The key message in BP’s Statistical Review of World Energy highlighted primary energy was +2.9% YoY in 2018 and it was “the fastest growth seen since 2010”. And natural gas was the big winner, BP said “2018 was a bonanza year for natural gas, with both global consumption and production increasing by over 5%, one of the strongest growth rates in either gas demand or output for over 30 years”. This is an excellent database, but it is backward looking. The numbers were strong, but don’t take away from the pricing pressure risk to LNG in 2020 and 2021 in the face of Russia’s two big gas export pipelines start up in 2019 and 2020 – the 3.6 bcf/d Power of Siberia gas export pipeline to China, and the 5.3 bcf/d Nord Stream 2 gas export pipeline to Germany. The fear remains that these two projects can almost cover (replace) any expected LNG demand growth in 2020 and 2021. The BP data showed it was a good 2018 for natural gas, but its not big to allay our fears that we detailed in our March 30, 2019 blog “LNG Price Pressures 2020/2021 With Gazprom Adding ~8.9 Bcf/D Export Gas Pipeline Capacity Into Europe And China” [LINK]. So it was a good 2018 for natural gas, but we still believe the big issues for LNG in 2020 and 2021 are these Gazprom pipelines and that they should cause continued pressure on LNG prices.
BP Statistical Review of World Energy for 2018 – natural gas demand growth was the good news story. It is probably the most referenced energy data document, on Tues, BP issued its annual Statistical Review of World Energy that provides an excellent look back at all the 2018 data for energy. This is a must add to reference libraries for the report [LINK], the chief economist speech [LINK], and the excel database [LINK].] BP’s overall energy comment is “Global primary energy grew by 2.9% in 2018 – the fastest growth seen since 2010”. BP highlighted natural gas as the good news story “as I mentioned, 2018 was a bonanza year for natural gas, with both global consumption and production increasing by over 5%, one of the strongest growth rates in either gas demand or output for over 30 years. BP also said “This acceleration was particularly pronounced in natural gas demand, which increased 5.3%, one of its strongest growth rates for over 30 years, accounting for almost 45% of the entire growth in global energy consumption”.
BP highlighted China within the natural gas story. BP had a good writeup on China starting with “China gas consumption grew by an astonishing 18% last year”. BP noted how the growth was driven by the push to clean up its air. BP wrote “This strength stemmed largely from a continuation of environmental policies encouraging coal-to-gas switching in industry and buildings in order to improve local air quality, together with robust growth in industrial activity during the first half of the year. These coal-to-gas switching polices have been instrumental in increasing Chinese gas consumption by over a third in the past two years alone. Official estimates suggest that as many as 10 million households – roughly half the number of households in the UK – switched from coal-to-gas boilers over this 2-year period, with even greater switching in the industrial sector. Importantly, a series of improvements in import capacity, distribution and demand management meant that this second successive year of rapid growth in Chinese gas consumption was achieved largely without a repeat of the price spikes and shortages which characterised the winter of 2017/18, with increased imports from both LNG and pipeline”. This theme of China being serious about dealing with pollution was what we saw in the summer of 2017, and why we wrote our Sept 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG” [LINK].
In 2018, China was 22% of YoY world gas demand growth, 55% of YoY world LNG imports growth. In 2018, BP estimated global natural gas consumption of 372.4 bcf/d, which was up 18.9 bcf/d or 5.3% YoY. For China, BP estimated natural gas consumption in 2018 was 27.4 bcf/d, which was up 4.1 bcf/d or 17.6% YoY. But what is important as we look ahead to 2020 and 2021 is that BP estimates China’s LNG imports were only +2.0 bcf/d. We built the below table to show how China compared to the world for natural gas consumption and LNG imports.
World Vs China 2018 Natural Gas Demand Vs Supply
China’s natural gas imports in 2018 were strong considering natural gas is still only 7.43% share of total energy mix. The above table shows China’s natural gas imports in 2018 were +2.8 bf/d YoY, including pipeline imports +0.8 bcf/d YoY and LNG imports +2.0 bcf/d YoY. We had expected, at least in 2018, that LNG imports would have been higher, but we did not expect the pipeline imports to be up as high as 0.8 bcf/d YoY in 2018. China’s target is to have natural gas be 10% of its energy mix in 2020, but it was only 7.43% in 2018. It is still behind the pace needed to hit its target. At 7.43% of the energy mix, we view 2.8 bcf/d YoY increase in total natural gas imports to be a strong number. In our Sept 20, 2017 blog, we said that it China were to get natural gas to a 10% share of its energy mix, it would need to increase its imports by ~3.5 bcf/d to ~4.5 bcf/d per year.
Pricing pressure on 2020 LNG prices – Gazprom’s 3.6 bcf/d Power of Siberia export pipeline to China starts up Dec 1, 2019. The BP report is primarily a look back report, so there is no mention of why we see this data as reminding of the risk to LNG prices in 2020 and 2021. BP has limited forward looking comments throughout the report and speech, so it is no surprise they do not highlight Gazprom’s new 3.6 bdf/d Power of Siberia gas export pipeline that is on track to begin deliveries to China on Dec 1, 2019. This links back to our March 30, 2019 blog “LNG Price Pressures 2020/2021 With Gazprom Adding ~8.9 Bcf/D Export Gas Pipeline Capacity Into Europe And China” [LINK]. Our concern for 2019 is slower YoY growth rate increases . It has been a slow start to LNG demand due to the mild Asian winter. YTD Apr 30, 2019, China’s LNG imports are only up ~1.5 bcf/d YoY. If we look thru the mild winter and use China’s 2018 +4.1 bcf/d YoY in 2018 for natural gas consumption as a baseline normal level, we would expect natural gas consumption to be at least 5 bcf/d YoY. If we assume China production continues to grow by ~1 bcf/d, it leaves the need for 4 bcf/d of either pipeline or LNG or a combination in 2020. The problem is that the Gazprom 3.6 bcf/d Power of Siberia gas export pipeline to China is on track for deliveries in Dec 2019 and it will almost, by itself take care of all China need for LNG or pipeline imports. From a total world perspective, China was 55% of the YoY growth in LNG imports in 2018, and if Power of Siberia can basically take care of China’s natural gas import needs, then it means there will likely be LNG cargos originally destined for China being redirected once again to NW Europe.
Even bigger pricing pressures whenever Gazprom’s 5.3 bcf/d Nord Stream 2 export pipeline to Germany starts ie. either in 2020 or 2021. On Sunday, we tweeted [LINK] “Gazprom says 5.6 bcf/d Nord Stream 2 export pipeline to German is now 57.2% completed and work is going on every day to complete. Don’t know when Denmark will approve, but will only take ~5 weeks to complete ~130 km in Danish waters … “ Gazprom’s target for in service was by the end of 2019. It still isn’t clear when Gazprom will get the final Danish Energy Agency route sign off, but the expectation is that Gazprom will likely miss its yr end 2019 in service with a more likely time frame being in H1/2020. Adding 5.3 bcf/d in mid 2020 will be a big negative to LNG prices as soon as it starts up and its pressure on LNG prices will continue at least thru the end of 2020. By itself, Nord Stream 2 will likely cover the vast majority of incremental LNG demand in 2020.