The news flow from China this summer on its increasing fight and urgency to fight pollution supports China’s plan to increase natural gas to 10% of its energy mix in 2020 and 15% of its energy mix in 2030. This is a game changer to global natural gas markets and, by itself, can bring LNG to under supply 2 to 3 years earlier than expected. China’s natural gas consumption increased by ~15% per year from 2005 thru 2016 and ~1.5 bcf/d per year vs China’s 8.5% growth rate in energy in total. Yet natural gas only got to 5.9% of China’s energy mix. If China is to hit 10% by 2020, it will need to increase natural gas consumption by 4 to 5 bcf/d per year. Assuming China continues to grow its domestic natural gas production by 0.6 bcf/d per year (its growth rate for last five years), China will need to import an additional ~3.5 to ~4.5 bcf/d per year. This is “per year”! And if so, we believe BC LNG will be back and there is a higher probability than ever before for a Shell FID on its BC LNG project in 2018.
China has had strong growth in natural gas demand to date. China’s natural gas consumption has increased by 15% per year from 2005 thru 2016. This was from a small base as China’s natural gas consumption was only 4.7 bcf/d in 2005. But it reached 20.3 bcf/d in 2016, or approx. 1.5 bcf/d increase per year. To put in perspective, US natural gas consumption was ~75 bcf/d in 2016 and Canada was ~11 bcf/d in 2016. Natural gas consumption increase of ~15% was almost twice China’s growth rate in energy consumption of ~8.5%. But even still, at 20.3 bcf/d in 2016, natural gas was still only 5.9% of China’s total energy mix.
There seems to be a greater urgency to switch from coal to natural gas before the winter to fight pollution. This is what got our attention over the summer and caused us to focus on China’s plan to increase natural gas in its energy mix. There has been an increasing flow of news this summer on actions to fight pollution. Anyone who has been to Beijing can tell you that the pollution issue is only getting worse. But what caught our attention was the Sat Sept 16 news reports in the South China Morning Post [LINK] and Xinhua news [LINK] on new actions to immediately switch from coal to natural gas for this winter. Hebei province is switching 1.8 million households to natural gas by Oct 31! SCMP reported that the Hebei province “announced on its website on Friday that 1.8 million households would switch to natural gas from coal for fuel and heating in order to improve air quality” and “Meanwhile, the Hebei authorities said 1.8 million households in the province would make the switch to natural gas by the end of October so that it can meet air quality targets”. Xinhua reported that “China has regulated use of cleaner fuel for heating in north China, where coal burning in winter is a major source of pollution. In the Beijing-Tianjin-Hebei region and nearby areas, 28 cities will now use only natural gas, electricity and renewable energy for heating”.
China’s domestic natural gas production has grown by 0.6 bcf/d per year for last 5 years. BP Amoco estimates for China’s domestic natural gas production was 5.9 bcf/d in 2006, reached 10.5 bcf/d in 2011 and finally 13.4 bcf/d in 2016. This is annual growth rate of 0.6 bcf/d for the last five years and 0.75 bcf/d for the last 10 years. The largest annual increases were 1.1 bcf/d in each of 2008 and again in 2010, whereas the smallest annual increase was 0.2 bcf/d in 2016.
China’s natural gas imports should increase by ~1.9 bcf/d per year assuming no change to a 5.9% share of the energy mix, As a reminder, China’s natural gas consumption has grown by ~15% per year and its total energy consumption by ~8.5% per year. We projected China’s natural gas consumption starting from the current 20.3 bcf/d and 5.9% share of energy mix, and grew it by 5%, 7.5% or 10%. The mid case being generally in line with China’s historical energy growth. In other words, we aren’t assuming any major increase in the 5.9% share of total energy. Under the 7.5% growth case, China’s natural gas consumption would increase by ~2.5 bcf/d per year, and natural gas imports by ~1.9 bcf/d per year assuming China’s production growth is 0.6 bcf/d per year. It’s a strong growth case for China and slightly higher than its historical 1.5 bcf/d per year growth in natural gas consumption. But remember, it doesn’t increase natural gas from its current 5.9% share of the energy mix. .
China’s Natural Gas Consumption Based On Current 5.9% Share Of Energy Mix
Source: BP Amoco, Stream Asset Financial
However, a shift to a 10% share of energy would increase China’s natural gas imports by ~3.5 bcf/d to ~4.5 bcf/d per year. As good as China’s natural gas demand growth has been, Its only going to get bigger as China moves to its target that natural gas would be 10% of its energy share in 2020 and 15% in 2030. This may not seem like much, but the math says to hit a 10% target, let alone a 15% share target, China will need to increase natural gas demand by 4 to 5 bcf/d per year and its imports by ~3.5 to ~4.5 bcf/d per year.
We took the above graph and added a line to show where China’s natural gas consumption wouild be if it was already at 10% of the energy mix. If so, it would be at 34.4 bcf/d instead of its current 20.3 bcf/d. We used that point to project where natural gas consumption will be at a 10% share of energy mix and assuming energy growth is increased by 5% or 7.5% per year. Remember that energy use has increased by 8.5% per year, and that we did not put in a 15% of total energy case which is China’s target for 2030. It means that to get to 10% of the energy mix in 2020 and a 7.5% total energy growth, natural demand would need to go from 20.3 bcf/d to 45.9 bcf/d in 2020 (+6.4 bcf/d per year) and 66.0 bcf/d in 2025 (+5.1 bcf/d per year). Under a 5% energy growth rate case, natural gas demand would need to go from 20.3 bcf/d to 41.8 bcf/d in 2020 (+5.4 bcf/d per year) and to 53.4 bcf/d in 2025 (+3.7 bcf/d per year). If we are conservative and use 4 to 5 bcf/d per year increase in natural gas consumption, this would mean an increase in natural gas imports of ~3.5 to ~4.5 bcf/d per year. This is a WOW! and even before we even think about natural gas moving to 15% of the energy mix in 2030.
China’s Natural Gas Consumption Based On Moving To 10% Share Of Energy Mix
Source: BP Amoco, Stream Asset Financial
This is why we see the market being able to absorb quickly the 8.1 bcf/d of new LNG supply in 2018/2019. As noted in our earlier blog today, the big test is coming up with under construction LNG supply projects expected to add 3.5 bcf/d in 2018 and 4.6 bcf/d in 2019. Then new LNG supply goes down to 2.6 bcf/d in 2020. If China is to get natural gas consumption to 10% of its energy mix by 2020, it is going to have to increase natural gas imports by ~3.5 bcf/d to ~4.5 bcf/d. It is why we see any oversupply caused by timing of supply additions vs demand growth should be temporary and be fixed quickly.
Under Construction LNG Liquefaction Projects
Source: Company Reports, Stream Asset Financial
If China can move to natural gas to 10% of its energy mix, it can move LNG markets to undersupply closer to 2020 than the conventional wisdom of closer to 2025. We recognize this is a major difference in the conventional wisdom views. Its not that we are trying to be bold, but the urgency we are seeing in China this summer to fight pollution makes us think that their plan to increase natural gas to 10% of its energy mix is a logical plan that they are working to attain. The math suggests that the conventional wisdom of LNG being oversupplied until close to 2025 is off by a few years and it will be fixed closer to 2020. Under construction US LNG projects are expected to add 4.6 bcf/d of new capacity thru 2020 and this provides increasing linkage of HH prices to global markets. It also is why we see HH gas prices potentially being ~40% above long dated strips post 2019. Cdn gas prices will be dragged up with HH prices, but we expect the 2018 and 2019 valuations and tone to Cdn natural gas to reflect this natural gas demand surge.
And it means that BC LNG will be back. We recognize that CNOOC just stopped pursing its BC LNG Aurora project and that the new BC NDP government isn’t viewed as being LNG friendly. And it will surprise long term readers of Energy Tidbits who know we have never believed BC LNG would happen. We always believed it had no hope, or at least we did up until the last two months. But that was before we saw the urgency and seriousness of China’s move to increase natural gas at the cost of coal and that China’s LNG imports were up 38% YoY in H1/17. The math that shows China will need to increase its natural gas imports by ~3.5 bcf/d to ~4.5 bcf/d per year means that BC LNG has to be back on the map. Shell has always been the higher probability of being the first BC LNG player. BC LNG will have to be cost competitive, but it also gives Shell more diversity to its LNG supply – a good thing for a global supplier of LNG. Especially with the increasing risk of North Korea and separately China’s increasing territorial claim to the South China Sea shipping lanes from its island building. So it may be a wildcard, but why we said earlier Cdn investors need to pay attention to what China is doing to increase natural gas share of its energy mix. For Canada, this should impact natural gas valuations in 2018 and 2091. And perhaps most of all for Canada, its why we see a better chance than ever to see a Shell FID on its BC LNG in 2018.