Energy demand ahead? Here’s what China’s insatiable natural gas purchases signal

China is actively engaging in a significant natural gas acquisition campaign, and government officials are encouraging importers to continue striking deals even as the global energy crisis subsides.

have expressed their support for state-owned buyers to secure long-term contracts and invest in export facilities, aiming to enhance energy security until the middle of the century.

Based on discussions with individuals who have met with Chinese officials, it is evident that the government is committed to bolstering its natural gas reserves. In 2023, China is poised to become the world’s leading importer of liquefied natural gas (LNG). Furthermore, Chinese companies have, for the third consecutive year, committed to purchasing more LNG on a long-term basis than any other nation, as reported by Bloomberg News.

To mitigate the risk of future energy shortages and sustain economic growth, China is taking a forward-looking approach. By focusing on long-term LNG contracts, the country aims to ensure a stable and predictable supply of natural gas. Compared to the volatile spot market, where prices spiked dramatically following Russia’s invasion of Ukraine, long-term contracts offer the advantage of securing shipments at relatively steady prices.

“Energy security has always been a priority for China,” said Toby Copson, global head of trading and advisory at Trident LNG in Shanghai. “Having ample supply in their portfolio allows them to manage future volatility. I would expect to see more.”

China’s ongoing efforts to strike long-term natural gas contracts will not only benefit its own energy security but also support global export projects and strengthen the role of liquefied natural gas (LNG) in the global energy mix. As suppliers actively seek to attract Chinese importers, Beijing’s influence in the market is expected to grow.

The Chinese government initiated its pursuit of long-term contracts in 2021, coinciding with improved relations with the United States. Although Chinese LNG imports experienced a decline last year due to reduced demand caused by Covid-19 restrictions, Chinese buyers renewed their efforts after the invasion of Ukraine disrupted pipeline gas supplies to Europe. This event served as a catalyst for China to further diversify its natural gas sources and strengthen its LNG imports through long-term agreements, thereby ensuring a more reliable energy supply.

In addition to China, other importers such as India are also actively seeking to secure more long-term LNG contracts to mitigate future shortages and reduce dependence on spot deliveries.

However, China has been particularly swift in finalizing these agreements. Bloomberg calculations indicate that China has accounted for 33% of the total long-term LNG volumes signed so far this year, indicating its accelerated pace in securing these contracts compared to other countries.

Recently, China National Petroleum Corp. (CNPC), a state-owned company, finalized a 27-year agreement with Qatar and also acquired a stake in Qatar’s large-scale expansion project. Additionally, ENN Energy Holdings Ltd., another Chinese company, entered into a long-term contract with US developer Cheniere Energy Inc. Both agreements involve significant durations spanning multiple decades. The supplies from these contracts are scheduled to commence as early as 2026.

More deals are in the offing as negotiations span boardrooms from Singapore to Houston. State-owned giants including Cnooc Ltd. and Sinopec are in discussions with the US, while smaller firms such as Zhejiang Provincial Energy Group Co. and Beijing Gas Group Co. are also searching for deals, according to traders. Qatar is in talks with several Chinese buyers for sales contracts that could last more than 20 years, the traders said.

The deals will help feed the roughly dozen new import terminals that are slated to start construction across China’s coastal cities in this decade. The nation’s LNG imports could rise to as high as 138 million tons by 2033, about double current levels, according to Norwegian consultant Rystad Energy.

“Currently, over half of China’s LNG demand from 2030 to 2050 remains uncontracted,” said Xi Nan, a Rystad analyst.

The government isn’t forcing companies to sign deals, and traders will only ink agreements that have attractive prices, the traders said. Chinese buyers are also using the new LNG contracts to expand portfolios and unlock lucrative trading opportunities.

The bullish demand outlook isn’t certain, however, especially as China boosts gas production at home, while overland shipments from Russia could rise if new pipelines are constructed. An excess of supply increases the risk that LNG import terminals are likely to sit idle more frequently, Cnooc senior analyst Xie Xuguang warned last month.

Nevertheless, power outages and shortages over the last few years have changed the thinking of China’s policymakers, who now favor energy security over fuel importers facing a possible oversupply, according to traders who are briefed on the government’s strategy.

China experienced electricity curtailments and a slowdown in economic growth due to a shortage of coal, which is the country’s primary fuel for power generation. In response to this challenge, China made a commitment to enhance its coal mining capacity, resulting in record-level production and well-stocked storage sites, thus reducing the need for coal imports.

Now, policymakers in Beijing are adopting a similar approach for natural gas. They are urging energy giants to increase domestic gas production by reducing drilling costs, aiming to enhance self-sufficiency in gas supply. By promoting higher gas production within the country, China seeks to mitigate the risk of gas shortages and ensure a more secure and reliable energy supply. These efforts align with China’s broader strategy of reducing dependence on imports and strengthening its energy self-sufficiency.

“Given that new pipelines are being discussed but have yet to be finalized, Chinese buyers are still looking to secure supplies” from the LNG market, said Michal Meidan, head of China Energy Research at the Oxford Institute for Energy Studies.

Plus, the more deals China signs, the more control the nation has over global LNG supply. China is already playing a key role in balancing the market, reselling its contracted shipment to the neediest buyers when demand at home is weak, with that trend set to expand as the new deals start this decade.

“Larger and more established buyers typically possess greater negotiation power compared to smaller or emerging players,” said Rystad’s Xi. “Continuing to sign long-term contracts is a logical decision.”
Source: Livemint