China’s growing role in the LNG industry

LNG imports will break 100 mmtpa by the early 2030s, despite more pipeline imports

by HUANG Miaoru

China can count on more pipeline import corridors. We expect the Power of Siberia pipeline to start up in December 2019, reaching the northeast region first and then the rest of northern China in 2020. The eastern coastal region can be supplied by Russian gas once pipeline connections are built, although the volume will likely be limited as northern China can absorb the majority of the 38 bcm and the economics of Russian gas will be eroded by the transport distance to the east coast. We’ve also modelled flows from Central Asia Line D, Russia West (Altai) and Russia Far East, with start-up in 2022, 2026 and 2029, respectively, to be additional sources to the Chinese gas market. Combined, China’s cross-border pipeline capacity will increase from 65 bcm a year to 181 bcm a year.

Despite higher flows of pipeline imports, LNG will be crucial to meeting China’s gasification ambitions. And LNG is more flexible than piped imports to counter demand and production uncertainty. In southern China, which is far away from onshore gas producing basins, LNG will serve both base and peak demand. Meanwhile in northern China, LNG will remain an important peaking source. We forecast LNG demand to reach 82 Mt by 2025, 98 Mt by 2030 and 126 Mt by 2040. Compared with our previous outlook, LNG demand post-2030 has been upgraded, as our reduced domestic supply outlook more than offsets the moderated demand outlook.

While having become more comfortable relying on spot procurement, Chinese LNG buyers will look for new contracted LNG supply to meet part of their requirements. NOCs are also expanding in the LNG value chain, becoming traders and portfolio players, and selling LNG.

Will China exert greater influence on global LNG pricing?

On the back of its vast and growing gas demand, China has already influenced the global LNG balance in a big way. Amid the current global supply glut, Chinese buyers have become tougher on pricing in contract negotiations and price review. We estimate that recently concluded deals were be around 11.5% slope of oil price index. Indexation to the gas hub price index and spot LNG index is being increasingly pursued by Chinese buyers.

Chinese buyers are still facing difficulties in passing through imported LNG prices to domestic markets. This is partly due to the nature of China’s multiple and diverse supply mix, and more importantly due to the lack of a price discovery function in domestic markets. While Chinese buyers have proposed including city-gate prices and domestic trucked LNG prices into contracts, it remains wishful thinking for now as these benchmarks are nascent, and not currently considered as reliable or transparent by global LNG suppliers.

With the midstream reform gaining momentum, the continued development of gas pricing hubs seems likely. Last year, the two trading platforms – Shanghai Petroleum and Natural Gas Exchange and Chongqing Petroleum and Natural Gas Exchange – saw their total transaction volume reach 37 bcm, equivalent to about 13% of China’s gas demand. Yet most of the volume was made up of listing transactions, representing contracts between suppliers and city gas companies that would have happened offline anyway even without the exchanges. It is possible that in the future, if liquidity increases enough, China could have its own pricing index equivalent to the Henry Hub or TTF. Could inclusion of Chinese hub pricing be the next game changer in LNG contract pricing?

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