By Nicolas Dupuis, CME Group
AT A GLANCE
- The IEA estimates that China’s share of active LNG contracts will double from 12% in 2021 to around 25% by 2030
- China’s percentage of natural gas sourced from Russia is likely to increase further, with planned increases in pipeline capacity and possible new pipeline construction
China’s demand for natural gas is set to increase strongly in the years ahead as it transitions to cleaner energy sources. The country has already signed a number of long-term liquefied natural gas (LNG) contracts with the United States to ensure supply and reduce exposure to volatile spot prices. As China’s appetite for LNG grows, expect it to become an increasingly dominant player in the global LNG market.
Demand Rebounds in China
Consumption of natural gas in China fell by 1% in 2022 – the first annual decline in gas consumption in four decades, as the country’s zero-COVID strategy reduced economic activity. The fall in demand for natural gas in China was in line with global trends in 2022, with demand from Europe seeing its steepest drop on record. Meanwhile, consumption in Asia eased by 2% on a combination of slower economic activity, a warmer winter in the Northern Hemisphere, and steep LNG price rises, according to the International Energy Agency.
For the whole of 2023, projections for natural gas demand are mixed. Consumption in Europe fell by an additional 10% in the first five months of this year, driven by lower residential and commercial demand in the first quarter, and then a steep drop in consumption in the power and industrial sectors in the second quarter. Meanwhile demand in Asia was broadly unchanged, further contributing to looser market conditions.
By contrast, demand for natural gas in China rebounded by 6% in the first quarter, buoyed by increased economic activity following the lifting of COVID-19 prevention measures, as well as droughts which caused the production of hydropower to fall by 23% year-on-year. Although China’s post-COVID recovery has recently stalled amid weakening demand both domestically and abroad, the country’s natural gas consumption is still expected to increase by 6% this year, in line with the rise seen during the first quarter. The rise in demand is expected to continue into 2024, increasing by another 7% year-on-year on the back of higher economic growth, according to the IEA.
Ensuring a Stable LNG Supply
While some of China’s increased demand has been met by higher domestic LNG production, which rose 6%, or 6 billion cubic meters (bcm), during the first five months of the year, LNG imports also played a role, with these increasing by 10%, or 4.5 bcm, during the same period. For 2023 as a whole, the IEA is forecasting a rise of nearly 15% in LNG imports by China, although they will remain below the record levels seen in 2021. The increase in imports is expected to be supported by a number of new regasification terminals which are due to come online by the end of 2023, and which will add 20 bcm per year to China’s current capacity of 140 bcm per year.
China has significantly increased its natural gas imports from Russia since the start of the Ukraine conflict, with Russia overtaking Australia, Qatar and Turkmenistan to become its top supplier earlier this year. The percentage of natural gas sourced from Russia is likely to increase further going forward, with planned increases in capacity for the Power of Siberia 1 pipeline, set to rise from 15 bcm in 2022 to 22 bcm this year, while talks are also underway for the construction of a Power of Siberia 2 pipeline.
Meanwhile, the U.S. remains China’s biggest supplier of LNG. In order to ensure their supply of LNG, and to protect themselves from volatile spot prices, a spate of Chinese companies have signed long-term supply agreements with U.S. projects on Henry Hub. For example, ENN signed a 20-year sale and purchase agreement with Cheniere for 1.8 million tonnes per year, and China Gas Holdings is set to buy a total of two million tonnes of LNG per year from Venture Global through its China Gas Hongda Energy Trading Co subsidiary.
LNG Price Volatility Expected to Continue
Despite the drop in global demand in 2022, the value of the LNG trade doubled to hit a record high of $450 billion during the year on the back of high prices, although volumes only increased by 6%. Spot prices in Europe and Asia have fallen by more than 50% since the start of 2023, amid concerns that high interest rates will curb economic activity, although they remain 140% higher in Europe and 180% higher in…
Read More: What China’s Growing Appetite for Natural Gas Means for World Markets