LNG: Fueling the Dragon

Bottomline: Coal-based China has emerged as the key player in the globalizing natural gas market (via LNG) over the past decade. In fact, China in 2021 surpassed Japan as the top natural gas importer and the largest LNG importer. China’s role in determining global natural gas trends— especially, gas pricing and LNG trade—is becoming increasingly important. China’s upside demand potential will alter global trade routes for LNG and natural gas in general. China’s reliance on U.S. LNG is likely to rise in the coming decades, as a growing number of U.S. exporters have signed long-term contracts with Chinese gas companies. As the LNG market continues to make gas a global commodity traded like oil, China’s prowess will have profound impacts for other LNG market players, namely Europe as it tries to drastically decrease its reliance on politically risky Russia. China has already shown a willingness to pay more for energy. 

Even though it has quickly become the world’s go-to fuel, natural gas remains a relatively small source of energy in coal-based China, accounting for less than 10% of the total energy mix in 2022. 

Compare this to the West, where gas constitutes about a third of total energy consumption. 

Yet, the upside demand potential in China for gas is immense, with usage potentially doubling or even tripling by 2050. 

Gas has much lower criteria pollutants and CO2 emissions than coal, so China’s sustainability goals favor more natural gas.  

Air pollution is an acute problem in China’s cities, which begs a long-term solution rather than temporary factory shutdowns and traffic bans. 

China’s five-year plans and supporting documents offered natural gas, along with electricity and renewables, as a key alternative source to coal in its efforts to fight air pollution. 

Although industrial gas use is expected to continue growing, cost remains the main challenge because cheap coal still serves as the pillar of Chinese manufacturing centers. 

In power generation, natural gas is still a costlier as well as much more volatile option for Chinese utilities. 

But policy change is becoming less avoidable even for the CCP: while progress has been made, further improvement is required as Chinese cities continue to experience months with lingering poor air quality. 

With limited domestic resources, China is on the prowl for growing imports of natural gas.

In 2022, imported natural gas made up 46% of the country’s total consumption. 

Passing Japan just a few years ago, China has now become the world’s largest LNG importer. 

Major uncertainties remain in pricing, domestic production, pipeline gas imports from Russia and, most importantly, China’s own economic conditions.  

While pipeline builds from Russia are advancing, turning to the global LNG market will be a major way in which China continually receives its gas. 

China’s unmatched buying power will impact other buyers in Europe and elsewhere: the CCP has shown a willingness to pay more for energy. 

China could be importing 30% of total world LNG supply in 2030, compared with 20% in 2022. 

As Europe continues to seek all ways possible to get away from Russian gas, ongoing competition from China (and increasingly India) could become its biggest energy security problem. 

Germany, for instance, is looking to double its LNG import capacity over the next three to five years. 

But China could be setting the price for LNG. 

The European Union in particular will need better links (and a willingness to sign long-term gas supply deals) with the U.S., potential suppliers in eastern Canada, Norway, and Northern Africa to supply natural gas, both for piped and LNG. 

Read the full study here.