The forces shaping Chinese LNG demand
It is difficult to overstate the importance of Chinese coal-to-gas switching to the LNG industry. The need to reduce air pollution in the middle kingdom’s industrial centres has over the last two years become the single biggest determiner of global LNG investment.
As a result of China’s gas push, the country is at present the world’s second largest importer of LNG, having overtaken South Korea late last year. But it is the unexpected pace with which these imports have grown that is the real kicker. In 2017, Chinese natural gas consumption rose by 15%, more than twice the percentage growth of the Chinese economy, and five times the international average for gas consumption. LNG imports grew even faster – by a staggering 46% year-on-year.
More than any other variable, it is rapid Chinese growth that has served to alter the LNG market’s predominant narrative. Fears of oversupply, which were until recently the industry’s most pressing concern, have largely abated.
They have been replaced by talk of a new wave of impending LNG project FIDs, made in anticipation of a supply shortage some time around the middle of the next decade. The success of these new projects will hinge upon how much new demand does in fact materialise, both in China and in Asia’s other fast-growing economies. Among industry participants, there is little question that the Chinese appetite for LNG will continue to grow strongly for the foreseeable future. The real questions being asked are: just how strongly, and for how long?
The critical factor will be infrastructure. To some extent that means the infrastructure needed to import LNG – including regasification terminals, and pipelines to transport natural gas from the coast to China’s Northern provinces, where residential demand is strongest in winter.
It also means the infrastructure that may allow pipeline imports and domestic gas production to place a dampener on LNG demand growth. That includes the Power-of-Siberia pipeline from Russia, and the underground storage capacity China needs if it is to import more pipeline gas during the months when demand is low, to use when demand is at its highest.
Whether LNG demand grows more or less strongly than expected, and how sustainable it proves to be over the long-term, will be influenced by which of these two forms of infrastructural development is more successful. The former will likely be less difficult to achieve, but China has a vested interest in increasing its pipeline imports if it is to limit the costs incurred by purchasing expensive spot LNG cargoes.
Here’s a summary of the various infrastructural developments that may have an impact on Chinese LNG demand going forward.
Growing Pains
That Chinese natural gas use has been able to grow so much faster than the overall economy has much to do with the fact that it is starting from a low base. At present, gas accounts for only 7% of the country’s primary energy use – less than one third of the global average. As set out under successive five year plans, the Chinese government aims to grow its contribution to 10% by 2020, and to 15% by 2030.
The country’s endowment of natural gas infrastructure is having a difficult time keeping pace. Most of the 17 LNG terminals operational in China at the end of last year were scattered along the southern coastline. A lack of pipeline capacity connecting these terminals with consumers in the northern provinces has meant that many of the least accessible regions suffered gas shortages over the Winter.
To meet these shortages, China has been resorting to transporting LNG northwards by truck. According to a recent report by Wood Mackenzie, fully 12% of China’s LNG imports are transported in this fashion, with an average journey length of 1000km, and at an average cost of $4 per MMBTU. However, during the worst of the shortages last winter journeys of over 2000km were not unheard of, with transportation costs rising commensurately.
Another consequence of China’s rapid transition to gas has been the high utilisation rate of its regasification terminals. Last winter, utilisation rates hit record levels, reaching a maximum of 90% during the period of peak demand. So far in 2018, 10 million tonnes of receiving capacity have been built. Sinopec has also announced plans to double its regasification infrastructure over the next six years, with the addition of 26 million tonnes of annual capacity.
Storage
A similar mismatch between demand and the available infrastructure is seen on the storage front. With a volume of 11 billion cubic metres, China’s storage covers only 5% of its total consumption. That compares to an average of 10% - 12% globally, and 26% in the EU 27 plus Ukraine. Insufficient storage capacity has constrained China’s ability to import more gas via pipeline throughout the year for use in the winter months.
Over the next 5 - 8 years, Chinese companies led by PetroChina have committed to invest $10 billion in developing natural gas storage, mostly through the conversion of depleted or partially depleted wells. But it will take time before most of this storage can become operational. The average underground storage project takes 2 years to be assessed, and a further 3 - 5 years to build. PetroChina have set the target of achieving 15 billion cubic metres of gas storage by the year 2025, meaning that at least 4 bcm of new gas storage facilities or storage upgrades will need to enter into development over the next two years.
Creating additional storage will be particularly important once the Power-of-Siberia pipeline becomes operational, probably in late 2019. The pipeline, which runs from the Chayandinskoye oil, gas and condensate field in Eastern Russia through to China’s northern border, will deliver an initial 5 billion cubic metres per year. The China National Petroleum Corporation expects that imports will reach the contracted volume of 38 bcm by 2024, supplementing the 42-44 bcm of pipeline capacity already available through the country's two existing pipeline routes – the Central Asia-China gas pipeline from Turkmenistan and the Sino-Myanmar pipeline route.
Gazprom has signaled its willingness to help develop more underground storage, both within China, and also potentially in Russia’s far east. The Russian major is working with PetroChina to establish the feasibility of building a new storage facility at Shengping to help balance annual flows from the Power-of-Siberia pipeline.
If these new storage projects cannot be developed before Russian pipeline imports begin in earnest – a not unlikely outcome – the probable impact on LNG demand will be to enhance its seasonality. LNG imports will still be needed in high volumes during the winter, but will sink during the summer months when the Power-of-Siberia is able to cover a higher proportion of demand.
Upstream Projects
One factor that may prove less influential is the progress of China’s upstream projects. In 2017, the country produced 150 bcm of natural gas annually, 9 bcm of which was from unconventional sources. China has long sought to replicate the shale boom seen in the US, but with little success.
Although the country’s shale gas reserves amount to an estimated 32 trillion cubic metres – the largest reserves found anywhere in the world – the difficulty of accessing these resources has so far frustrated stakeholders. Wood Mackenzie forecasts that Chinese shale production will reach 17 bcm by 2020, a significant shortfall on the government target of 30 bcm.
You can read more about the challenges involved with Chinese shale gas production here.
