China's push for cleaner air and its environmental reforms have impacted various sectors including the gas industry. To lower its carbon footprint, China is actively working to eradicate or at least reduce its usage of coal and supplement the gap with natural gas. Chinese officials have already started implementing policies to transition away from coal-fired electricity, and efforts are on to convert residential households that rely on coal-based heating in winter to move to natural gas-fired boilers. This push — which is leading to millions of households and thousands of industry users transitioning from coal to gas — is resulting in an unparalleled increase in demand for the natural gas. This trend began some six months ago.
Why China Needs to Import Gas
On paper, China can produce enough natural gas to fulfill its own needs and possibly serve other nations as well. China has the world’s largest reserve of shale natural gas in its three largest gas basins — the Ordos in Northern China, the Tarim in the Xinjiang region in the West and Sichuan in the Southwest. However, each of these reserves is plagued with either a geological or technological difficulty, which forces China to look for foreign sources to achieve its environmental goals. China, which imported almost 40 percent of its annual requirement in 2017, is expected to further increase its import volumes, and is poised to surpass Japan as the largest importer after overtaking South Korea for the second position in 2017.
Chinese imports of natural gas have already spiked, with LNG imports increasing by about 46 percent on a year-on-year basis. The LNG imports for the first two months of 2018 were assessed at about 9 million tonnes, a significant rise from the previous year. The spot prices in the Chinese market reached a high in late December, when the demand peaked. U.S. LNG exports to China increased significantly last year — from 0.5 Bcf/day in 2016 to 1.94 Bcf/day in 2017. The volume of exports is expected to rise further in the coming quarters as China begins talks with most of its 26 partner nations. The expected pipeline from Russia, increased LNG cargoes from the U.S. and the first long-term contract of CNPC with Chernie facilities all indicate China’s strategy toward the environment and China’s criticality as an export destination going forward. The key question to be answered though is, what will be the impact on the U.S., which is the biggest producer and supplier?
Impact on the U.S. Market
Beijing’s move to leverage imports to complement the reform gap has translated into bullish voices for the U.S.’ LNG exports. There are already talks of more joint investments into long-term infrastructure such as floating terminals. Chinese enterprises already have a minority stake in some U.S. energy companies, and this is expected to increase further over the coming years. The major upside for the U.S. will be the reduction in the trade deficit with China along with the capability to challenge Qatar and Australia as a global export leader.
However, there are certain constraints that can act as a barrier — China’s storage capacity, which is as low as 5 percent of their total consumption, and increased Russian supply, which is expected to commence in 2019. The major issue though is the cost of U.S. shipments, which are estimated to be at about $8.65/thousand cubic feet, higher than most of China’s trade partners except Myanmar and Qatar. When transporting to Shanghai, tankers from the U.S. Gulf coast take 10 additional days when compared to Qatar, and 15 days when compared to tankers coming in from Western Australia.
Although there are some strong upsides, there is a greater need to assess the downside potentials/factors for the U.S. If more attention is given to exports to the East, the higher international demand might lead to an upward push in the domestic prices and Chinese demand might act as the major driver. There is also a chance that such a price rise might undermine the low input cost advantages for domestic industries that utilize natural gas as a major raw material.
The U.S.’ focus is switching from competing with China in the energy technology sector, as Trump’s administration is reducing funds directed toward clean energy R&D by approximately 70 percent, a cause of concern in the long run. The U.S. might also lose out to other gas majors on the technology innovation front, as the funds would be pushed toward the development of fixed import and export terminals, and not invested in enhancements such as floating liquefaction units, automation, etc.
It will be interesting to see what happens in the near future, and what the repercussions are in the international market with regard to China’s hunger for clean air and environmental reforms.