ISSN 2330-717X

China Pushes LNG Imports To The Limit – Analysis


By Michael Lelyveld

China is importing record volumes of liquefied natural gas (LNG) to meet its air quality targets and may have no alternative for the next several years, experts say.

In November, China’s LNG imports soared 48.5 percent from a year earlier to 5.99 million metric tons, according to customs figures. In the 11-month period, imports of 47.52 million tons climbed 43.6 percent from a year before, the official Xinhua news agency said.

Total natural gas imports, including both pipeline gas and LNG, rose 31.9 percent to a record of 90.39 million tons last year, the General Administration of Customs said Monday.

Last year marked the second in a row of LNG growth rates of over 40 percent as the government presses ahead with its wintertime fuel-switching policy to reduce heating with high- polluting coal.

Despite higher costs and infrastructure problems, the government has shown determination to pursue the gas policy as the gap between domestic production and consumption grows.

In November, China’s gas output jumped 10.1 percent from a year earlier, but the daily consumption rate also rose to a new record on Nov. 21, Reuters reported, citing the National Development and Reform Commission (NDRC).

A detailed study released last month by the Oxford Institute for Energy Studies suggests that China faces a critical period between now and 2020 with implications for the international LNG market, depending on how far the government pushes its fuel-switching campaign.

Total natural gas consumption in 2020 will range between 300 billion and 400 billion cubic meters (10.6 trillion and 14.1 trillion cubic feet), based on minimum and maximum estimates of coal-to-gas switching, said the study by senior researchers and analysts at Osaka Gas Co., Ltd. of Japan.

Central Asian pipeline network

Domestic gas production is likely to contribute 180 billion to 200 billion cubic meters (bcm), or anywhere from 45 to 67 percent of consumption. In the first 11 months of 2018, China’s gas output inched up 6.6 percent from a year earlier to 143.8 bcm, Reuters said, citing National Bureau of Statistics (NBS) data.

China can fill some of the gap with imports of pipeline gas, but capacity and supplies will be limited, the study said.

The country’s major Central Asian pipeline network from Turkmenistan through Uzbekistan and Kazakhstan is nearing its rated capacity of 55 bcm per year. Efforts are planned to boost the volume to 65 bcm with new compressor stations, but progress on building a fourth strand of the system through Tajikistan appears stalled.

Last year, the Central Asian system increased supplies by 21 percent to 46.9 bcm, according to state-owned Turkmengaz, as reported by Azerbaijan’s Trend News Agency.

Another import pipeline through Myanmar is expected to deliver only modest volumes to China in 2020, estimated at 4 bcm, despite its 10-bcm capacity.

And Russia’s mammoth Power of Siberia gas pipeline project, scheduled to open next December, will supply China with only 6 bcm in 2020, the analysts said. By then, the total of pipeline gas available to China will reach only 55- 65 bcm, they said.

The rest of China’s demand will have to be filled by LNG imports, although the conclusions are subject to a host of variables.

Last year, China overtook South Korea to become the world’s second-largest LNG importer, surpassed only by Japan.

According to the study, China had 19 receiving terminals for the tanker-borne fuel with an annual capacity of about 59.6 million tons as of last August. The volume is the equivalent of about 81 bcm.

By 2020, new terminals and other infrastructure could raise LNG import capacity to as much as 70 million tons, or about 95 bcm.

‘Virtually impossible to meet projected demand’

Although some of China’s terminals have already operated at more than 100 percent of their rated capacity, the study concludes that “it will be virtually impossible to meet projected demand” if China sticks to its maximum target for switching from coal to gas.

Capacity constraints will also keep China from meeting its 2020 target for raising the natural gas share of its primary energy supply to 10 percent, the study said. Gas is believed to account for about 6 percent of the country’s energy mix now.

The authors also see implications for LNG demand beyond 2020 if Russia’s plans for larger volumes of pipeline gas are delayed.

The study said that “LNG demand will depend above all on steady growth in natural gas imports from Russia from 2020 onward. If imports from Russia grow steadily, this makes it more likely that LNG imports will slow from 2020. Conversely, if natural gas imports from Russia do not, for some reason, grow as planned, dependence on LNG will increase further.”

The conclusions suggest that China may have to pursue more moderate targets or build even more LNG infrastructure to avoid excessive reliance on Russian supplies.

Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, said the report highlights both pluses and minuses for China as gas demand rises at astronomical rates.

On the plus side, the finding that eastern LNG import terminals were able to operate at over 100 percent of rated capacity suggests there may be elasticity in the system, said Herberg.

On the downside, the average 82-percent utilization rate of all terminals as of mid 2018 is a sign that the system will be running “pretty close to flat out” with the larger volumes expected in 2020, he said.

Although the international LNG market is expected to be well supplied over the next two years, any glitch in China’s system could lead to sudden shortages.

“It’s still a pretty rickety LNG and gas supply logistics system bumping up against stunning increases in LNG use,” Herberg said by email.

“Lots can go wrong, especially if there’s a very cold winter in 2019 or 2020,” he said. “The system will be running so tight that things will get very difficult, and serious regional supply shortages would inevitably occur.”

‘Industry and market indigestion’

Vessel traffic at China’s receiving terminals is likely to become intense if current growth rates continue.

The study noted that in December 2017, the NDRC issued emergency measures in response to gas shortages, ordering 39 LNG cargoes in addition to the 248 that had already been planned for the winter season.

The potential for disruption came into focus over the weekend after a liquefied petroleum gas (LPG) carrier leaked gas into the water near Dongying port in east China’s Shandong province, Xinhua reported.

The incident on Saturday due to a valve malfunction on a South Korean-registered tanker is being monitored for environmental impacts, Xinhua and China Global Television Network (CGTN) said.

Ships have been warned to avoid the area. Xinhua reported Monday that the leak had been stopped.

Other reports have raised questions about the availability of LNG carriers (LNGCs) to respond to high demand growth and winter emergencies.

According to the latest count by the Paris-based International Energy Agency (IEA), the world fleet of LNGCs consisted of only 467 tankers in mid-2018.

The low rate of orders for new vessels suggests that China’s demand growth could exceed fleet capacity.

“Considering that LNGC construction takes between two and three years, fleet capacity is expected to remain almost flat in 2020 (and possibly 2022) unless new orders are placed in the coming months,” the IEA said in its October report.

Some of those concerns may have been eased by a rush of new orders late in the year, a report last month by said.

But the lengthening list of potential problems suggests that China has entered a high-risk period as it strives to meet its air quality and energy goals.

“Any country trying to raise LNG imports at the pace and scale of China over the past few years would experience monumental ‘industry and market indigestion,'” said Herberg.

China’s soaring demand for LNG has already played havoc with shipping costs, affecting the entire Asian market.

Spot charter rates for LNG carriers in November rose fivefold since May to U.S. $190,000 (1.3 million yuan) per day, Japan’s Nikkei Asian review reported on Jan. 2.

“We did not expect that we would run short of vessels so quickly,” an unidentified official at a major Japanese shipping company was quoted as saying.

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