This site is part of the Informa Connect Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 3099067.

Home to the Flame conference: insights into investment, market dynamics and decarbonisation policy for the gas & LNG industries.

Will US LNG Make a Splash in China?

Share this article

According to Wood Mackenzie Ltd. burgeoning American LNG supplies accounted for almost 7 percent of China’s LNG imports in March of 2017, and a recent Forbes article by Jude Clemente predicts significant growth for US LNG imports to China over the next few decades. Why? He cites factors such as: natural gas pricing, air pollution and the ongoing development of China’s economy. Clemente prophesizes: “Just imagine the possibilities: if the Chinese ever consume like Americans, global gas demand would effectively double.”

To investigate further, I asked several Global energy thought leaders what they think LNG demand in China will look like in the short and long term and where they think US LNG might fit in.

Nick Grealy, Publisher,  No Hot Air  @ReImagineGas 

“China will be shaping up as one of the most dynamic natural gas markets, and a free market there could one day rival Henry Hub. While an attractive and growing destination for US LNG, the impact of Chinese renewables may one day be as strong as in Europe. The two megatrends to watch will be the Q4 2018 opening of Russian gas imports from Siberia and the continuing progress of China’s shale industry. China has a history of infrastructure that actually gets delivered, and the US LNG industry would be prudent to seek new LNG demand in South and South East Asia.”

Jarl PedersenChief Commercial Officer, Port of Corpus Christi  @PoccaPort

“Due to significant concerns about new coal fired power generation in China, in the short to medium term, LNG is probably the most promising alternative fossil fuel for power generation in China. In the long term, the outlook for LNG demand is China is even better as natural gas fired power generation is more flexible than other types of thermal power generation and therefore more suitable for integration of the increasing amount of intermittent renewable energy including Solar and Wind Energy. With the vast resources of shale gas in the US and cost competitive extraction technology combined with construction of significant new natural gas liquefaction capacity with flexible off-take contracts, US LNG supply might be a very good fit for increase in demand from China.”

Jarl Pedersen will be part of the Global LNG Supply Panel at our LNGgc London event happening this September.

Jason FeerHead of Business Intelligence, Poten & Partners  @PotenPartners

“We expect that demand in China will grow significantly over the next decade as the economy grows and the government encourages the use of cleaner generating fuels. We forecast that Chinese LNG demand will more than double from just under 30 MMty in 2017 to more than 62 MMty in 2027, driven largely by these two trends. US exports to China will face competition from suppliers that are closer and therefore will able to offer cheaper freight such as Australia, Qatar and Mozambique, among others. US producers will have to offer competitive and flexible supplies in order to gain significant market share in China in the long run."

Max Tingyao Lin, Markets Editor, Lloyd's List  @MaxL_Lloydslist

“China is the world’s third largest LNG importing nation and indeed the fastest growth market. The long-term prospects are strong as the country seeks to burn cleaner fuel for environmental seasons, and for the medium-term imports will stay on the upwards trajectory as new regasification terminals continue to come onstream.”

“That said, before Beijing is willing to liberalise domestic gas markets, the growth potential won’t be fully realised. With the Chinese gas markets controlled by state energy majors and prices heavily regulated by the state, Chinese consumers will likely continue to pay for gas at higher than international prices.”

“How does the US come into play? Chinese firms are already buying US spot LNG, and they obviously would want to fix long-term volumes with US producers to diversify their sources, like Japanese utilities. They will see the recent US-China deal as a green light for them to do so. So indeed the Chinese commitments could trigger another wave of investments in US LNG production projects later on.”

“But market conditions would constrain actual US-China physical flows. There could be times when Chinese firms find it more economical to import Australian and Qatari LNG, or buy Russian LNG via pipelines. As US LNG is sold on a destination-free basis, Chinese firms could well re-sell their volumes in the Atlantic basin if needed.”

Joanna Martin Zeigenfuss, Associate Director, Berkeley Research Group @BRGExpert

“China is one of the leading LNG import growth markets which will have a significant impact on global supply and demand balances in the near to mid-term. It has a vast potential demand for natural gas and a government keen to displace coal in power generation and diesel in transportation. Chinese buyers are actively engaged in supply negotiations with U.S. suppliers following the recent trade deal between the U.S. and China. However, LNG uptake in China faces some key short-term challenges:

  • Downstream markets need to develop fast to absorb the LNG under procurement contracts.
  • Lack of LNG open access, midstream liberalization, and adequate pricing mechanisms is hindering LNG demand growth. Hopefully, regulatory and market pricing reform will resolve this. A more competitive market, outside the control of the dominant NOCs, will stimulate trade between smaller counterparties and bolster demand.

"As China’s buyers close deals with U.S. suppliers and as existing long-term LNG contracts expire, there will probably be an increase in Henry Hub indexed LNG contracts in the Chinese market. The velocity and magnitude of this change will depend on the competitiveness of U.S. LNG relative to China’s shale gas development and imported pipeline gas from Russia and Central Asia. We expect China will eventually overtake Japan as the world’s largest LNG importer.” (Disclaimer: this is Ms. Martin Ziegenfuss's opinion and not that of her company)

Karen Sund, Founder, Sund Energy AS @KarenSund

“The use of gas is expected to increase, just as renewables will. China sees some potential to replace coal, but also oil (transport and shipping). Some of the growing demand will be met by domestic production (large potential), which could set the pace for growth. Imports will be both in the form of pipelines from several countries and LNG. LNG will probably grow, but only as part of total imports. Where this LNG comes from will depend on prices and other terms – US is only one of several possible suppliers.”

Howard Rogers, Chairman, Natural Gas Research Programme and Senior Research Fellow, Oxford Institute for Energy Studies @OxfordEnergy

“The development of natural gas demand in China is inherently uncertain. The economy is moving to a slower growth trajectory and gas demand growth will be overwhelmingly influenced by Government and regional policies to improve air quality (PM 2.5 emissions). The main reason for this is that domestic coal prices are likely to remain structurally lower than gas prices - whether on a cost of supply or contractual basis. As well as natural gas demand being uncertain - so to are the relative contributions of Chinese domestic production, pipeline imports (Myanmar, Turkmenistan and Central Asia and in the future Russia) - and of course LNG. A key factor is probably the degree to which coastal industrial users are able to access spot LNG at low prices via third party access to Regas terminals and pipelines. By 2030 Chinese LNG imports may be in the range of 75 to 105 Bcma - considerably lower than the LNG industry was anticipating 5 years ago. Its hard to say what proportion of this will be US LNG. In the near term Chinese imports will comprise the long term contracts it has already committed to (no US LNG) plus spot imports in times of peak demand (which would probably include the US). We are probably facing a 'glut' of LNG supply between now and 2021/2022 - so US LNG will probably continue to feature in China's imports in this period on a spot or short term basis. For the next LNG supply wave of the mid 2020s I anticipate the US to feature strongly - given its lower cost and superior project execution attributes - so in the second half of the 2020s China's imports of US LNG could grow significantly.”

Howard Rogers will speak on  LNG Contracting and Pricing Trends Post 2020 at our LNGgc London event happening this September.

Sheila Slocum Hollis, Partner,  Duane Morris LLP  @energylawgirl

"Recent developments in the U.S. reinforce the desirability and appropriateness of sales of liquefied natural gas (“LNG”) to the burgeoning markets in China, South Korea and Japan. Presently, Japan is the largest consumer of U.S. LNG; South Korea, sixth; and China, third. It is likely that China will move to the top of that list. A new agreement with the U.S. solidifies an enhanced LNG trade relationship between the countries. Doubtless, the need for LNG for electric power generation and industrial operations in China is immense. Yet, lingering concerns clouded progress. That fog has now lifted between Washington and China, emanating from the détente between the Trump Administration and Chinese Premier Xi. Of course, expansion will be met with obstacles, i.e., environmental impacts, and the upticks in shale gas development and associated infrastructure; the potential price effects on U.S. markets; and complexities of other trade and policy issues."

"Looming large in the U.S. is the closure of coal fired electric generation plants, despite the President’s “softening” of the Obama Administration’s anti coal initiatives. The closure of aging nuclear plants, which has accelerated due to safety and environmental opposition, impels greater gas dependency. Demand for gas in the U.S. is not guaranteed with renewables and efficiency gains; nonetheless, demand is likely to expand."

"Inevitably, in these lively markets there will be aggressive competition among LNG suppliers as well as consumer countries. Other suppliers in the lead are Qatar and Australia, who have a geographical advantage. To say there are a number of moving parts to the LNG equation is an understatement. Despite the shift in sentiment towards the acceptability and appropriateness of LNG exports, loose ends remain. A series of LNG export projects await approval from regulatory authorities, frustrating exporters and consumers. Even with the policy shift at the highest executive levels and the friendlier environment in the executive agencies, there are many rivers to cross in order to reach the global goals of LNG demand and supplier players."

Andrei Belyi, Senior Researcher, University of Eastern Finland@Belyiand

“LNG has been longtime considered as a transportation method for natural gas before reaching regasification terminals. However, an emerging trend in maritime and road transport stimulating a direct use of liquefied methane will eventually reach China. Thus, a proper demand for the fuel used in LNG-based propulsions will rapidly evolve. The LNG will be subsequently supplied in a decentralized way by specific containers from any port of the country without even using regasification infrastructures. This new market model would imply a vital for China reduction in capital expenditure, even though the operational costs are obviously elevated. Interestingly, some LNG containers with western patents are actually manufactured in China, hence, some delivery costs can be decreased for local supplies.”

“It remains hard to estimate an impact of the potential LNG market fragmentation on the future of China’s imports. Ceteris paribus, China benefits from the current gas glut and hence has a choice of nearby suppliers. Still, being the world's best-priced gas, US-originated LNG could become the crucial component for intercontinental swap agreements involving East Asian region. Much might again depend on the political atmosphere between the two major countries.”

Susan Sakmar, Visiting Assistant Law Professor, University of Houston Law Center, Author, "Energy for the 21st Century: Opportunities and Challenges for LNG" @SusanSakmar

“In the short-term, there’s an abundance of LNG on the market and the resulting low prices might encourage China to import additional volumes. According to the most recent LNG export report from the US DOE, as of March 2017, Cheniere has shipped 10 LNG cargoes to China. As more US LNG comes on the market, we might see more cargos headed to China depending on price signals."

“In the long term, China’s LNG demand is expected to grow as the country shifts from coal to cleaner burning fuels and US LNG exports could play a key role. While the 100-Day Action Plan statement does not reflect any change in law that would make it easier to export US LNG to China, it does reflect a change in US policy to actively promote US LNG exports to any country, including China, which wants to buy US LNG.”

“Under President Obama, US LNG export policy was less clear and while there was not an official policy against US exports to China, the Obama Administration had discouraged US LNG exporters from signing deals to China for political reasons. As a result, Chinese counterparties are not offtakers of any current US LNG export project under construction. Regardless of past US policy, it is now clear that Chinese buyers are welcome to sign deals with current or future US LNG exporters. Cheniere Energy has already indicated it is looking to line up new LNG export deals with reports that it has had extensive negotiations with China over the past month. I would not be surprised to see a Chinese counterparty sign up for offtake in Cheniere’s Corpus Cristi LNG project or for Cheniere’s Sabine Pass Train 6, which is fully permitted but awaiting FID.”

“The next wave of US LNG export projects – those targeting start-up dates in the early 2020s –will need firm offtake commitments in order to advance and I suspect many of these projects will look to China. Market forces in the rapidly evolving global gas and LNG markets will ultimately determine the volume of US LNG exports that go to China. US LNG will need to be competitive with other LNG suppliers, most notably Qatar and Australia, and will also have to compete with piped gas from Russia. It will also depend on whether Chinese buyers want exposure to U.S. gas prices or whether the next round of US LNG exporters come up with a new pricing mechanism, much like Cheniere did when it proposed Henry Hub linked prices. While there are many unknowns, US LNG exports to China could be an important bilateral tie in the coming years.”

Mark Renton, Oil/LNG Analyst,  Lloyd's List Intelligence  @MarkRenton11

“China is trying to move away from its dependence on coal as air pollution levels have been rapidly rising with smog causing major health issues and grounding flights at its airports. LNG is seen as an efficient replacement - China is already the world’s third largest importer of LNG behind Japan and South Korea and 2016 saw a 33% rise in LNG imports compared to 2015.”

“Already this year LLI data shows that China has received 4 shale gas loads from the US’s only export facility at Sabine and the new trade deal which will allow Chinese buyers both private and state to negotiate long term contracts with US suppliers should see a marked increase in trade as long as prices are attractive - US shale gas exports to China have benefitted greatly from the Panama Canal expansion, reducing travel time and shipping costs but LNG powerhouses Qatar and Australia are still better placed than the US geographically to supply China.”

“Chinese demand will certainly rise over the next 10 years but there will be much competition to supply it and for the US a lot depends on how quickly the new wave of LNG terminals come on stream to take advantage of this.”

Vivek Chandra, CEO & Co-Founder, Texas LNG, Author, "Fundamentals of Natural Gas: An International Perspective"

“China is on-track to be one of the largest LNG importers in the world. For the past few years, China has been building its LNG infrastructure, including many LNG terminals and gas networks. China now has 15 operational terminals - and significantly, not all are owned by the three large state-owned entities, CNOOC, Sinopec and CNPC. Private and provincial LNG companies are involved in many of these facilities, opening up a new era in China LNG. In 2017 alone, four new terminals are expected to be commissioned, bringing total import capacity to over 40 MTA.”

“There are many reasons why LNG will play an increasing role in China's future energy mix. LNG import prices are now equivalent to pipeline gas prices, especially in the coastal and southern provinces. Environmental pressures and difficulties in building new coal-fired power generation is encouraging the greater usage of natural gas - and the government is actively promoting natural gas as an alternative fuel.”

“So, where is China going to get its LNG? China remains a price sensitive market and the new buyers would prefer not to buy from expensive sources such as Australia. The three state-owned entities are part-owners in some of these plants and thus have to abide by their purchase contracts. However, there is very little prospect of additional Australian LNG going to China. The remaining exporters in SE Asia (Indonesia, Malaysia, Brunei) will likely be reducing their LNG exports in the future, diverting more of the supply to domestic demand. China was counting on Canadian gas for future LNG supply - but this is looking increasingly difficult as Canadian projects are likely to be as expensive as Australian projects to develop and local environmental opposition is significant.”

“Thus, the US remains the only viable source that can supply the volumes that China needs at the prices it can afford. China will undoubtedly play an increasingly important role in purchasing US LNG.”

Vivek Chandra will speak at our LNGgc London event happening this September. His talk will be on US LNG and emerging markets.

Bruce Robertson, Analyst Gas/LNG Australasia, Institute for Energy Economics and Financial Analysis (IEEFA), @Barobertson111

“Chinese imports were up by 35% in 2016 to 26.8 MTPA. While Japan is the world’s largest LNG importer it is China that the industry is pinning its hopes of expansion upon. While we do see growth in gas demand in China we see it as a fundamental mistake to conflate a rise in gas consumption with a rise in demand for LNG.”

“According to the International Gas Union, Natural gas accounts for roughly a quarter of global energy demand, of which 9.8% is supplied as LNG. Piped gas dominates the supply chain in gas globally.”

"We see five principal dynamics that will crimp demand for LNG in China:

• The rise of renewable energy and energy efficiency are collectively crimping demand growth for gas/LNG. According to Tim Buckley from IEEFA: “China plans to invest US$360bn in new renewable energy capacity by 2020, driving new employment and technology development. A world record 33.2 gigawatts (GW) of solar was installed in 2016, double China’s then record 15GW installed in 2015, which itself was double the highest ever German record annual installs of 7.6GW achieved back in 2012. On-grid utility solar grew 34% yoy to 39TWh in 2016. In terms of wind, China installed ‘just’ 17.3GW in 2016, down from the record annual install of 29GW in 2015, again set by China. Wind generation grew 19% to 211TWh.”

• The growth of a domestic gas industry. China is rapidly expanding its Shale gas fracking industry. The US Energy Information Administration estimates that China contains the largest technically recoverable shale gas reserves in the world- 1, 115 tcf as of September 2015. In 2015 results from the industry were below expectations however 2016 production results were stronger. It is still early days for the Chinese shale gas fracking industry however reserves in China are massive and the government is focused on energy security issues.

• Global geopolitics affecting energy security issues. China is likely to want to diversify away from energy sourced from countries allied to the USA given its ambitions in the South China Seas.

• Increased Russian supply. On 21 May 2014, Gazprom and CNPC signed a US$400bn contract to supply gas from Russia via the eastern route, the Power of Siberian pipeline. The 30 year contract amount was equivalent to 28Mtpa of LNG. A second large pipeline deal was signed on 8 May 2015 - Western route (Power of Siberia-2 pipeline). Initially equivalent to 22Mtpa of LNG. These two large deals will transform the Chinese energy landscape.

• Fugitive emissions – The fugitive emissions of the CSG to LNG industry are not well known. A recent study by the Melbourne Energy Institute highlighted the knowledge gaps in current reporting methods. It could be that the industry’s emissions are far higher than claimed making imported LNG from Gladstone less attractive for the Chinese."

“The US will be an attractive source of LNG for a portion of imports notwithstanding the geo politics. The flexible nature of the Henry Hub pricing structure and the ready availability of supply will ensure that the US sends more LNG to China. The Chinese will be mindful of not becoming dependent on the US.”

Gregory PilkintonCommercial Director, Magnolia LNG  @PMCommercial

While it’s clear that the Chinese Government wants to drive a “clean energy shift”, there’s a lack of executable guidelines that require it, and the harmonious culture will make this a slow process. Companies have very little incentive to switch to cleaner energy right now. In addition, most of the utilities have seasonal demand, the regulatory system isn’t keeping up with proposed development, and the government’s delivered natural gas pricing structure to city gates is challenging… making it difficult for greenfield, financing-dependent projects to make short-term headway in China. Chinese companies feel no pressure to sign a long-term deal right now given the low oil price and their ability to source low-cost cargoes from the spot market.(Disclaimer: this is Mr. Pilkinton's opinion and not that of his company's.)

Gregory Pilkinton will speak at our LNGgc London event happening this September.

Ruth Liao, Editor, ICIS   @Icis_Ruth_Liao

"The recent announcement has been welcomed as potentially providing support for further US LNG production which could be shipped to China."

"In the next five years, China’s natural gas market will see rapid demand growth. According to ICIS China, gas consumption in China will grow by over 9% each year over the next five years and reach 338 billion cubic metres by 2021. Gas imports are expected to rise by over 14% annually, close to 150bcm."

"In China’s Five-Year Plan, environmental protection is a central fixture. But work still needs to be done to open up the Chinese LNG market. More than 30 companies, most of which are provincial pipeline companies, power generators, city-gas companies and investment corporations, have indicated interests in LNG."

Tim Boersma, Senior Research Scholar, Director of Global Natural Gas Markets, Columbia University, @TimBoersma4

"The 2016 boom in Chinese LNG imports was mainly the result of contractual shipments from Australia ramping up (a trend which will continue in the coming years) and some spot purchases to meet higher than expected seasonal demand in the winter. Most US spot cargoes were also sold in the Dec 2016-Feb 2017 period to China. The structural demand for gas in the Chinese energy sector is mainly driven by policy, namely the government's efforts to increase the share of gas in the country's energy mix (to 10% by 2020), the forced conversion of small coal-fired boilers to gas-fired ones (mainly in residential and industrial applications) and the connection of rural households to the gas distribution grid."

"Over time, gas has great growth potential in the Chinese energy system, as its penetration is very low compared to other developed economies in the power, industrial and residential/commercial sectors alike. Further deregulation of domestic gas markets in China could create additional demand for natural gas in the future. But LNG is only one way to meet this growing demand. Domestic production from the country's prolific shale gas plays has been initially disappointing, and the challenging conditions suggests that China will not see an American-style shale gas revolution anytime soon, if at all. But if domestic production ramps up meaningfully over time, then domestic gas will most likely be prioritized over imported LNG. Pipeline gas imports come from various sources, including Turkmenistan, Myanmar, and, in time, likely Russia, and most of these resources will be able to compete with LNG and / or be tied up in long-term take-or-pay contracts."

"To the extent there will be continued demand growth and China decides to meet it with LNG, US LNG can fit in the Chinese energy system in two ways. It can be in the form of spot purchases from US LNG offtakers (e.g. from Shell's portfolio) and marketing arms of terminal operators (e.g. Cheniere Marketing), as happened this winter in response to increased demand due to the cold weather. This type of demand will be somewhat unpredictable (and periodic at best), depending on when unexpected demand arises on top of China's contractual LNG supplies. The other type will be in the form of long-term offtake agreements with US LNG exporters. A recent trade agreement between the Trump administration and China reinforced the existing policy that US LNG exports under such long-term contracts will be treated as exports to any other non-free trade agreement countries. It is not impossible that Chinese buyers will sign such long-term contracts with US sellers, but it should be emphasized that China currently has fairly high contract coverage for the foreseeable future. Only faster-than-expected LNG demand growth (and sufficiently high confidence in high long-term demand) would justify signing additional contracts on top of the existing ones."

 

Sara Vakhshouri, President,  SVB Energy International  @SVakhshouri

"China LNG demand is growing rapidly  - more than was anticipated by market experts. China's LNG imports in January 2017 rose above 39% in comparison to its average imports in January 2016. It is expected that Chinese LNG imports will surpass South Korea and make this country the second largest LNG importer after Japan.
By 2020-2021 the market expects to have further LNG demand growth from China and this could offset some of the extra supply in the market, particularly from Australian and US LNG supply growth. This could also have impact on the LNG prices especially in Asia.
The growing LNG demand creates a great opportunity for US LNG industry to sign and secure long-term agreement with this country. US share of LNG exports to China in March was about 7% of this country's imports and this number could increase further in the medium and long term."

Don't miss keynote speaker Sara Vakhshouri at our LNGgc event in London this fall!

 

 

We very much look forward to hearing Sara Vakshouri, Jarl Pedersen, Howard Rogers, Vivek Chandra and several other Global experts on LNG at our LNGgc London event this September.

 

LNGgc London
LNGgc London

Share this article

Subscribe to the Gas & LNG newsletter

Upcoming event

Flame

03 - 05 May 2022, Amsterdam
Join Europe's most senior gas and LNG community and networking experience
Go to site