Does LNG Have a China Problem?
November 14, 2019
In the first nine months of 2019, China’s liquefied natural gas (LNG) imports rose by 17 percent. In today’s market environment, that growth rate is seen as bearish, underscoring the extent to which the global LNG market has come to rely on China to soak up excess supply.
In just three years, from 2016 to 2018, global LNG supply rose by an unprecedented 28 percent, with China absorbing half of that new supply. China’s LNG imports, which had grown slowly in the early 2010s, almost tripled between 2015 and 2018. Unlike other countries, LNG grew alongside domestic production and piped imports—in fact, from 2015 to 2018, local production grew more than imports did (88 billion cubic meters, or bcm, versus 62 bcm). But through September 2019, the weight of different supply options has changed: pipeline imports have not grown at all, while domestic production has grown by 10 percent. One way to look at the reduction in LNG imports is to see domestic gas displacing gas imports.
But the more fundamental dynamic is gas competing with other fuels. From 2015 to 2018, 80 percent of the growth in Chinese gas demand came from fuel switching—i.e. gas displacing other fuels. This switching is driven by policy and remains partly subsidized. PetroChina, for instance, continues to report losses on its pipeline and LNG imports, as prices for imported gas are still high. For example, in the first nine months of 2019, the average price of LNG was $9.80 per million British thermal unit and $7.30 for pipeline gas.
In short, this is the problem for LNG: Chinese growth is indispensable, but LNG in China is up against both domestic gas and pipeline imports. LNG is also competing against other energy sources, and it is so expensive that the country’s largest importer loses money selling the fuel. At some point, something in this equation will break—and how this dynamic plays out will have profound consequences for global LNG markets.