[NGW Magazine] China soaks up the LNG pool

China finds itself in a tight spot. Only one month into the winter season, much of the country is already experiencing natural gas shortages as cold temperatures persist, with little respite in sight.

China’s gas import problem is rooted in the decision of the country’s powerful top economic planner, the National Development and Reform Commission (NDRC), to speed up the replacement of coal for home heating and industry with natural gas in the north.

The government’s so-called “2+26 cities” initiative, an unprecedented push to clean up the environment, includes Beijing, Tianjin and 26 smaller cities in the surrounding Hebei, Shandong, Shanxi and Henan provinces, or about two-thirds of the worst polluted cities in China.

However, it has since become apparent that Beijing’s reach exceeded its grasp. Reports coming out of the country indicate growing upset over the situation. Gas needed for home heating has become increasingly scarce while cities have had to divert gas supplies for industrial use to residential customers in efforts to make up for the shortage. 

The problem has become so pervasive that it is even impacting the warmer, southern part of the country. By mid-December, Hunan province in southern China began warning of natural gas shortages and issued a “yellow” warning, the third most serious level of warnings in a scale of four, local media reported. The Hunan shortages come as producers rush to divert gas supplies to heat homes and fuel factories in the north. “Any measures to run after a ‘blue sky’, including the ‘gas-replacing-coal’ campaign some local governments have launched, should fully consider residents’ needs and be tailored to local conditions,” a China Daily opinion piece said. 

China’s gas quandary also comes amid the government’s long-term goal of replacing dirtier-burning coal with natural gas for 10% of its power generation energy mix by 2020, up from 5.1% in 2015. Further targets have been also set for the year 2030. 

Even before the winter gas demand increase, the country was already setting gas consumption records as well as posting historic LNG import increases.

China’s LNG imports for the first 10 months of the year were 48% ahead of the volume delivered over the same period in 2016, according to government data. Moreover, LNG sales within China rose by 45% year-on-year in H1 2017 to 8.11mn metric tons. Chinese demand for LNG is on track to grow by about 30% from last year to 2020. 

Data from China’s General Administration of Customs shows that gas imports in November – including both pipeline and LNG – reached 6.55mn mt of LNG equivalent, breaking a previous record of 6.1mn mt last December. Gas shipments year to date are at 60.7mn mt, heading for a new record.

LNG import complications

China’s greater gas use, particularly winter demand and the government’s push to replace coal with gas, also creates complications trying to manage LNG imports during the colder winter season. On November 2, French-based energy giant Engie said it renewed the sub-charter of a FSRU vessel to state-run oil major Cnooc, China’s largest LNG importer, for the coming winter. The vessel arrived at the port of Tianjin on October 28 and will remain there until spring 2018. The China Daily called the move an unprecedented, costly step to avoid a heating crisis. 

On December 6, Cnooc took its precautionary moves one step further. Reuters, citing an industry source, said the state-run oil major was spending $10mn to lease two tankers to store emergency LNG amid growing concerns over China’s winter fuel crisis. Going forward, Beijing is still scrambling to divert gas to where it is needed most and making up for some obvious short-sighted planning. Keun Wook-Paik, a senior research fellow at the Oxford Institute for Energy Studies (OIES) and a China, Russian and Asian natural gas export told NGW that it’s not easy for China to cope with an improvised supply option, except for the maximisation of spot cargoes. “It’s a good lesson for Beijing authorities that a properly organised plan for gas expansion is needed. Currently the compartmental response on the gas supply shortage cannot cope with the situation professionally,” he said.

However, China is still pushing forward with more gas and renewable energy plans. On December 19, the country announced what Chinese media is calling “an ambitious plan” to phase out coal-fired winter heating systems in dozens of smog-prone northern cities by 2021.

Under the new plan, areas north of a demarcation line, marked using the Huai River and Qinling Mountains, are required to switch to clean or renewable energy sources including natural gas and electricity to power 70% of their winter heating systems by 2021.

A Caixin report said the plan requires northern China to replace 150mn mt of coal – more than a third of the fossil fuel burned during the 2016-17 winter heating season – with clean fuels. To accommodate these plans, Beijing needs additional infrastructure.

Paik said that Beijing “should think very seriously about the development of a coastal pipeline network that will connect all of the LNG terminals along the cost, from Hainan Islands to Dalian. Further, this coastal pipeline should be connected with the three west-east pipelines and the Shaanxi-Beijing gas pipelines (based on Ordos basin) to maximise the efficient use of gas pipelines,” he said.

China’s increased gas appetite is also impacting regional LNG prices. On the back of increased Chinese gas consumption, Asian LNG spot prices recently reached three year highs, breaching the $10/mm Btu mark.  “China’s appetite for spot LNG will be a big boost for the LNG producers. But the expensive LNG spot cargo prices will deliver a massive burden to the emerging economies starting to take LNG,” Paik said.

One way out of this dilemma, he added, would be for “Japan, South Korea and China, to initiate LNG co-operation to cope with the price burden of LNG spot and term cargo trading.”

Tim Daiss