From The Wall Street Journal

China is replacing coal with gas, sucking up global supplies of the fuel and pushing up the price of liquefied natural gas to a three-year high.

The world’s No. 2 economy is cutting back on coal after President Xi Jinping made a cleaner environment a key priority at last Fall’s Communist Party Congress.

That has left swaths of industry in China struggling with limited gas, including giants like German chemical company BASF SE and local producer Yunnan Yuntianhua Co., as supplies are diverted to households that had previously relied on coal for heating.

China’s smog levels are still well in excess of World Health Organization standards, and analysts see no letup in the country’s move out of coal, which releases more greenhouse gas emissions than gas.

That’s good news for the LNG industry, which ships super chilled gas in its liquid form, at a time when large amounts of new supply has limited price gains.

“We were optimistic on the opportunity in China, but the magnitude surprised us,” said Anatol Feygin, chief commercial officer at U.S. LNG exporter Cheniere Energy Inc.

Cheniere opened an office in Beijing in 2017 to market its LNG and is in discussions with China National Petroleum Corp. for a long-term sales contract for U.S. gas. Among others, Malaysia’s national energy company Petronas also announced plans last year to expand their LNG sales in Southern China.

The price of LNG delivered to Asia hit $11.70 per million British thermal units this month, its highest level since November 2014, according to the Platts JKM benchmark price.

Chinese LNG imports rose by almost 50% in 2017, and the country has now eclipsed South Korea to become the world’s second-largest importer behind Japan.

The extra imports still haven’t been enough for some parts of Chinese industry.

On Dec.12, BASF stopped producing some chemicals at a Chongqing-based facility due to “a supply shortage of natural gas,” it said at the time. The company told The Wall Street Journal on Tuesday that its production remained suspended and it is unclear when it will resume.

Yunnan Yuntianhua said on Dec. 13 that its ammonia and urea production lines in the southwest province of Yunnan were halted due to “partial suspension in natural gas supply in southwest regions” to ensure heating demand for residents during the winter, according to a company filing to the Shanghai Stock Exchange.

Analysts say that given Beijing’s very public commitment to improving air quality, the shift away from coal is unlikely to lose urgency over the medium term. But neither will Chinese policy makers let citizens freeze, meaning that gas supplies will continue to be diverted to households.

“It’s clear that Beijing will continue its push to reduce reliance on coal,” said Fan Qingtian, senior analyst at Changjiang Futures Co. It isn’t unusual for Chinese policy makers to implement broad rulings that lead to unintended consequences, he said.

China has committed to increasing gas’s share of its energy mix to 10% by 2020 from its current level of around 7%. That could increase annual gas demand by more than 50% from 2016 levels to 325 billion cubic meters, according to Bernstein.

Even after accounting for the growth, gas consumption in China will remain a fraction of consumption in Germany, Japan or the U.S: a sign of the long-term potential in the market, Bernstein analysts also said.

“There’s an issue of how quickly can this be achieved without creating bottlenecks and price spikes especially when it’s cold,” said Kerry Anne Shanks, head of Asia Pacific LNG research at consultancy Wood Mackenzie.

The surge in demand from China couldn’t have come at a better time for the LNG market. A wave of new projects in Australia, the U.S. and Russia have helped keep the price of LNG at almost half its 2014 peak of more than $20 per million BTUs.

Royal Dutch Shell PLC, the biggest LNG shipper and producer, estimates that from 2016 to 2020, trade will increase by one-third to 350 million tonnes a year.

“I think part of the reason they [China] decided to do this was they knew they could purchase extra amounts from the market without tripling the price of LNG,” said Alan Townsend, senior energy specialist at the World Bank.

As it takes in more gas, China has been beefing up import facilities, according to consultancy Energy Aspects.

At the end of last year, China had the capacity to import 56 million tonnes of LNG a year and that is set to rise by a third to 74 million tonnes by 2020. A new pipeline from Russia to China is due to be completed in 2019, plus production from domestic gas fields is ramping up.

The move to gas is set to stay.

“Once certain cities, industries go into gas, they can’t get out; it’s that simple, even if the price increases,” said Javier Moret, global head of LNG at RWE Supply & Trading GmbH.


Legal Notice