Ever since China overtook South Korea as the world’s second-largest importer of LNG last year, traders have been keeping a very close eye on any development that might suggest whether this year will see a repeat of the 46-percent surge in LNG imports that the country experienced in 2017.
Bloomberg analysts Michael Filatov and Mark Rossano seem to share the opinion that one critical factor for such a repeat would be the speed at which China can build LNG storage facilities. Another will be the rate of energy reforms aiming to cut the country’s reliance on coal in favor of gas. The likelihood of another 46-percent jump in imports, based on these factors, is limited.
China has plans in place to expand its underground gas storage capacity to 15 billion cu m by 2020 and raise this further to more than 30 billion cu m until 2030. But these are long-term plans. Right now, China lacks sufficient capacity to buy and store LNG during the summer, when demand is the weakest and prices the lowest, and use the LNG in the winter, during peak demand as the fuel is mainly used for heating and industrial activity.
Energy Aspects’ forecast is that the growth of LNG imports to China this year will slow down to 25 percent from last year, which is a substantial decline. Part of the reason for that decline is the lack of adequate storage capacity. Also, after the initial strong push away from coal and into LNG and natural gas, we could see a slowdown prompted by a shift to a more measured step of the reform. Last December, several million households in northern China suffered heating shortages because of the too-fast switch to gas and insufficient supplies and infrastructure.
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Over the longer term, things are looking good for LNG producers. Bloomberg Intelligence has forecast that the country’s LNG demand will soar from 38.1 million metric tons last year to more than double that in 2026 and over 82 million tons in 2030.
No wonder, then, that Total and Exxon are investing $6 billion in the capacity expansion of their joint LNG project in Papua New Guinea. Meanwhile, Cheniere Energy bagged the first long-term contract for shipments of U.S. LNG to China. The 25-year deal will likely spur more producers into China-focused action now that the U.S. company has demonstrated that Chinese buyers don’t necessarily insist on short-term commitments.
Production capacity is growing everywhere from Australia to Russia’s Arctic. This could depress prices, stimulating more import appetite in China, and this, in turn, would lead to sharper price swings that traders need to brace themselves for, as Reuters’ Clyde Russell noted in a recent column.
In the 2016/2017 winter, Russell recalls, China’s LNG imports hit a peak of 3.73 million tones in December and then slid to a low of 1.99 million tons in March. But last winter saw a record amount of gas imports, with LNG imports hitting 5 million tons in December 2017. The fall from this high could be sharper later this year, Russell warns, as heating demand wanes. This fall would be all the sharper if demand growth indeed slows down as China rushes to build storage capacity.
By Irina Slav for Oilprice.com
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Fortunately Gazprom's Power of Siberia pipeline is more than two-thirds complete. It will be delivering gas to China by the end of this year. A second pipeline is still under discussion.