China is increasing domestic natural gas production, and fast. As a major LNG consumer and importer, the country has been key to LNG demand forecasts. Now, those forecasts need revision.
Less than a decade ago, China was struggling to boost domestic natural gas production, particularly from shale gas. China’s shale geology is different from U.S. basins, and energy companies find it difficult to produce commercially. Now China’s state-owned oil and gas giants are extracting more natural gas than ever before and announcing new discoveries in shale fields.
Kpler reported this month, citing official production data, that China produced 22.1 billion cubic meters in November, a year-on-year increase of 7.1%. The growth was driven by “faster-than-expected growth in shale gas production in the Sichuan Basin.” Based on the data, the energy analytics firm expects China’s total to reach 263 billion cubic meters in 2025, rising to 278.5 billion cubic meters this year, also due to growth in shale gas production in the Sichuan and Shanxi basins.
As with oil, rising domestic production will inevitably affect imports, although China is more reliant on natural gas for emissions reduction purposes. For example, China’s domestic natural gas production increased last year while LNG imports fell significantly. In fact, LNG imports fell to their lowest level in six years last year, following 12 consecutive months of declines. Imports only rebounded at the end of the year, but it was not enough to reverse the decline. Kpler predicts that China’s demand for LNG will also decline this year, with shale gas production reducing LNG demand by about 600,000 tons, reducing total demand to 73.9 million tons.
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Now, 600,000 tons is not a huge number for a market where exports from the United States alone exceeded 100 million tons last year. But it is yet another piece of evidence of China’s trend to reduce its reliance on energy imports, which has implications for global energy commodity markets that have become accustomed to relying on China as the ultimate driver of demand.
An expected decline in China’s demand for natural gas, as well as LNG, could disrupt plans for new LNG capacity additions and prices, leading to shrinking producer profits. It is these plans that will introduce a wave of new LNG supplies by the end of the decade, mainly from top exporters such as the United States and Qatar, which has led many analysts to predict that the LNG market will be oversupplied by 2030, which will put pressure on prices.
In addition, there is competition in the LNG market itself. China is no longer importing U.S. liquefied natural gas as a tariff dispute erupted between the two countries after President Donald Trump was sworn in. But Russia’s exports to its neighbors are at a record high. For now, these record numbers are not huge. However, they come from two sanctioned LNG facilities, showing that, like oil and love, gas will always find a way if the price is right.
Growth in Russian LNG exports to China may also become a factor in LNG market forecasts, especially once a blanket EU ban on Russian energy imports (i.e. natural gas) comes into effect next year. Currently, the EU is the largest buyer of Russian LNG; once the ban takes effect, these flows will be redirected, and the most likely new destinations will be China and India.
Meanwhile, pipeline natural gas flows into China will also increase this year, further dampening demand for LNG. Kpler said that the volume of oil imported from Russia through the “Power of Siberia” pipeline alone may increase by 8 billion cubic meters by 2025, pushing total pipeline imports to increase by 8% to 80.7 billion cubic meters. Meanwhile, pipeline gas imports by Central Asian countries are expected to fall by 4 billion cubic meters by 2026 due to strong domestic demand, which will allow these countries to keep more gas at home.
China will continue to increase domestic natural gas production. Reducing dependence on energy imports is a top priority for Beijing. However, this reduction in imports will be gradual and will reach its limit sooner or later. Until then, prices will drive import decisions and the impact those decisions may have on the global LNG market.
However, to be fair, this impact is unlikely to be as large as the impact of China’s oil demand trends. The reason is that there are plenty of other countries with strong demand for LNG – especially if prices go lower and stay there, whether due to new capacity adding to supply or lower demand from China due to increased domestic production.
Author: Irina Slav for Oilprice.com
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