CRACKS are appearing in the bullish picture for liquefied natural gas (LNG) demand in China.
Global majors such as Shell and TotalEnergies have invested billions of US dollars in new seaborne gas supply, wagering that consumption in the world’s biggest importer will continue to expand rapidly. That long-held view hinges on China using ever more of the cleaner-burning fuel as a bridge between dirty coal and renewable energy that will deliver net zero by 2060.
But the realities on the ground are changing. China looks like it’s ahead of schedule on emissions, which may have peaked more than half a decade ahead of its 2030 target. It’s also subsidising overcapacity in coal power as a backstop to intermittent wind and solar, a strategy that essentially skips using gas as a transitional fuel.
Beijing is also developing other sources of gas. It’s raising domestic production and relying more heavily on pipeline supplies, particularly from its strategic partner Russia, which are much cheaper than seaborne shipments.
“Gas demand growth is on a downward trajectory due to the lack of economic competitiveness and a strong government push,” said BloombergNEF analyst Daniela Li.
The government’s wavering support was evident in the latest ruling from its economic planning agency, which placed new constraints on the fuel’s role in the power supply, including the flagship policy of switching from coal to gas in rural areas.
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Siberian power
If it gets off the ground, Russia’s proposed pipeline, the Power of Siberia 2, would help reduce China’s additional LNG requirements through 2030 by nearly 20 per cent, according to BNEF. Even though China has invested a lot in terminals to receive LNG, relying on the uncertainties of the international market for supply is probably a less attractive option for a government that has energy security as one of its top priorities.
Chinese buyers reined in their appetite last month when international gas prices climbed. After surging 32 per cent in April, import growth slipped heavily to just 3.4 per cent in May. Imports via pipeline rose 13 per cent. Although just one month, the data illustrates how a burgeoning menu of alternative fuel sources are likely to eat into demand when overseas LNG gets too pricey.
China’s LNG imports may rise 13 to 14 per cent this year, according to Rystad Energy analyst Xiong Wei. That’s less than the 18 per cent growth seen three years ago, when China overtook Japan as the world’s top buyer and before Russia’s invasion of Ukraine caused prices to spike and imports to fall.
“We expect China’s growth to continue to outpace other countries, but the increase won’t get back to 2021’s level,” she said.
Low base
A double-digit increase may seem like a lot, but gas is coming from a low base. The fuel accounts for just over 4 per cent of the nation’s installed power capacity, and investments in much larger sectors such as clean energy and coal are likely to hamper its ability to take a greater share.
China’s thermal power investment, primarily in new coal plants, climbed 15 per cent last year, even as usage is shrinking. In May, the country saw electricity generation from hydroelectric dams and solar farms jump 39 per cent and 29 per cent respectively.
LNG terminal capacity, meanwhile, is expanding faster than demand and is expected to almost double from current levels to 251 million tonnes a year by the end of the decade, according to BNEF.
That will inevitably lead to lower utilisation rates, which could drop to just 38 per cent by 2030, according to China National Offshore Oil, the country’s biggest LNG importer.
Buyers, including Cnooc and PetroChina, are signing decades-spanning contracts to import LNG. But it is not guaranteed those supplies will end up in China, as the companies expand trading desks to allow them to resell the fuel in Asia and Europe. BLOOMBERG
