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Chinese LNG faces headwinds

Huge expansion in imports masks challenges for the future

China was an apt choice for April's LNG19 conference, given the disruptive impact that its imports have had on the fuel's global trade in recent years. And Shanghai even more so, given that it is home to the huge Yangshan terminal and acts as a hub for several more LNG terminals along the Middle Kingdom's east coast.

But at the event, Chinese energy officials underlined that LNG's potential to become Asia's dominant gas delivery method versus competitors such as pipelines—and indeed the future of gas itself as a cleaner fuel alternative—depends on the industry's ability to improve coordination.

"Competition from pipelines and renewables is fierce, costs are still high, and the large scale of the natural gas system is causing bottlenecks," said Yang Hua, chairman of Cnooc, at the opening ceremony. "Some LNG suppliers insist on traditional methods of duration and pricing, and resolution of this will require a joint effort".

Taking the lead as it is in many macroeconomic indicators, China is set to become the world's top gas importer in 2019, boosted by LNG. It imported 37.8mn t in 2017, rising to more than 54mn t in 2018, an increase of 42pc. The ministry of transport also plans to quadruple China's import capacity within the next two decades from its 21 terminals with 2.86tn ft³/yr (or just above 220mn m³/d) capacity to 34 terminals with over 11tn ft³/yr (or over 850mn m³/d).

However, executives at the "big three" Chinese national oil companies (NOCs) warn that, based on their experience, LNG trading conditions-both contracts and pricing-are stuck in the past. And this could become a wider regional issue amid plans to supply developing nations such as Pakistan and Bangladesh with more LNG to support their expected move away from coal.

"Flexibility in trade needs to be strengthened, as more flexible contractual terms will lead to greater liquidity. Suppliers and vendors must jointly support innovation to promote the stability of the market," says CNPC chairman Wang Yilin. "LNG demand growth may be subject to price constraints-only acceptable LNG prices lead to sustainable growth."

Shanghai mayor Ying Yong also highlights the importance of LNG to his city of 24mn people, with the same caveats over future growth. "For a long time, LNG was constrained by the high cost of its storage and transport. A global LNG market has yet to form and the pricing mechanism does not reflect fundamentals yet," says Yong. The LNG industry needs to work together to reduce costs and improve its competitiveness against other fuels, he adds.

Market evolution

Increased co-ordination emerged as a key LNG19 theme, with the major deals at the event going beyond simple corporate tie-ups. Shell and Japan's Tokyo Gas signed a long-term LNG deal using an innovative pricing formula that is partly based on coal indexation. Shell will supply 500,000 t/y of LNG to the Japanese utility firm.

A 20-year supply agreement between US project developer Next Decade and Shell-for 2mn t/y of LNG from Next Decade's 27mn-t/yr Rio Grande LNG plant at Brownsville, south Texas-was inked with a Brent crude index, but flexibility on destination.

Total and US independent Tellurian also agreed several deals to develop the Driftwood LNG project in Louisiana, initially involving an investment by the French firm of $500mn for 1mn t/y of LNG from Driftwood. Total has also pledged to buy almost 20mn Tellurian shares for $200mn, , dependent on the firm taking FID, giving it access to additional Tellurian equity volumes.

But the increasingly flexible global nature of LNG trade will be subject to the same trade tensions as other energy and wider commodity sectors. BP CEO Bob Dudley said in Shanghai that trade tensions could impact LNG's ambitions for a central role as the world transitions to cleaner energy sources, by encouraging countries to resume a dependence on domestic resources rather than imports.

"Gas is affordable, abundant, cleaner and easily transportable, thanks to LNG," says Dudley, noting that global trade is set to more than double from 400bn m³/yr to around 900bn m³/yr by 2040.

But trade wars only serve to remind countries that becoming dependent on imported energy can create political risk. "Countries need to have confidence in the security of their gas supplies," adds Dudley.

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