China has been the focus of oil traders' attention for years thanks to its seemingly insatiable demand for the fuel. Now, the country is about to cast itself as the star of the natural gas show as well.
Last year, China’s natural gas consumption hit 394.5 billion cu m—a 7% annual increase, analysts from Columbia University’s Center of Global Energy Policy wrote in a recent paper. The authors noted that while most of the new demand came from industrial consumers, urban heating and cooking demand rose much faster, adding 10% versus 8% for industrial gas consumption. It seems this trend will accelerate.
In a recent column looking into China and natural gas, energy analyst John Kemp wrote that demand for natural gas for heating and cooking purposes in Chinese cities would drive the country’s overall gas demand growth, even as it remains a small part of the electricity generation mix.
Kemp noted the expansion of China’s natural gas pipeline infrastructure, driven by that very same urban gas demand, which saw the total length of transmission and distribution pipelines swell from less than 40,000 km in 2000, to over 1 million km as of last year. The expansion was prompted by the rising numbers of households connected to the gas grid: from fewer than 50 million back in 2003 to 471 million in 2023, Kemp wrote, citing data from the Chinese statistics bureau.
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So, the demand for natural gas in China is on the rise, and the biggest contributors to this rise are retail consumers in large cities. It is this retail demand that gas traders and producers should probably focus on with a view to their own future demand prospects, although electricity generation and petrochemicals will also be factors driving gas demand higher in the coming years.
According to Kemp, gas for electricity generation is somewhat negligible because most of China’s electricity still comes from coal and hydro, as well as a massive amount of wind and solar installations. Reuters’ Gavin Maguire also recently noted that natural gas generation only makes up a tiny portion of the total energy mix, at a puny 2.8% this year, down from 3% last year.
However, Maguire also pointed out that this puny 2.8% was, in absolute terms, a record high amount for gas power generators, at 188 TWh for the first eight months of the year. The amount was an increase of 1.5% from the first eight months of 2023 and a reason for optimism among gas bulls. This optimism, however, should be accompanied by caution because China is unlikely to plan on boosting its reliance on gas for power generation—not when it already depends on imports for between 40 and 45% of its consumption, per Kemp.
Of course, these numbers may be a reason for caution among Chinese planners, but they are the opposite for gas producers. China has already become the world’s largest importer of liquefied natural gas, and it’s only going to grow larger, according to one Cheniere Energy executive.
Chinese demand for natural gas is set to jump by more than 50% by 2040, from 400 billion cubic meters now to more than 600 billion cu m, Cheniere director of LNG origination Yingying Zhou said at the Asia Gas Markets conference in October. He added that Cheniere expected China to become the world’s first market with 100 million tons of LNG demand very soon. LNG will represent about 25%-30% of China’s total natural gas demand in this scenario.
LNG demand specifically will benefit from the increased appeal of LNG-powered trucks in China, which are replacing diesel-powered vehicles. In just the first half of this year, LNG truck sales rose by 104% on the year, after logging a 307% surge in 2023, the CGEP paper said. In absolute numbers, the 2023 total stood at 152,000 trucks—and that growth pattern continues this year. Likewise, LNG subsequently saw strong LNG demand—that is, until prices rose.
China may be the biggest importer of LNG and is likely to get bigger, but it is a price-sensitive buyer, too, and sellers would do well to bear this in mind. The country has been gobbling up LNG cargos to fill its storage ahead of winter and avoid another energy crunch, but it has been gobbling up relatively cheap LNG cargos—precisely because they were relatively cheap. The moment spot prices spike, China starts importing less LNG.
The country is also boosting its domestic supply of the commodity to limit its dependence on imports. Last year, total gas output rose by 5.6% over the previous year. This year, it has continued to grow, adding 6% in just the first half of the year.
China, then, will be a key force to reckon with in the natural gas space even as it continues building out its wind and solar capacity. It will rightly be the focus of traders’ attention for years to come, just as it is with crude oil now. Yet it would pay not to pin all demand growth hopes on China alone—the country is demonstrating a rather disciplined approach to demand management in that energy supply segment.
By Irina Slav for Oilprice.com