China has much to gain from Qatari LNG push
Thursday, Jul 06, 2017
China’s long-standing drive to increase consumption of natural gas received a shot in the arm this week after Qatar announced plans to expand its LNG exports by 30%.

While the Asian economic giant is busy boosting its own gas production it has become increasingly reliant on foreign supplies following Beijing’s efforts to lift gas’ share of the energy mix to 10% by 2020.

As such, the country has developed a multilayered gas import strategy that relies on piped imports from Central Asia, Myanmar and eventually Russia as well as a network of LNG import terminals.

News that Qatar is preparing to increase its LNG production to 100 million tpy from 77 million tpy within the next five to seven years will be welcome news for Chinese buyers, promising to bolster consumer power ever further.

Reclaiming the throne
For several years the global LNG debate has been dominated by the rise of Australia, which is set to replace Qatar as the pre-eminent gas exporter by mid-2018. Australia is projected to have 87 million tpy of export capacity operational within the next 12 months or so.

But a prolonged LNG price slump, driven by a swathe of new projects coming on stream around the world as well as several more moving through the project pipeline, has reduced the likelihood of major new Australian export initiatives being greenlit anytime soon. This has led to forecasts that the US LNG industry will eventually surpass Australia’s thanks to the ongoing North American shale gas revolution.

All this has been a major boon for Asian gas importers, which have begun renegotiating long-term supply contracts, with Japan even going as far as cracking down on destination clauses.

Into this mix, then, comes Doha’s decision to bump up LNG output by 30%. The move has been described as both the start of a price war for Asian customers as well as a means of preparing for a lengthy battle with Saudi Arabia, Egypt, the United Arab Emirates (UAE) and Bahrain, which have just extended sanctions on Qatar over accusations that it is sponsoring terrorism.

But Qatar’s announcement has caught some buyers in Asia, which consumes 70% of global LNG supplies, by surprise. A spokesman for major LNG buyer Korea Gas (KOGAS), Kim Young-ki, told Reuters “We would have to figure out why Qatar is planning to boost its output. We don’t have plans yet to import new LNG cargoes from Qatar.”

But Qatar’s choice should not just be boiled down to a desire to capture a greater share of the existing market. Rather, it could be seen as laying the ground work to supply ever greater volumes to the region’s fastest growing consumer – China.

Securing supply
China has long been preoccupied with securing its energy supply lines and has sought ways to become less dependent on fragile maritime delivery routes. It has built gas pipelines through Central Asia and Myanmar and is working with Russia to bring the first Power of Siberia pipeline on stream by the end of 2019.

But in the last few years Beijing has embraced a new approach to its maritime security concerns, by boosting its military presence in the South China Sea as well as in the Indian Ocean. Just this week Indian media quoted the Indian Navy as saying more than a dozen Chinese Navy vessels had been sighted in the Indian Ocean in the past two months.

Beijing’s One Belt, One Road (OBOR) strategy envisions a network of road and maritime routes funnelling business to China, which sits at the heart of the trade network. The central government demonstrated at the end of May that it had the financial and diplomatic clout to bring such vision to pass, through the first OBOR summit, and now it is demonstrating that it can protect those trade routes once established.

This makes all the more sense when viewed through the prism of recent Chinese LNG trading activity.

LNG imports in May rose 104% year on year to 2.9 million tonnes, overtaking South Korean purchases for the first time. South Korea received 2.49 million tonnes, up 12.4% on the year. In 2016, Chinese deliveries rose by 32.6% to 26.1 million tonnes while South Korea increased its imports by 2.3% to 33.4 million tonnes.

Chinese buyers are capitalising on the fact that Asia’s spot LNG prices have tumbled in recent years as availability of supply has outpaced regional demand. This has made the fuel competitive with pipeline imports, once additional fees for transportation and distribution have been factored in.

While the Chinese NOCs continue to dominate the gas infrastructure landscape, changes are quietly taking place that should slowly but fundamentally change the nature of local gas market, leading to additional demand for the chilled fuel.

Changing it up
In what has been called a watershed moment for China’s emerging independent LNG players, Xinjiang-based Guanghui Energy commissioned its first LNG import terminal in June.

The Chinese company received a 60,000 tonne cargo from Trafigura on June 5 at its terminal in Qidong City.

Meanwhile, fellow independent Poly-GCL Petroleum is looking to build an import terminal in partnership with state-owned China National Offshore Oil Corp. (CNOOC) in Binhai City and is trying to close long-term sales contracts before it embarks on the project.

Private players are nimbler than their state rivals and should be able to drive demand for LNG. After all, the involvement of private players in China’s crude import strategy has supported national crude demand while radically changing the nature of the country’s fuel market. The country is struggling with an oil product oversupply that has forced the NOCs to increase sales into the regional market in order to offload surplus inventory dampening regional margins.

But while it may be tempting to draw parallels between the private players in the oil and gas import sectors, it is essential to remember the fundamental differences between the two markets – notably the hefty investment commitments required to build an LNG import terminal.

Still, China’s commitment to gas is a long-term one. Once Beijing’s goal of supplying 10% of its energy mix with gas is met, the government will in all likelihood move the goal posts again. First to 15% and then to 20%.
As such, any move to flood the LNG market by gas giants such as Qatar will be met with joy by China’s energy strategists.

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