China Braces For Another Spike In Natural Gas Demand

China’s push to have millions of households and thousands of industry users switch from coal to natural gas led to an unprecedented increase in natural gas demand and imports in the coldest month—December. The Chinese race to burn more gas instead of coal this winter season, in a bid to fight stifling pollution, left residents in the north freezing in a cold snap early last month, prompting China to backpedal on the coal ban in some areas to ease natural gas shortages.

China is currently gobbling up LNG cargoes from all over the world as it tries to avoid severe natural gas shortages in the coming month in which another cold snap will be gripping North Asia and which will see the longest holiday period in China—the Lunar New Year, or the Spring Festival—in the middle of February.

While the weather in China in January and February is usually milder than in December, this year in the second half of January another cold snap is gripping North Asia, with temperatures below normal for the season.

Chinese officials also want to ensure that gas shortages will not spoil the Chinese New Year holiday period, and continue their buying spree on the international markets. According to shipping data by Thomson Reuters Eikon, around 60 ships carrying a total of more than 4 million tons of LNG are en route to China in January—the third-largest volume of LNG imports after the previous record-breaking 4.36 million tons in November, and the new record of 5.1 million tons in December. LNG cargoes traveling to China are literally from all over the world, including the U.S., Equatorial Guinea, Angola, Peru, and Trinidad and Tobago.

“The Chinese have bought loads of short-term delivery cargoes to meet an expected spike in demand,” the head of LNG trading at a major Singapore-based fuel merchant told Reuters.

The Chinese coal-to-natural gas policy made the country the world’s second-biggest LNG importer last year, outpacing the previous number 2, South Korea. China is now sitting behind the global LNG import leader, Japan.

While Japan is expected to remain the world’s top LNG importer until around 2028, if we consider all natural gas imports—LNG and pipeline flows—China is set to topple Japan from that global top spot as early as this year.

“Both LNG and pipeline imports will continue to increase in the next few years. We expect China to overtake Japan as the world’s largest gas importer in 2018,” Miaoru Huang, Asia gas and LNG senior manager at Wood Mackenzie, told Reuters earlier this month.

Soaring Chinese demand, along with the steady demand in Japan and the rest of north Asia, pushed Asian spot LNG prices to a three-year high last week, after production outages at facilities in Russia, Malaysia, and Angola had additionally tightened the Asian natural gas market the prior week. Asian spot LNG prices have been higher than the oil-linked fixed-volume LNG cargoes that make the bulk of Asian LNG supplies since December, signaling that the Asian LNG market is tighter than usual.

China’s domestic natural gas production has been rising over the past few years, with December production at the highest monthly volume since 2010, but incapable of meeting the soaring demand from the switch to gas from coal. Last year, China’s gas production rose 7.7 percent annually, and production has jumped by 56 percent since 2010. In December 2017 alone, Chinese gas production rose by 2.3 percent compared to December 2016 and by 7.8 percent compared to November 2017, according to China’s National Bureau of Statistics.

Last year, Chinese LNG imports jumped nearly 50 percent, according to ClipperData. Australia is China’s top LNG supplier with roughly half of supplies, followed by the world’s current no.1 LNG exporter, Qatar, with a 20-percent share of Chinese imports, and by Malaysia.

China has been the main driver of global oil demand growth for much of the past two decades. In the coming two to three decades, China is expected to become the leading determinant in global natural gas demand as well, thanks to its economic and industrial production growth, coupled with government efforts to reduce pollution.

The International Energy Agency (IEA) sees global gas demand growing 1.6 percent annually until 2022, with China making up 40 percent of this growth. Consumption in China is expected to increase to almost 340 bcm by 2022, of which imports will account for 140 bcm, up from 70 bcm in 2016, according to IEA’s Gas 2017 report. In addition, China’s domestic production is seen growing by around 65 bcm to 200 bcm by 2022, with annual growth of 6.6 percent, which would make the country the world’s fourth-largest natural gas producer by 2022.

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