's ability to maximise gas sales to China. 

China will import LNG from a variety of sources, including Australia, Qatar, Indonesia, the UAE and Papua New Guinea. LNG exports from the US would largely affect China by displacement of demand for other suppliers, rather than direct sales, with US cargoes destined to land in Japan and South Korea.

As a result of increasing competitive pressures in the global LNG markets, Russia's pipeline sales to China will find it hard to get beyond the initial volumes in the May 2014 supply deal (38bn cubic metres) in the coming 10-15 years, NBR's analysis shows.

However, if the price of oil remains at $50 per barrel or if China fails to develop its shale industry sufficiently until after 2030, then Russia's pipeline sales to China will be roughly 20% higher, making up 13.1% of China's gas needs (estimated at 332bn cubic metres) in 2030, up from 10.7% in their base case scenario. 

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