The global natural gas market has been unusual among commodities in that it has not had a China story over the last ten years. The market has seen significant volatility, due in part to its shallow liquidity pool and some big fundamental swings – Qatari LNG trains and post-Fukushima Japan being the stand-out ones. But the fundamental swings have not been about China – that is, until now. This winter the biggest single question is, will it get cold in China and how big will the demand side response be, given China's rush to get 9.2 Mtpa of LNG regas capacity operational in Q4 13?
In this report, we look in greater detail at the emerging gas market in China and assess the likely impact of China's emerging gas use on the global gas market. We find the following:
- Rapid increases in consumption since 2000 have led to 16% gas demand growth per annum. This has turned China into the world's fourth-largest gas consumer, with total consumption in 2012 at 144 bcm (13.9 bcf/d). This growth has come from all major sectors; the biggest changes have been seen in the urban gas sector as municipalities look to replace inefficient and polluting coal-fired heating systems with cleaner gas systems.
- China's current “air-mageddon” crisis ensures that consumption growth will remain fairly rapid over the coming years from the urban gas sector. While this source of gas demand will probably crowd out some further industrial growth and power sector growth, it will be sufficient to see gas consumption exceed 300 bcm (29 bcf/d) by 2020.
- Domestic Chinese gas production has also shown good consistent growth, averaging 12.1% per year since 2000. Domestic production in 2012 was 107 bcm (10.3 bcf/d) and almost all of that growth has come from conventional onshore production, with a relatively small offshore contribution and almost no shale gas production. China has the world's thirteenth largest proven gas reserves, and this recent growth has turned the country into the world's seventh largest gas producer.
- Future increases in production will come from both conventional and unconventional gas resources. The Chinese government is targeting some 80 bcm/y (7.7 bcf/d) of shale gas production by 2020. We have looked at a number of scenarios for the uptake of shale gas production based on China's sizeable shale gas resource base and the state of its onshore drilling industry (which is fairly well developed). While more complex geology means the speed of uptake is unlikely to be as fast as in the US, we estimate that best case shale production in China by 2020 is likely to be between 35–50 bcm/y, (3.4-4.8 bcf/d).
- With consumption having outpaced production growth, China has increasingly had to import gas. The sources of imports have been pipeline gas from Central Asia (mostly Turkmenistan) and LNG imports. We estimate that by 2020, gas imports from Central Asia will increase from current levels of around 20 bcm/y to 65 bcm/y (1.9-6.3 bcf/d) – facilitated by the completion of the third and fourth West-East gas pipelines. By 2020, some 15 bcm/y (1.5 bcf/d) of gas will be imported from Russia with the ramping up of imports from the eastern route (Power of Siberia pipeline) taking time given the huge infrastructure investment required.
- The remaining imports come through LNG. China has seen a rapid increase in LNG regas facilities, adding some 19 Mt of import capacity in the last three years. As a result, imports have expanded from around 5.7 Mt in 2009 to being on track to total 17.8 Mt in 2013. We estimate that by 2020, LNG imports will have to increase to between 35 Mtpa and 77 Mtpa, largely on how well domestic production performs in the future.
- We estimate LNG imports to grow at an average of either 5% or 9% per year to the end of the decade, depending on different assumptions about the rate of Chinese domestic production. This highlights the uncertainty about future demand for LNG that directly relates to future progress in Chinese conventional and shale gas production. If domestic production maintains current growth levels, then the growth in LNG imports will be much slower than if domestic production growth falls short. The difference is enough to have a material impact on spot LNG prices; however, even then we expect prices not to drop much below the 12 $/mmbtu level, as prices below this could well start to close the US arbitrage window.
- We believe that there is greater risk of production falling short, which suggests that actual Chinese demand for LNG imports is likely to be at the higher end of our forecast range. Globally there will still be a lot of liquefaction capacity around by then, but it appears China will provide considerable new demand.