How will China’s LNG demand affect the global market?
China has pledged to curb its air pollution that is now affecting 37% of the country’s population. The main objective is to switch to cleaner fuels such as LNG to replace the highly polluting coal. Over the next two decades, China plans to increase its LNG import capacity by nearly fourfold to reach its clean air targets since right now only around 7% of the country’s energy comes from natural gas. What opportunities or challenges could this LNG demand boost pose for the global economy?
Imports of gas, both by pipeline and LNG, are expected to grow following the record highs in 2018 in an effort to replace coal with natural gas for heating in China. In 2018 natural gas imports saw a nearly 32% rise, reaching a total of 90.39 million tons. Russia is planning to cash in on this demand. Starting with the completion of Power of Siberia gas pipeline in December 2019 and by expanding its LNG export capacity and building storage hubs closer to the Asian market.
In December, Russia’s biggest LNG producer Novatek signed an agreement with Japan’s Saibu Gas to enter the end-customer market in the Asia-Pacific region by using the Hibiki LNG terminal in Japan. The company also expects to reach a final investment decision for the Arctic LNG 2 project this year along with plans to supplement the Yamal LNG supply with gas from Sakhalin. LNG deliveries from the Arctic region to China could also see a boost with the construction of the Kamchatka transshipment complex that is close to the Asian markets.
China is Australia’s second largest destination for coal exports. Could this relationship falter now that China is moving away from coal and plans to diversify its energy mix by including at least 10% gas by 2020? While coal is still very much in play in the Asian country and Australian high-quality product seems to be a cleaner alternative to the locally mined coal with a higher ash and sulphur concentration, the predictions for future demand are dire.
According to a study by the Institute for Energy Economics and Financial Analysis (IEEFA), the overall global demand for thermal coal will drop 28% by 2025 and specifically in China it will fall 57% by 2040. The import restrictions have already been felt as Chinese authorities have stopped all imports of coal from across the globe at the end of 2018 to protect the interests of domestic producers. In 2019, the local production in China is projected to rise by around 100 million tonnes, signalling the further decline of imports.
US Trade War
It would be advantageous for the US to follow Russia and find a way to benefit from China’s rising LNG demand as it was the third biggest buyer of US LNG in 2017. However, the ongoing trade dispute between the two countries is a considerable barrier. The tariffs on US cargoes that went into effect in September 2018 have made their mark. In the last six months of the previous year, only six LNG vessels went from the United States to China, Reuters reports, while during the same period in 2017 there were 25.
While there is optimism that a new trade agreement could stabilise the situation, time might be running out. There are plenty of other countries ready to fill the gap and supply China with the much-desired fuel. On the other hand, China’s plans to quadruple LNG imports might mean that there will be a wealth of opportunities for all suppliers, US included.
What do LNG producers have to say on the subject? Ask them yourself by joining executives from leading industry companies at the Gas & LNG Summit in Calgary, Canada on November 5th. Experts and professionals from across the value chain will gather there for two days of discussions, networking and more. For additional information visit www.gaslngcanada.com.