LNG: A Growing Factor In Oil Demand Destruction

The global population of plug-in electric vehicles (PHEVs) is expected to reach 8.5 million by the end of 2019, according to EV Volumes, with an addition of 3.1 million passenger and light commercial vehicles (LCVs) this year, an increase of 57%.

This is a slower pace of growth than the 64% seen in 2017, reflecting an overall weaker Chinese car market, where sales of passenger cars have declined for 10 months in a row, although PHEVs continue to outperform. PHEVs made up 4.3% of all new passenger car and LCV sales in China last year and the China Passenger Car Association forecasts sales of 1.7 million units this year.

Heavy-duty EVs

EV Volumes put the number of medium and heavy-duty EVs (HDEVs) on the world’s roads in 2018 at 600,000, an increase of 120,000 from 2017. They expect the fleet to grow by 140,000 over 2019 to 740,000. Most of these vehicles are urban and suburban buses, with the remainder being mainly garbage trucks, road sweepers and other municipal vehicles.

In terms of displaced oil demand, HDEVs remain more significant than LDEVs because they are used much more intensively and replace vehicles with much lower fuel efficiency, but this looks set to change.

At end-2018, global EV oil demand displacement was about 272,000 b/d, of which about 60% could be attributed to HDEVs. The growth pattern for HDEVs shows a sharper decline than LDVs from a very short exponential period above 200% in 2016 to 55% in 2017, 25% in 2018 and a forecast 23% in 2019.

While LDEVs are displaying ‘s-curve’ growth, HDEVS are not. The reason is that while LDEVs compete across the global LDV market, HDEVs currently compete only within a very small segment of the overall HDV market – urban and suburban buses (i.e. not coaches) and some municipal vehicles.

There is also a geographical constraint as the vast majority of HDEVs are made, sold and used in China. China also predominates in LDEVs, but by no means to the same extent. China hosts just over half of the world LDEVs, but more than 95% of the world’s HDEVs.

According to Interact Analysis, the Chinese electric city bus market is close to saturation, while export markets offer neither the same level of state support nor the market scale of China’s huge and numerous metropolises.

Based on EV volumes’ forecasts, EV oil displacement by end-2019 will rise globally to about 372,000 b/d, of which a declining share - 54% - will be accounted for by HDEVs.

LNG as transport fuel

Estimates of Chinese LNG-fuelled truck numbers vary and are reported inconsistently, but the fleet appears to have numbered around 220,000-240,000 in 2017. Production of large LNG trucks in 2017 reached 96,000, up from 19,600 in 2016, according to a report by Zheshang Securities cited by official Chinese media channel Xinhua.

Data from China’s CVWorld shows LNG truck sales in 2018 below those in 2017 for the first 10 months, rising to a record monthly peak of 14,000 in November 2018 before falling to 8,000 in December. CVWorld reports strong year-on-year sales in first-quarter 2019 of 4,500 in January, rising to a forecast 9,000 in March, which would put LNG truck sales on a trajectory towards 70,000 this year, which CVWorld says would be a record.

The discrepancy probably reflects the inclusion of different sizes of truck in different data sets and only partial counting – for example of sales from only the largest manufacturers. A rough estimate would be that China’s LNG truck fleet numbers just over 300,000, but with production capacity of around 100,000 units a year.

The big difference, however, between LNG-fuelled trucks and HDEVs is that LNG can compete with diesel in a much wider and larger market. While HDEVs are limited by current technology to short ranges on clearly defined routes, LNG-fuelled trucks include long-distance haulage trucks, dump trucks, cement mixers and municipal vehicles. Moreover, while China’s passenger car market is in the doldrums, the country’s HDV manufacturers reported record sales in March.

LNG drivers

The strong start to LNG-truck sales in 2019 reflects a widening differential between LNG and diesel prices and a drop in road freight rates pushing haulage firms more actively to pursue reductions in running costs. Given an oversupplied LNG market globally and the prospect of diesel shortages as a result of IMO 2020, the LNG-to-diesel spread looks positive for LNG-fuelled truck sales at a time when China has ramped up its capacity to build them.

Import capacity is unlikely to be a constraint. China continues to build new LNG terminals and moving LNG by truck increases import capacity as the LNG does not need to be regasified. Pressure on LNG import capacity should also ease in 2020 as the Power of Siberia pipeline comes into operation.

In addition, there is significant regulatory push. Local governments are actively buying clean energy vehicles for municipal use, which for many applications means NGVs rather than HDEVS. This is being driven by the national ‘Three-Year Action Plan for Winning the Blue Sky Defence War’.

Moreover, measures were introduced in January to phase out 1 million older diesel trucks. These are expected to be replaced not by HDEVs, but by more efficient diesel engines and LNG trucks. China also has ambitious plans for the conversion of its inland waterway fleet to LNG, a prospect which again will be advantaged by the LNG-to-diesel spread.

Sales of Chinese LNG-fuelled trucks may take a hit in second-half 2019 as new HDV emissions standards push up their capital cost, but the scope and conditions for the expansion of LNG as a heavy-duty transport fuel look much better than for HDEVs based on current battery technology.

Power demand impact

China will also be affected by the other side of the oil demand displacement coin – rising electricity consumption. Here the country’s estimated 200 million e-bikes will also have an impact.

Globally, the fleet of EVs required an estimated 55 TWh of electricity in 2018 and will require roughly 72 TWh by end-2019. This remains an insignificant fraction of global electricity generation (0.28% of 2017 levels), but for China rising EV electricity demand is nearing 1% of total power consumption.

Given that China’s electricity system remains dominated by coal-fired generation, its transportation policies may start to edge up coal-fired power plant utilisation with unwelcome effects on local air pollution and national carbon emissions. LNG use in transportation – until such time as e-trucking becomes economically viable – would sustain improvements in local air pollution and reduce the pressure to use polluting power generation assets.