China's Gas Binge Blamed for Energy Squeeze

A summer spike in liquefied natural gas demand may raise winter consumption of coal, analysis says.
An analysis by Michael Lelyveld
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China's Gas Binge Blamed for Energy Squeeze A liquified natural gas (LNG) tanker leaves the dock after discharge at PetroChina's receiving terminal in Dalian, Liaoning province, China July 16, 2018.

Even before summer reaches its peak for energy demand, some analysts have started to warn about the effect that China's growing consumption will have on winter fuel supplies.

On June 25, Bloomberg News outlined a "desperate scenario" that could leave European markets short of natural gas next winter as a result of China's rising demand for liquefied natural gas (LNG) now.

The report cites the recent surge in LNG prices, in both Asia and Europe, as a sign that "there isn't enough supply to go around."

But despite the high prices, China has kept buying, both for consumption and storage.

As a result, Europe could be forced to fall back on coal for power generation and heating, an option that would have dire consequences for carbon emissions and climate change, the argument goes.

"If a gas deficit does develop during the winter months, it could spur European utilities to burn more coal, which has already started happening," Bloomberg said.

"At the center of the action is China, which in a surprise move is set to overtake Japan as the world's top LNG importer for the first time this year. China is stockpiling supplies of the super-chilled fuel in order to power its booming economy and help it shift away from dirtier fossil fuels," it said.

According to China's customs figures, LNG imports jumped 35.8 percent in May from a year earlier to 7.03 million metric tons, more than double the volume of pipeline gas. LNG imports this year through May climbed 30.4 percent, Platts Commodity News reported.

The increase has been traced to strong demand, economic recovery and a low base for comparison during the COVID-19 crisis last year, Platts said.

China has also been competing with its Asian neighbors for LNG to be delivered next winter in preparation for a repeat of last year's unusually cold temperatures.

"China's importers were scolded by the government for not being well prepared last winter and they don't want to make the same mistake twice," Bloomberg said, citing unidentified traders.

State-owned China National Petroleum Corp. (CNPC) recently released a forecast that underscored the importance of natural gas to the country's plans for controlling emissions and reducing the role of coal.

CNPC estimated that China will cut coal's share of the country's primary energy mix from 56.8 percent last year to 44 percent in 2030, while the gas share will rise from 8.7 to 12 percent over the same period.

China's carbon emissions are expected to peak before 2030, according to goals set by President Xi Jinping last September.

In 2060, the deadline for "net zero" emissions, coal's share of the energy mix would drop to just 8 percent, gas would edge down to 11 percent and non-fossil fuels would account for 75 percent of China's energy, Reuters reported, citing the CNPC forecast.

The path ahead

Gas is seen as a "bridge fuel" for China's shift from coal to non-fossil energy sources.

Gas consumption is projected to grow by over 60 percent from 326.2 billion cubic meters (11.5 trillion cubic feet) last year to 526 billion cubic meters (bcm) in 2030, peaking at 650 bcm by 2035, an official of the state-controlled PipeChina monopoly said, according to Argus Media.

Consumption is expected to fall back to 550 bcm by 2050 as the net-zero goal nears.

CNPC plans call for gas to account for 55 percent of its production by 2025, the official English-language China Daily reported.

Despite the plans to reduce coal's share of consumption, domestic production of the high-polluting fuel has already climbed 8.8 percent through May to 1.62 billion metric tons, the National Bureau of Statistics said.

But the link between China's LNG demand and the risk of more coal use in Europe is debatable.

In its analysis, Bloomberg pointed to European gas inventories, which are said to be "the lowest in more than a decade for this time of year," leaving the region vulnerable to a sudden increase in coal use for winter heat and power.

But Edward Chow, senior associate for energy security and climate change at the Center for Strategic and International Studies in Washington, said the analysis fails to take into account the cyclicality of the LNG trade in a "notoriously cyclical industry."

LNG spot market prices in Asia have hit extreme highs and lows over the past year with disruptions from the COVID-19 pandemic and the economic recovery. Chow also cited the wide swings in weather conditions and demand over recent years, affecting prices and inventories.

"European gas inventories are coming off historic highs after the two previous mild winters before last winter's unusually cold weather in northeast Asia," said Chow.

"It wasn't too long ago that producers were complaining that gas prices were too low. Now, consumers are complaining that prices are too high. This is typical of industries with long lead times," he said.

Winter weather conditions will affect spot market pricing in the short term, but there is little chance that Europe will be forced to burn more coal because of China's demand for LNG, Chow said.

"Europe was always the market of last resort for spot LNG supplies, since it has access to imports of pipeline gas and more gas storage capacity, while other major LNG markets do not," he said.

"If Europe was really worried about it, its gas buyers could firm up more LNG supplies with term purchases. U.S. LNG project promoters would love that, but it is not happening," Chow said.

A new forecast by the Paris-based International Energy Agency (IEA) also sees little chance that a global LNG shortage will emerge. The average annual growth of LNG demand in 2019-2024 is projected to be just 3.3 percent, a fraction of the double-digit rate between 2016 and 2019, the IEA said.

"The wave of final investment decisions on LNG projects taken before 2020 should therefore prove sufficient to satisfy additional LNG demand in the coming years," the agency said in its Gas 2021 report.

"In the absence of major project delays or unplanned outages, the risk of a structurally tight market appears limited before 2024 with the possible exception of short seasonal episodes," the forecast said.

Europe's demand for LNG will have more to do with Russian supplies of pipeline gas than with China's consumption of LNG, said Chow.

Russian pipeline

Despite U.S. sanctions and concerns about the loss of transit through Ukraine, Russia's Gazprom appears close to accomplishing plans for new direct pipeline routes to Europe with the Nord Stream 2 project to Germany and the TurkStream pipelines to Turkey and countries of southeastern and central Europe.

Taken together, the routes will add 86.5 bcm per year of new transit capacity. Europe is also supplied by the Southern Gas Corridor with new pipelines through Turkey from Azerbaijan.

"Once Nord Stream 2 comes into operation along with TurkStream 2 and the Southern Corridor pipelines, Europe will have surplus gas pipeline import capacity. The future depends more on how Russia decides to play the market, maximizing volume or price, than Chinese LNG demand," said Chow.

"I assume Russia will price its gas to Europe to make U.S. LNG uncompetitive. Coal consumption is a different but interesting story and a test of European commitment to climate policy, but it has little to do with China, except that it faces a similar test," Chow said.

Last month, a heat wave in Europe drove gas prices to the highest level in three years due to a spike in electricity demand as inventories fell to record lows, Interfax reported on June 21.

European gas storage was 44.3 percent of capacity on June 19, dipping below the previous record low for that date, BCS Global Markets said, according to Newsbase Daily News.

"After the gas glut of 2019, gas supplies have been depleted by a very cold winter and now a very hot summer. The price for gas has tripled from the start of this year and that has driven up Gazprom's profits and stock price," a Newsbase report said.

In February, Gazprom reported that its exports to Europe in 2020 reached 174.9 bcm, down 8.6 percent from a year earlier, Interfax said.


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