China’s pursuit of natural gas jolts markets and drains neighbours

Beijing’s quest to run world’s second-largest economy on cleaner energy is reshaping global trade in the fossil fuel.

Beijing’s efforts to shift from coal to gas as a fuel over the longer term has drawn ever-larger liquefied natural gas imports. Picture: Getty Images

China’s quest to anchor its industrial growth to cleaner energy is whiplashing global prices of liquefied natural gas, reshaping trade in the world’s fastest-growing fossil fuel and raising fears of power blackouts in neighbouring economies competing for the resource.

A sudden confluence of global supply outages and an unusually cold winter tripled LNG prices in mid-January to a record $US32.50 a million British thermal units from early December — and brought into focus China’s increasingly outsize role.

Underpinned by its economic boom and rising presence in LNG spot markets, Beijing’s efforts to shift from coal to gas as a fuel over the longer term has drawn ever-larger LNG imports in recent years, tightening supplies available to gas-dependent neighbours Japan and South Korea. The three economies account for 60 per cent of the world’s LNG consumption.

China’s voracity worsened a natural-gas shortage in January in Japan — which China last year outstripped as the world’s largest LNG importer — that put parts of Japan at risk of blackouts. In December, China imported 7.6 million tonnes, the most ever. Utilities in Japan reported severe shortages of natural gas and averted blackouts by turning back to coal, oil and other older means of power generation.

Chinese LNG consumption rose last year by some 11 per cent, far outpacing the 1 per cent rise globally, data from consulting firm Wood Mackenzie shows. Imports meet about 45 per cent of China’s demand, which has been rising since President Xi Jinping set around 2015 decades-long plans to pipe natural gas into millions of Chinese homes and factories. Beijing views natural gas as a stepping stone — a cleaner fossil fuel — in its campaign for carbon neutrality by 2060.

Provincial authorities, including in southern Guangdong, began requiring more manufacturers to burn gas instead of coal last year, official reports say. And Beijing loosened rules in the past two years to allow more companies to import LNG, turning provincial gas distributors into more active bidders in spot markets once reserved for a handful of state-controlled giants.

“When you have an extreme need for supply and physically can’t deliver on it, then that underpins this type of price rallies.” said Jeffrey Moore, analytics manager at researcher S&P Global Platts.

Prices for the fuel have fallen to around $US6.30 MMBtu in mid-February, an 81 per cent dive from January’s record, as the fading cold snap eased buying competition. Just weeks earlier, the outsize imports didn’t seem to be enough. Platts estimates show that LNG stocks in northeast Asia were 64 per cent of capacity heading into winter, well below the 70 per cent average in previous years, forcing buyers to the spot market.

Unexpected shutdowns of export plants in Australia, the world’s top producer, and elsewhere, meant Asia had to rely on imports that needed three times as many days — or more — to ship.

In late December, China’s top economic policy body ordered domestic gas producers to operate at capacity and LNG shipping terminals to give priority to imports. Authorities also had to fall back to coal-fired power and ordered more coal imports, too.

“We are doing everything possible to increase supply of the resource,” the National Development and Reform Commission said at the time. “We are making every effort to increase the purchase of spot LNG.”

In Japan, power plants in the heavily populated Kansai region were running at 99 per cent of generation capacity; more than the usual 60 per cent for LNG-fuelled plants. Japan depends on natural gas for about a third of its electricity.

The strains on Japan’s grid forced operators to turn to old playbooks, including running some plants beyond capacity and, in the case of Tokyo-based utility Electric Power Development Co., burning crude oil for two days in January to keep up power generation.

The heady prices in January were profitable even at the height of the rally: In China, prices for end-use LNG trucked into metropolitan Beijing were 20 per cent higher than imports. The gap widened in smaller and less-developed cities.

“Our biggest priority is to have stable supply, which means we purchase from the spot market when necessary,” said Korea Gas Corp. Spokesman Kim Chi-ho. “This year, our spot purchases increased due to unexpected cold waves.”

Like most of its counterparts, state-owned Kogas locks in more than half its LNG supply through long-term contracts but relies on the spot market to meet sudden demand.

China’s huge presence has chipped away at its neighbours’ supplies. For years, Australia has been the top exporter to Japan, accounting for about a third of its LNG imports. But last year, Japan imported 26.3 million tonnes from Australia, down from each of the previous two years. Australian LNG shipments to China rose 5 per cent year over year to a record 29 million tonnes last year.

Korean data shows that Australian LNG imports have stayed largely flat since 2018. Korea began looking elsewhere for shipments in recent years. The U.S. share of Korea’s LNG imports has risen to 14 per cent in 2019 from 1 per cent in 2016, after Kogas agreed in 2017 to long-term supply by Houston-based Cheniere Energy.

But China, too, is shipping more from the U.S., with imports reaching a record 3.2 million tonnes last year, up 50 per cent from 2018.

China’s gas demand is set to keep rising, underpinning the potential for supply shocks to turn prices volatile in coming years.

“Even before winter, there were a lot of policies to hasten infrastructure investment” in China’s LNG storage and connectivity, said Woodmac analyst Miaoru Huang. “But I think after this price spike, there will be renewed incentive to advance the build.”

The Wall Street Journal