Chinese Demand Unlikely to Rescue US LNG: Report
Chinese demand is not likely to come to the rescue of the ailing US LNG industry, according to a report published on July 29 by Institute for Energy Economics and Financial Analysis (IEEFA).
Global LNG prices and consumption have collapsed due to Covid-19 lockdowns and an enormous supply glut in Europe and Asia, even as the US LNG industry continues with expansion plans, the IEEFA said.
More than 20 US projects in various stages of development, as well as 20 existing commercial-scale plants, are competing with new LNG plants in Russia, Australia, Malaysia and Cameroon. The ensuing glut has convinced many international buyers to obtain LNG from spot markets rather than signing new long-term contracts, the report said.
Prior to 2019, China had been the world’s fastest-growing LNG consumer, leading to hopes that it could rescue the planned US LNG buildout. The IEEFA analysis, however, finds that PetroChina, China’s largest natural gas company, has lost money on gas imports every year since 2015, throwing doubt on the Chinese gas market’s ability to absorb new imports.
The report says that if China is to expand its LNG imports, it will likely have to secure long-term supplies at prices well under $7/mn Btu, said Clark Williams-Derry, an energy finance analyst and co-author of the report. “Even with US costs close to historically low levels, the margin for reaching those prices is slim: Shipping LNG from the Gulf of Mexico to East Asia costs about $2/mn Btu for feedstocks, $3/mn Btu for liquefaction, and $1/mn Btu for transportation. Regasification and transportation to Chinese cities would add another $1/mn Btu to the total cost.”
The IEEFA study examined gas pricing in seven major Chinese cities with access both to LNG terminals and pipeline gas. Wholesale prices in April 2019 ranged from $7.73/mn Btu to $8.57/mn Btu; at the time, it cost roughly $8/mn Btu to deliver gas from the Gulf of Mexico to China, meaning that US LNG offered little or no economic benefits to Chinese consumers.
“The most optimistic LNG demand scenarios are simply unrecognisable to experienced analysts of the Chinese energy sector,” said Williams-Derry. “Even if China expands its gas use, the country will likely find cheaper sources of gas than US imports, including domestically produced gas, pipeline imports, and LNG from lower-cost global suppliers.”