China, the world’s top importer of natural gas and second-largest buyer of liquified natural gas (LNG), just announced plans to increase its intake capacity of the seaborne fuel four-fold over the next two decades.
Burgeoning demand for natural gas in the People’s Republic is driven by a number of factors, not least of which is the country’s still impressive economic growth. But popular demand for better air quality has spurred an aggressive national ‘fuel-switching’ policy, which favors cleaner burning gas over ‘king coal’ in China’s power sector. Roughly 7 percent of China’s energy comes from natural gas (up from 0.5 percent in 2010). That’s low. Compare that to 55 percent for dirty coal.
Coal’s dominance of the power sector means that Chinese urban areas suffer from chronic air quality issues, ranging from ‘moderate’ danger in Beijing to “hazardous” in cities like Shanghai, according to official measurements. China’s latest five-year plan requires cities to meet ‘good’ or ‘excellent’ air quality standards by 2020. Renewable energy is rightly being incorporated into the fule-mix to achieve this goal, but solar and wind alone are not sufficient to meet rising energy demand.
That means using more natural gas.
The initiative is having a noticeable impact on China’s energy sector: as of November, Chinese LNG imports are up by a whopping 43 percent year-over-year. Total gas imports have grown by nearly one-third in the same period.
To accommodate this growing influx of seaborne gas, China is expanding its LNG intake and distribution infrastructure. According to a Ministry of Transport proposal, plans are in the works to quadruple the country’s import capacity within the next two decades from 19 terminals at 2,860 billion cubic feet (bcf) per year to 34 terminals at over 11,000 bcf per year.
Some of that gas will need to come from the United States, especially as low American prices reach a competitive level with supplies out of leading Qatar and Australia. This can be also a major factor in offsetting the looming trade deficit between the U.S. and China – something the Trump Administration is fighting for.
But American liquified natural gas (LNG) exports to China have been hit hard by the ongoing trade spat, dropping significantly following China’s September 2018 imposition of tariffs of U.S. LNG cargoes. During the last six months of 2018, only six LNG vessels went from the United States to China, down from 25 during the same period in 2017. The falloff in Chinese gas purchases is not just hurting U.S. energy companies today, but future projects as well: with an uncertain future vis-à-vis China, the final investment decision (FID) of a number of U.S. Gulf Coast LNG export projects could now be in question.
It wasn’t always like this. In the early days of the U.S. – China trade war, many experts believed that oil and gas were commodities immune from retaliatory tariff hikes. The mutual benefit of America’s surplus energy supplies – a product of the Shale Revolution – and China’s staggering energy needs – a natural consequence of rapid economic development – seemed to transcend diplomatic relations.
Indeed, as late as July of 2018 (half a year after Trump first declared ‘global safeguard tariffs’ targeting elements of China’s economy), China remained the largest importer of U.S. oil exports – buying just under 400,000 barrels per day. But by August, China imported zero.
American LNG sales began to taper off at around the same time, dropping to under 2 percent of China’s liquid gas purchases by November, despite accounting for almost 10% of China’s needs in Q1 2018. It is estimated that China imported 90 bcf of U.S. LNG over the course of last year – a significantly lower figure than the 141 bcf projected prior to July’s tariff hikes.
Losing China would be a massive blow to the future of the U.S. LNG exports, as the gas market there is the fastest growing in the world. We still export more LNG to Mexico and South Korea, but these markets have a limited absorption capacity for the U.S. commodity.
And so U.S. companies are doing what they can to muscle their way back into China’s market. America’s premier LNG exporter – Cheniere Energy Inc. – already has two agreements inked to sell gas to China’s National Petroleum Corp over a 25 year period. The two liquefied natural gas (LNG) sale and purchase agreements (SPA) were secured with CNPC subsidiary PetroChina International for 1.2 million metric tons/year (mmty) – a value of $11 billion. America’s other LNG exporter – Dominion Energy out of Cove Point, MD– will likely be looking to secure its own contracts with high-demand Chinese buyers.
It stands to reason that the economic, strategic, and environmental interests benefiting from increased bilateral LNG trade will prevail over the current diplomatic row. China needs gas and the U.S. wants to sell it; a classic win-win scenario. Who knows, perhaps the so-called ‘bridge fuel’ to renewables could also be a bridge to improved future relations.