China recently released its Natural Gas Development Report for 2021, which reviews recent developments in the country’s gas sector and sets out plans for the years ahead. This is the seventh in the series to date.
The focus of the report is different from that of last year. In 2020 the focus was largely on climate change and how gas could help China achieve its aims. However, this most recent report is focused on the market dislocations caused by the Russia/Ukraine conflict.
One of the key takeaways from the report’s release is the conclusion by several participants in the gas sector that the central government’s forecasts for gas demand growth over the next few years are over-optimistic. Instead, they believe that China will see its first-ever decline in gas demand this year rather than a continuation of the growth we usually see. In 2021 gas demand rose by 12.8% to reach 379 bcm (representing 8.9% of total primary energy consumption), its highest ever level after average growth over the past decade of almost 11% per annum.
There are suggestions from industry sources that gas demand growth may actually be negative for the next two or three years in contrast to the historically positive growth that the country has seen. The Chinese government’s own forecasts suggest a low, but still positive, rate of growth in 2022 so they are clearly more optimistic than market participants who are concerned that with GDP growth expected to fall from 8% in 2021 to 5% in 2022, gas demand growth will be adversely affected by the weaker macroeconomic environment. In addition, industry journals report a sharp fall in the rate of construction of infrastructure for both pipeline gas and LNG, which could have adverse consequences for China further down the line.
The government’s demand forecasts published in the Natural Gas Development Report suggest a 1-3% increase in demand, a sharp decline against the 12.8% growth seen last year. The cause of the slowdown in growth is variously attributed to the weather and to seasonal factors but we must expect a decline in overall energy – not just gas – demand given China’s lockdown measures to contain Covid-19 and the impact that these have had on the economy.
The sharply slowing demand growth for gas has given companies building infrastructure to support gas demand growth continuing at the previously high levels, pause for thought. Gas pipelines, storage facilities and LNG receiving terminals are all expensive and immovable projects; faced with significant uncertainty about gas demand growth, companies will not commit to billion-dollar investments until they can see an acceptable return on their investment – and that requires rising demand for natural gas.
Without rising demand – and there were signings of long-term LNG contracts by Chinese buyers earlier in the year, but that phase seems to have passed – substantial investments in new regasification facilities are unlikely. With gas prices soaring because of the Russia-Ukraine war, driven by higher oil prices, and spot LNG cargoes trading at particularly high prices, the availability of LNG import capacity has little impact on China’s ability to import LNG as even term contracts are based against oil prices, which themselves remain elevated.
Signals from the government also suggest that the “dash for gas” in China may have eased. There are reports from the gas industry that the government is now downplaying the switch from coal to gas and instead focusing on switching from gas to electricity. Gas is seen as an option primarily when supplies are plentiful and stable, which cannot be said to be true of current market conditions.
So, China will likely slip into second place, after Japan, in terms of LNG imports, which are reported to have declined for seven months in a row. Gas traders suggest that, with spot prices reaching more than $50/MMBtu recently, spot gas is off the agenda until prices decline significantly. We have also seen Chinese importers with long-term LNG contracts selling their cargoes into the European spot market where returns are higher because of the cessation of Russian gas supplies through the Nord Stream 1 pipeline.
Russia’s own pipeline exports of gas to China through the Power of Siberia line from East Siberia are steadily increasing (rising 54% in 2022 against the 2021 volumes), cutting further into the market for pipeline gas.
Domestic gas production is, however, rising – it looks set to increase by some 6% this year, although that is itself a slowdown from the 8% growth seen in 2021. Nevertheless domestic gas supply is responding to President Xi’s call for increased energy security and 2021 was the fifth year in succession that domestic production increased by more than 10 bcma, an achievement that the Natural Gas Development Report expects to see continue in the future.
What does this mean for Russia, China and world gas markets?
China (along with India) is widely seen as a beneficiary of the energy confrontation between Russia and the west after the Russian invasion of Ukraine. With Russian gas deliveries to Europe suspended, talks about oil price and gas price caps being enforced and China’s energy demand perceived to be rising, that is an understandable conclusion. The data, however, does not support this conclusion as strongly as it might. China’s gas demand may not rise as strongly as in the past – or at all, if industry sources are to be believed – in the near future; domestic output looks set to meet President Xi’s expectations of growth, rising by at least 10 bcma a year; overall imports themselves may decline in response to the changed circumstances we find ourselves in; concerns over US sanctions may inhibit increased purchases of Russian gas.
In my opinion, China is not certain to buy significantly greater volumes of Russian natural gas than it has in the past, bar the already scheduled ramp-up of Power of Siberia gas volumes. The country’s supply/demand balance is changing over time with rising domestic output and an uncertain outlook for demand. Russia’s need for problematic extra gas imports may be an optimistic reading of the situation. In addition, to be encouraged to take additional volumes from Russia, China will no doubt drive a hard bargain, the countries’ seemingly strong relationship notwithstanding. Time will tell whether increased natural gas imports from Russia are an integral part of China’s future energy strategy or whether they are an opportunistic addition to the country’s gas balance only when it makes commercial sense.
Global Energy Comment 