China's changing energy mix undermines global LNG growth

?China has been viewed as the main driver of future LNG demand by producers for years. This helped justify billions in investment infrastructure from?the U.S. Gulf Coast up to Qatar.

China's appetite is waning for super-chilled fuel, even though producers are preparing a new wave of supply in the coming years. This could undermine the viability of future projects that rely on long-term needs of imports from Asia and Europe.

The Iran 'war' has triggered a second global LNG supply crisis in four years, following Russia's invasion of Ukraine?in 2022. This is reinforcing China's push to prioritize domestic gas, pipeline gas, and renewable energy while reducing the share of imported LNG.

Megan Jenkins, S&P analyst, said: "Even if the Persian Gulf LNG supply eventually returns to China, we expect increased energy security concerns there will lead to a more cautious approach towards LNG."

She said that this would lead to efforts to increase energy independence, resulting in a lower LNG demand than we had anticipated before the war.

JPMorgan S&P Global Energy, and Wood Mackenzie all reduced their estimates for China's growth in LNG demand between the early 2030s. They have done so by 14 to 22 million tons. The demand is expected to grow between 19 and 53 millions tons from 2025 until early 2030.

Shell, the top LNG trader in the world, has released its latest outlook. It offers a variety of possible outcomes. The low-case scenario is that imports will peak at 120,000,000?tons (ton) by 2035. A high-case scenario would be near 150,000,000 tons by 2040. The 2024 outlook projected imports to peak around 2030-2035, at 146 millions tons.

UPCOMING NEW CAPACITY

Global producers face high stakes. The IEA predicts that by 2030 there will be around 217 millions tons of?export capacities, a 40% increase from the current levels. This is mainly due to expansions in Qatar and the U.S.

Up to 10% of the new capacity could be impacted by the weaker outlook on China's LNG consumption. This may affect final investment decisions for new projects.

Henning Gloystein is director of Energy, Climate and Resources at Eurasia Group. He said that China's rapid de-carbonization will "almost certainly" impact LNG FIDs and cause cancellations of certain projects, particularly those with long lead times and high costs.

As many Asian and European countries are still LNG import-dependent, it is likely that most U.S. project will go ahead.

According to Wood Mackenzie Research Director for Asia Pacific Gas and LNG, Huang Miaoru said that due to the U.S. China tariff dispute and Beijing's tax on U.S. LNG direct purchase agreements are unlikely between Chinese buyers, and U.S. developers.

Chinese buyers will instead be expected to purchase LNG from portfolio players that source LNG from different projects.

She said that "while?China will remain the dominant driver for Asian and global LNG through the mid-2030s," the commercial and geopolitical path to capture this demand has become significantly more complex for U.S. Project Developers.

Venture Global, a U.S. exporter of LNG, said that it continues to see a strong commercial demand in Asia which is growing.

Cheniere Energy declined to comment. QatarEnergy has not responded to a comment request.

Alternatives to LNG

China has many alternatives to LNG thanks to its years-long efforts to diversify and increase self-sufficiency. This helped it avoid the worst effects of the Iran War despite being the top energy importer in the world.

The development of unconventional gas resources, such as shale and coalbed methane, has driven the growth in domestic gas production by an average 9.5% per year over the past 25 years.

China also intensifies its energy relations with Russia by increasing pipeline gas imports. In 2027, the Far East pipeline will begin delivering gas. This will further reduce?incremental LNG consumption. Power of Siberia 2, a larger and more ambitious project, would be another major pipeline source.

JPMorgan analysts wrote in an email that recent developments had, in their opinion, accelerated China’s acceptance of Power of Siberia 2. China is more motivated to reduce LNG imports through this route, as Iran has been exploring new ways to control the transit via Hormuz and monetize it.

The continued expansion of coal-fired power capacity and the world's largest renewables buildout in China are reducing gas demand growth.

Zhang Yaoyu, global head of LNG at PetroChina International and new energies, said that renewable energy is a "structural obstacle" to LNG usage. This was stated in February during a conference held in Doha.

The levelized cost of solar and wind electricity has dropped dramatically. How do you compete? He said.

According to Rystad, ICIS, and S&P, China's LNG exports will fall between 61 and 64 million tonnes this year. This is the second consecutive decline.

Customs data show that China imported 68.4 millions tons of LNG last year, narrowly edging out Japan as the top LNG importer in the world.

According to Rystad energy analyst Xiong Wei, the competition from local gas production and pipeline supply last year pushed down the price that China would buy LNG on the spot markets to $8-$9 per million British thermal units.

This is a significant discount to the spot price of $25/mmBtu that was charged after Iran's attacks on the world's No. 2 LNG exporter, Qatar. Qatar is the world's No. 2 LNG exporter.

Sinopec, a state-owned energy company, halted the expansion of its Tianjin import terminal in March, instead using 590 million yuan (4 billion yuan) to increase domestic gas production, according to a statement released in March.

Analysts say that a surge in global LNG supplies could drive down prices and stimulate future demand in China where coal-to gas switching is expected to be the driving force behind future demand.

Gloystein, of Eurasia, said Beijing would be encouraged by its success with renewable-fueled electrification. He also noted that Beijing has been stockpiling fuel to protect itself against supply disruptions.

He said that the peak in China's gas and oil demand will come sooner than expected.

(source: Reuters)