By Michael Lelyveld
After years of spectacular growth, cracks may be forming in China’s demand for natural gas as the economic slowdown starts to drag on long-range forecasts.
While the outlook for growth is still strong, a string of projections suggests that the boom of double-digit increases in gas consumption may be turned down a notch due to a combination of economic factors and competition from other fuels.
Slower growth could have consequences for investment in gas exploration, development, networks, and infrastructure, both for imports by pipeline and tanker-borne liquefied natural gas (LNG).
Growth rates are already expected to slip to 10 percent this year from 18.1 percent in 2018 and 15.3 percent in 2017, according to a recent forecast from Sinopec Gas Co., a subsidiary of state-owned China Petroleum & Chemical Corp. (Sinopec).
The 2019 outlook for demand of 307 billion cubic meters (10.8 trillion cubic feet) nearly matches an earlier forecast from Sinopec’s larger rival China National Petroleum Corp. (CNPC), according to naturalgasworld.com.
“Due to the macroeconomic situation and the government’s easing (of its) push to the coal-to-gas program, China’s gas consumption growth is slowing,” said Sinopec Gas in prepared remarks by its deputy chief economist, Wu Gangqiang, Reuters reported.
Although the increase in consumption from 280.3 billion cubic meters (bcm) in 2018 will still be substantial, the weaker growth forecast seems to reflect the government’s priorities with slower economic expansion and the effects of its trade war with the United States.
In a sign of weakening, gas imports in October fell 10.6 percent from a year earlier, marking the first monthly decline since November 2016, Reuters reported.
The Sinopec statement suggests that China’s national oil companies (NOCs) are feeling less pressure from the government on fuel-switching programs to replace coal with cleaner but more costly electricity and gas.
The government’s abrupt order to ban coal-fired heating in northern cities during the winter of 2017-2018 touched off the gas boom and spurred the high double-digit growth rates of the past two years.
But with economic growth falling to a 27-year low of 6 percent in the third quarter, the government is pursuing cuts in corporate taxes and other costs, putting more aggressive fuel-switching on hold.
Burden on consumers
Philip Andrews-Speed, senior principal fellow at the University of Singapore’s Energy Studies Institute, noted “the high price of gas compared to coal and the consequent burden on consumers during an economically and politically testing time.”
Consumers have already struggled with a doubling of pork prices in the past year, making it a bad time to be digging deeper for fuel.
Andrews-Speed also cited “the risk of boosting gas too fast at the expense of coal and the coal industry,” despite the pollution and climate concerns.
A marked lag in import demand last month has been met with warnings that market prices for gas may weaken as well.
“Economic risks, combined with unsupportive weather in the north, has been weighing on import demand into China and putting prices at risk,” S&P Global Platts energy news said on Oct. 29.
Under current conditions, the big spike in demand from the government’s 2017 conversion order seems unlikely to be repeated among industrial and commercial users.
“Demand in this sector has surged on the coal-to-gas switch, which is now slowing due to supply constraints and the slowing economy, but the coal-to-gas switch was always going to be a one-off event,” said Michal Meidan, director of the China Energy Program at the Oxford Institute for Energy Studies.
The government has yet to acknowledge any easing of pressure for fuel-switching or air quality improvements.
Switch from coal
Last month, the official Xinhua news agency reported that northern Hebei province bordering Beijing would switch 2.2 million households from coal-fired heating to gas and other cleaner fuels this winter. Five million homes in the province have already been converted, the Ministry of Ecology and Environment said.
But increased coal consumption this year also seems likely. Raw coal production rose 4.5 percent from a year earlier in the first nine months to 2.74 billion metric tons, Xinhua said.
The website of Britain’s The Times cited Premier Li Keqiang’s call for “the safe, clean extraction of coal and development of clean and efficient coal.” So far this year, the government has approved 40 new “modernized” mines with combined capacity of 196 million tons, Reuters reported.
Coal accounted for 59 percent of China’s primary energy sources last year, while gas contributed less than 8 percent. Coal consumption rose 3 percent to 3.82 billion tons in 2018, Reuters said, citing official data.
This year’s lower growth rate for gas may already be a factor in longer-term forecasts.
The recent Sinopec projection calls for demand of 510 bcm in 2030, for example, an impressive 82-percent increase over 2018.
Expectations higher last year
But a review of earlier forecasts found that the expectations for 2030 were considerably higher last year.
The Energy Research Institute of the National Development and Reform Commission (NDRC), the nation’s top planning agency, estimated 2030 demand at 580-670 bcm.
A lower forecast by the Paris-based International Energy Agency (IEA) put 2030 demand at 559 bcm, but that was still nearly 10 percent above the Sinopec outlook.
CNPC’s Economic and Technical Research Institute predicted demand in 2030 would reach 535 bcm.
The narrowing of growth rates comes as gas producers converge on China with new pipelines and LNG exports, competing to supply what is still likely to be the largest gas importer in the world.
China is preparing for next month’s launch of supplies from Russia’s giant Power of Siberia gas pipeline, which may reach maximum capacity of 38 bcm per year sometime after 2023.
Cuts to imports, assets
At the same time, China’s NOCs have invested heavily in 22 LNG import terminals along with associated storage facilities and pipelines, expecting to displace Japan as the world’s leading LNG buyer.
Reduced long-term growth rates may still be historically high, but they could also cut into the utilization of import infrastructure and assets over time.
China’s LNG imports rose 17.6 percent from a year earlier in the first eight months of this year, the South China Morning Post reported, citing customs data.
While this year’s pace remains strong, it has dropped sharply from the 40.9-percent surge recorded in 2018. The Morning Post cited a Morgan Stanley forecast calling for average annual growth of 10.9 percent through 2025.
The Sinopec forecast suggests that average annual demand growth rates will fall to around 4-5 percent in 2020-2030, Meidan said, adding that the estimate may still be conservative.
Even so, such a decline in China’s growth could catch big investors by surprise.
“The outlook is certainly not bearish, but if markets have factored in 15-16 percent year-on-year growth rates indefinitely, based on growth rates in 2017-2018, then they are in for a rude awakening,” Meidan said.
China has largely missed out on historically low LNG spot prices because much of its import volume is tied to long-term contracts negotiated at higher rates, S&P Global Platts said.
In a slower-growing economy, the costs may work against faster LNG growth in competition with other fuels. Only 5 percent of China’s LNG contract commitments will expire in the next five years, according to Platts.
Growth in gas imports seen
Russian pipeline gas may also start to drive some of the higher-priced LNG away in the coming year, Platts reported separately.
“The growth of China’s LNG imports is expected to be affected,” a source at one of China’s major city gas suppliers was quoted as saying. Another Chinese LNG importer may turn into a reseller of inbound cargoes, the report said.
“You might see us in the market this winter, perhaps not to buy, but to sell,” the importer said.
The combination of economic cooling, demand and price pressures could be complicated for both China and Russia, which is shipping gas from its arctic Yamal LNG project, in which China holds shares.
Chinese NOCs have also agreed to take a 20-percent stake in Russia’s Arctic LNG 2 project, which is expected to start supplies in 2023.
President Vladimir Putin has repeatedly stressed the importance of preventing competition between Russia’s pipeline gas and its LNG exports, although it is unclear how it will be avoided.
Last month, the Energy Information Administration (EIA) of the U.S. Department of Energy added to the debate over demand growth and LNG imports with a forecast that gas consumption in Asia will continue to outpace supply through 2050, despite the current signs of oversupply.
The forecast relies largely on projected gas use in China’s power sector and displacement of coal to improve air quality. Gas consumption for power generation is expected to increase fourfold by 2050, the EIA said.
In July, the U.S.-based environmental research group Global Energy Monitor warned in a report that U.S. $1.3 trillion (9.2 trillion yuan) in worldwide investment for LNG infrastructure and development could fail to recover its costs, becoming “stranded assets” as the competitive cost of renewable energy sources comes down.
The report argued that “a sensible approach to the question of LNG terminal expansion would be a moratorium on further construction.”