Will the World Be Running on Fumes as China Takes All the Gas?

In its haste to meet ambitious clean-energy targets, China is rapidly replacing coal-fired power with natural gas. This dramatic shift in fuel dependence from the world's most populated country has, according to Reuters, skyrocketed the price of domestic liquefied natural gas (LNG) to a three-year high and resulted in major industrial players scrambling to compete for supplies against domestic demand.

China's rush for gas is good news for slumping LNG prices and new capacity coming online, but could it impact the world's access to LNG?

A Radical Shift, and It's Cooking With Gas

For over 30 years, coal has accounted for more than two-thirds of China's energy needs, according to Lawrence Berkeley National Laboratory. However, the country has a self-imposed target of increasing the share of gas in its energy mix from approximately 7 percent today to 10 percent by 2020, according to the US Energy Information Administration (EIA). Doing so will help China balance out the intermittency of its world-leading renewable energy adoption efforts with a reliable fossil fuel that emits roughly half the CO2 of coal.

As such, in 2017 China saw its LNG imports rise by almost 50 percent, and overtook South Korea as the world's second-largest importer, according to data from Reuters.

The country's surge for gas is expected to increase significantly. In its World Energy Outlook 2017, the International Energy Agency (IEA) states that China's natural gas demand will rise to over 600 billion cubic meters by 2040, which is more or less double its usage today.

Some Feel the Shaft From a Supply Perspective

Unlike Japan and South Korea, which rely heavily on long-term fixed LNG contracts, China has considerable domestic natural gas reserves, as well as supply from a central Asian pipeline. However, this means it rallies for new supply only when it needs it, which has left some big energy users short.

For example, industrial firms such as German chemical company BASF SE and local producer Yunnan Yuntianhua Co. have at times been left short of gas, as supplies were diverted to households during cold snaps, The Wall Street Journal (WSJ) reports.

The Worldwide LNG Market Braces for Impact

Wood Mackenzie gas analyst Wen Wang tells Reuters that the market should expect "higher surges in winter demand over the next three to four years" as the Chinese government pushes "its gas-for-coal drive."

"China will surely become a key driver for Asian spot LNG prices," she adds.

This is good news for the LNG supply, as several new projects in Australia, the US, and Russia have helped keep the price of LNG at around half its 2014 peak of more than $20 per million BTUs, according to the same WSJ story.

But how will this shift impact the rest of the world's access to gas?

New LNG Supply is Expected to be Needed Earlier

Speaking to Transform, Wang says: "China's demand will have an impact on the global supply-demand balance as well as prices. We would have seen an oversupplied situation in 2017 if Chinese demand didn't pick up. However, because of higher demand in China, as well as in South Korea and Europe, we are now seeing a less pronounced oversupply situation in 2019–2020."

She adds that it creates the expectation that the world will need new LNG supply starting from 2022, whereas before Wood Mackenzie was predicting this need to arise in 2023.

The new demand coming out of Asia as a whole, and new projects expected to come online in the near future, will balance the market out until then. Australia alone has almost $80 billion worth of LNG projects under construction, according to APPEA. A Russia-to-China gas pipeline is also due for completion next year, reports Reuters.

Prices May Rise on the Demand Side of the Equation

However, prices could be pushed up for power generators and the industrial sector. Weng says: "Because there's still a possible oversupply in the short- to mid-term, the rest of the world will still have access to supply, but just possibly at a higher price, compared with a scenario with lower Chinese demand."

She adds: "The impact on prices is quite clear—last winter, spot prices created a new record high, and China's winter demand played a major part, along with some issues with supply, but post-2021, the competition for supply will intensify if not enough projects take FIDs in 2018 and 2019."

A New Quest for Unconventional Gas is Set to Begin

In its latest analysis published on April 17, Wood Mackenzie projects Chinese shale gas production to almost double, to 17 bcm in 2020. According to the report, shale has grown significantly in China to nearly 600 wells and 9 bcm of production.

"China is eager to materialize its shale gas potential to fuel its massive gasification initiative and support rising demand growth," explains Dr. Tingyun Yang, consultant, Wood Mackenzie. "To meet the government's 30-bcm target, up to 725 additional wells are needed by 2020 on top of the nearly 700 new wells. This will double the amount of investment needed in the base-case drilling plan. The required well number could be larger if well productivity degrades. This is a mammoth task for the Chinese national oil companies."

Companies Will Ramp Up Shale, Coal Seam Gas Production

South China Morning Post (SCMP) reports that PetroChina is targeting shale rock formations and is looking to quadruple shale gas to 12 bcm in 2020. Nearly 700 new wells will come onstream between 2018 and 2020 from Sinopec's Fuling, as well as from PetroChina's Changning-Weiyuan and Zhaotong projects, with a total capital investment of US$5.5 billion, writes Wood Mackenzie.

According to Yang, well costs for Chinese shale have gone down considerably—40 percent for exploration wells compared to 2010 levels, and 25 percent for commercial wells compared to 2014.

Also, AAG, the operator of China's most advanced coal seam gas project called Panzhang, plans to raise total output by 15 percent to 723.3 million cubic meters this year, according to the SCMP story. This includes increased output from a smaller sister project called Mabi. PetroChina and Beijing Enterprises Group will each add two 160,000-cubic-meter tanks at a shared site, reports Reuters.

Still, Shale is Not Likely to Make Much of a Difference

What impact will China shale have on the market? Lynn-Yuqian Lin from Wood Mackenzie writes that, considering the impact of shale gas production on domestic demand, the 2020 13-bcm gap will have to be filled by imports, in particular LNG. Therefore it is unlikely to ease tightness in the market.

In fact, China's shale is unlikely to boom like in the US, where success was built on a combination of underlying factors, according to Wood Mackenzie. These include competitive and open markets, active small players, developed infrastructure, and easily available expertise.

China does not have any of these. Furthermore, it took the US three decades to build up its shale industry. Therefore, it looks like high Chinese demand in the LNG market—and its effect on prices—is a trend that's set to stay, at least until new capacity comes online around the early to mid-2020s.