Friday,
October 04, 2019 /07:12PM / By Oilprice.com / Header
Image Credit: Oil Price
Trade
talks between the US and China are expected to resume in October, but US LNG
producers can already count the cost of earlier failed negotiations, which
resulted in the imposition of 25% tariffs on their LNG exports to China. The
number of US LNG cargoes heading to China so far this year has plummeted from
levels in 2018.
Even
for producers not facing tariffs, China's LNG demand is not showing the
dynamism of the last two years. China's LNG boom in Winter 2017 reflected a
lack of policy coordination between coal-to-gas switching on the one hand and
the country's domestic gas supply capabilities on the other. Two years later
and China enters the 2019/2020 gas year better prepared.
In
addition, the trade dispute has compounded the already evident slowdown in
Chinese GDP growth. Chinese LNG demand is still expected to rise by more than
10% this year, but this is a far cry from the near 44% growth seen in 2017 and
39% in 2018.
Strong
but not stellar demand growth now appears the order of the day. China's LNG
imports are expected to rise to 80 million tons per annum (mtpa) by 2025 up
from around 54 million tons in 2018, according to forecasts made by the China
National Petroleum Corporation.
Start-up
at the end of the year or in early 2020 of the 38 Bcm/yr (3.7 Bcf/d, 27.8 mtpa)
Power of Siberia pipeline will bring more Russian gas into China's north,
although flows will take time to ramp up and are not expected to reach full
capacity until 2025.
In
the meantime, Sinopec should have completed the 7.2 Bcm/yr Qingdao-Nanjing
pipeline by October next year, which will take LNG from the company's terminal
in Qingdao 531 kilometres to the Nanjing gas station, passing through seven
cities in Shandong and Jiangsu provinces, supporting the supply of regasified
LNG into the north and east of China.
The
government's environmental policies and the build out of delivery
infrastructure, including new LNG terminals, mean Chinese LNG demand is likely
to remain on an upward curve in contrast to the more limited prospects for
growth in Asia's two other key markets, Japan and South Korea.
While
the US-China trade war persists, this is a lost opportunity for US LNG
producers in terms of immediate sales, but also in terms of a dearth of
long-term purchase agreements from Chinese buyers and a lack of Chinese
investment in new US LNG plant.
European dependence
It
also creates a particular reliance on European LNG demand, but Europe's ability
to absorb cheap LNG is not infinite. According to Gas Infrastructure Europe,
Germany's gas inventories reached 93.9% of capacity September 29. Analysts put
storage levels across Europe 12 Bcm higher than a year ago at record levels.
European
LNG imports have come down from the peak levels seen in April to levels on a
par with last year, reflecting both the filling up of storage capacity on the
one hand and a lack of further capacity to switch from coal to gas in the power
sector on the other.
There
are of course uncertainties. A European Court of Justice (ECJ) ruling in
September has restricted Russian state gas company Gazprom's use of the Opal
pipeline in Germany. Initially, from 2011, Gazprom was only allowed to use 50%
of Opal's 36 Bcm/yr capacity, limiting its ability to bring in gas via the Nord
Stream import route. This restriction was lifted in 2016, but has been
re-imposed by the ECJ decision, which prevents Gazprom from the right to
participate in auctions for 40% of the pipeline's capacity.
Whether
the ruling results in a real cut in supply depends on whether Ukraine and
Russia reach an agreement on gas transit through Ukraine beyond the end of the
year, when the current contract expires. Both have economic incentives to reach
a deal and the ECJ ruling certainly puts pressure on Russia as transits through
Ukraine provide an alternative route into European gas markets for the lost
capacity on Opal. Nonetheless, to say Russian-Ukrainian relations are fractious
and unpredictable is an understatement.
While
Ukrainian-Russian gas relations provide the backdrop, more immediate is the
Dutch decision also announced in September to halt production at the once giant
Groningen gas field by 2022, eight years earlier than previously anticipated.
The field's production has fallen from 54 Bcm in 2013, before earth tremors
were felt, to just over 16 Bcm in the current gas year, which runs to October
1.
European
gas prices have strengthened on the back of the developments surrounding
Groningen and Russian gas supplies, alongside Norwegian gas field maintenance,
but this may only serve to price Europe's burgeoning coal stocks back into the
power market. Even as Groningen output drops to an expected 12 Bcm next year
and question marks hover over the volume of Russian supplies, record high
levels of gas in storage mean security of supply concerns are low.
In
the event of a mild northern hemisphere winter, LNG cargoes could well end up
in floating storage – i.e. loaded on LNG carriers with nowhere to go. At that
point, US LNG producers really will have cause to rue the tariff barriers
pricing them out of the Chinese market.
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