China LNG demand depends on pipeline imports and domestic production
Of all the unknowns facing global natural gas markets in the years ahead, none loom larger than China.
The nation of more than 1.3 billion people could buy a lot more liquefied natural gas, or not. It could buy a lot more pipeline gas from Turkmenistan and maybe even Russia, or not. It could produce from its own massive shale gas reserves, or not. Its electrical generating plants could break out of the Coal Age, or not.
There's not much doubt that China will play a huge role in determining future global LNG supply, demand and pricing, said speakers at a recent natural gas conference in Houston. The doubt is whether anyone really can accurately predict future supply-and-demand numbers – and prices.
"I find it a little disconcerting that everybody has so much confidence so far out into the future," cautioned Jimmy Straughan, chief commercial officer for BP LNG Americas.
Heavy demand growth from China will depend in great part on the country's commitment to switch from coal to gas-fired power generation, David Sanderson, director of LNG marketing at Chevron Global LNG Marketing and Trading, told the audience at the 11th annual Platts LNG conference in Houston Feb. 16-17.
Just how much LNG China will buy also will depend on the nation's economic growth, domestic production and pipeline imports. "The uncertainty is high," said Daryl Houghton, manager for LNG consulting at Poten & Partners, a global broker and commercial adviser to the energy and shipping industries.
China holds contracts to take delivery of up to 2.3 trillion cubic feet of gas a year (about 6.3 billion cubic feet per day) from Turkmenistan, with an additional 200 billion feet per year of pipeline gas under contract from Myanmar, said Thierry Bros, senior analyst for European gas and LNG at Societe Generale. Gas is already moving down the pipe from Turkmenistan – at an average daily flow of 1.6 bcf in January 2012, and growing – while the 1,700-mile-long pipeline from offshore Myanmar is expected to start moving gas to China in 2013, with a capacity to carry more than 1 bcf a day.
The China Petroleum and Chemical Industry Federation this year said the country's domestic production will total 11 bcf a day in 2012, with pipeline imports and LNG to provide an additional 3.3 bcf a day. That gap between China's production and consumption is growing and attracting attention, especially from LNG suppliers looking for long-term contracts.
However, China covers most of its gas needs with domestic production and signed import deals until 2018, Bros said.
U.S. export projects looking to gain entry into the market will have to compete against other LNG supplies worldwide, pipeline gas and China's own shale gas reserves, Bros said.
In January 2012, China's gas buyers paid an average $10.33 per million Btu for pipeline deliveries from Turkmenistan, and between $3.38 and $18.48 per million Btu for LNG cargoes, according to data compiled by Reuters news service. Half of the LNG volume was low-cost cargoes from Indonesia, Australia and Malaysia – all under $8 per million Btu and all under older contracts. The higher-price spot and short-term deals were from Russia, Qatar, Yemen and Algeria.
Though not yet a shale producer, China is moving strongly in that direction, signing up for joint ventures to gain U.S. and Canadian technology, Bros said. (The U.S. Energy Information Administration estimates China's shale gas resources exceed those of the United States, though not all of it is judged economically recoverable at this time.)
One move in favor of selling more LNG to China is the government's initial attempts to lift price controls on gas, allowing buyers to pay market prices for deliveries and pass along the actual cost to their customers, Houghton said. Under price controls, importers currently subsidize gas sales to consumers.
The managing editor for Platts' Asia LNG report, Hong Chou Hui, agreed that price reform could encourage more natural gas imports if companies no longer are forced to subsidize the fuel. The downside would be whether customers would burn more gas if they paid higher prices.
Houghton was among the more optimistic speakers on the potential of LNG sales to China, saying the nation's demand could top 6.5 bcf a day by 2025, or more than three times the LNG import level of January 2012. But pipeline-delivered gas could be double the LNG number, he said.
"Vast amounts of Russian gas could ultimately end up in China," Houghton said, in addition to gas from Myanmar, Turkmenistan and elsewhere in Central Asia.
Already construction is under way on a third west-to-east pipeline to move Central Asia gas to China, with talk of a fourth and fifth pipeline someday, Hui said.
And while imported gas by pipeline and tanker will grow in volume, China will continue to meet most of its gas needs from domestic production, Houghton said. But even that will require new pipelines. "Whereas China is well endowed in gas, it's all in the wrong place," Houghton said.