By Michael Lelyveld
Analysts are divided on the degree of China’s risks from its growing reliance on imports of liquefied natural gas (LNG) as threats to shipping from the Persian Gulf grow.
As the world’s largest oil importer, China already faces questions about its rising reliance on imported crude at a time of tensions in the Gulf and recent attacks on tankers near the Strait of Hormuz.
In the past decade, China’s dependence on foreign oil has climbed from 50 percent of consumption to 70 percent.
With China’s push to curb air pollution from coal, the growth of reliance on imported gas may not be far behind.
Last year, imports covered 44.5 percent of gas consumption, up from 30 percent in 2015.
Much of that import growth has come in the form of LNG, the super-cooled fuel shipped by tanker. In 2018, LNG imports of over 53 million metric tons jumped 170 percent during the same three-year period.
Despite increased gas imports from pipelines and smaller gains in domestic production, China’s LNG imports are expected to rise by another 30 percent from the equivalent of 73 billion cubic meters (2.5 trillion cubic feet) in 2018 to 95 billion cubic meters (bcm) in 2020, according to a recent report from the Oxford Institute for Energy Studies (OIES).
Russian gas supplies from the giant Power of Siberia pipeline are set to start in December, gradually reaching a peak of 38 bcm per year in 2025. But by then, China could still need to increase its annual LNG imports by 49 bcm over 2018 levels, said OIES senior visiting research fellow Stephen O’Sullivan.
The added demand for LNG could rise even further to 79 bcm per year if a second Russian pipeline from Western Siberia, known as the Altai or Power of Siberia 2 project, is not built, O’Sullivan said.
While general terms were agreed in 2014 for the difficult 30-bcm per year pipeline through the Altai mountains to Xinjiang, Russia’s Gazprom has still not settled with China on gas pricing, CEO Alexei Miller told shareholders on June 28, according to Interfax.
Growing tanker traffic
The impasse may be good news for LNG suppliers, but it could also raise tanker traffic to new highs, as well as questions about China’s energy security.
Rough calculations suggest that China would have to increase tanker imports by at least 130 cargoes annually just to meet the 2020 forecast, even using the largest class of vessels available, prompting concerns about risk, logistics, and vulnerability.
Concerns about the implications of import reliance rose last week after China’s Foreign Ministry spokesman, Geng Shuang, dismissed “rumors” of plans for sending warships into the Strait of Malacca to guard vessels through the strategic waterway for both oil and gas.
“As to sending warships to escort Chinese ships, that is nothing but rumors fabricated out of thin air,” Geng said at a press briefing.
The denial followed a Ministry of Transport notice to Chinese ships on July 2, raising the security warning in the strait to Level 3, the highest alert, according to Bloomberg News.
Lloyd’s List, a maritime intelligence news service, reported that an internal email alert from China’s Cosco Shipping had warned of planned attacks by “a certain Indonesian organization.”
Other nations on the route were reportedly wary of the Chinese warning.
The Maritime and Port Authority of Singapore said it had no information of an immediate threat, the website Porttechnology.org said.
In comments made before last week’s reported confrontation between a British-flagged tanker and armed Iranian boats in the Strait of Hormuz, analysts voiced contrasting views of the risks for LNG supplies and the impact of recent attacks on routes from the Gulf.
“In theory, an extended conflict along the lines of the so-called tanker war of the 1980s could have a serious impact on the LNG trade,” wrote Bloomberg columnist Liam Denning, noting that 26 percent of the world’s LNG cargoes pass through the Strait of Hormuz.
Although China has imported LNG from 25 countries, according to officials at a Shanghai conference in April, its decision to slap a 10-percent retaliatory tariff on LNG from the United States last September could deprive it of a key alternative to Qatari supplies from the Gulf.
“This effectively closes off an important avenue for China to diversify its LNG imports, the primary means of managing increasing import dependency,” said Denning.
“This changing environment could chill China’s appetite for more LNG cargoes — and that could reshape the energy outlook in multiple dimensions,” Denning said. Reactions could include “dialing back reliance on gas in general,” he said.
But Reuters columnist Clyde Russell noted that the temporary price hikes for LNG were milder than those for crude oil following tanker attacks on June 13.
“In some ways, this could be viewed as surprising as LNG is actually more exposed to the threat of closure of the Strait of Hormuz,” Russell said.
One possible explanation is that Qatar sells LNG primarily under long-term contract rather than on the spot market. LNG trading also attracts fewer headline-driven speculators than crude oil.
The smaller price spike for LNG “perhaps offers a more reasonable assessment of the risks,” Russell said.
“While LNG traders are aware of the risks surrounding an escalation of conflict around the Strait, they are also aware that as the situation stands right now, the chances of the vital passage being blocked are small,” he said.
‘Enough LNG import capacity’
In his OIES report, O’Sullivan indicated that a major question for China in dealing with the coming surge in LNG demand is whether there will be enough import terminals and regasification facilities to turn the fuel back into pipeline supplies.
China now has 21 receiving terminals with total annual capacity of 67 million tons, the equivalent of 91 bcm, Reuters reported in March. Three new terminals with combined capacity of 10 million tons were opened last year.
The country could need 119 bcm of import capacity by 2025, O’Sullivan said. Current regasification capacity is estimated as 97 bcm with the addition of 30 bcm expected in 2020-2021, he said.
“Having looked at the numbers, I think China will have enough LNG import capacity … to meet its import needs,” O’Sullivan said by email.
O’Sullivan also thinks there will be enough tankers to meet the surge in demand.
“Just like LNG export projects, tanker owners respond to the market. If long-term demand and prices look set to rise, they will build ships to meet that demand,” he said.
But O’Sullivan suggested that energy security may be a bigger worry for China’s LNG imports now than it appeared to be for oil imports in the past.
“That didn’t seem to be a problem for their oil dependency, but the international situation has changed since then and now it may not be so acceptable to Beijing to be so dependent on gas imports by sea,” he said.