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Analysis: China passes Japan to become world's largest natural gas importer

Singapore — China has passed Japan to become the world's largest importer of natural gas in recent months, and is expected to maintain that position as it continues to build out both LNG and pipeline capacity to meet rising demand levels.

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In recent months, the growth of China's natural gas imports has been driven mainly by the pace of LNG imports, which has grown faster than pipeline gas imports, even as domestic gas production levels have struggled to keep up.

In Japan's case, which only has access to seaborne LNG but doesn't have any pipeline flows, imports are slowing from the previous year due to nuclear power station restarts.

Natural gas imports: China vs Japan

China's total natural gas imports first exceeded Japan's in April 2018, when it posted 6.818 million mt of imported gas volumes compared with Japan's 6.079 million mt of LNG imports, according to official data from the two countries.

Cumulatively, China imported 72.06 million mt of natural gas over the January-October period, up 33.1% year on year, even higher than the full-year imports of 68.57 million mt in 2017, customs data showed. Meanwhile, Japan imported 67.36 million mt of LNG in the same period.

China's total natural gas imports are expected to continue rising as new LNG terminals will be supplemented by the startup of the Power of Siberia pipeline from Russia scheduled for December 2019 that will add a significant chunk to its gas supply.

"As you can see, 2018 is the year that China is expected to overtake Japan as the world's largest natural gas importer," Jeff Moore, manager for Asian LNG Analytics at S&P Global Platts, said.

He said during November and December both countries tend to import more because of their seasonal demand profiles so there is a likelihood that things could change, although they are not expected to deviate under current projections.

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China vs Japan natural gas imports: Monthly

CHINESE GAS DEMAND SURGE

Higher-than-expected Chinese LNG imports last winter was one of the pillars of support for LNG price levels, helping soak up much of the additional supply from new projects and the bulk of spot market cargoes.

This demand was largely backed by unprecedented coal-to-gas switching in northern China, particularly around Beijing to cut down pollution levels, which led to a significant change in projected LNG market fundamentals for this year's winter gas demand as well.

Since last winter, China has added new LNG import terminals and national oil companies have invested in debottlenecking gas infrastructure like pipelines to facilitate gas distribution, which hit a wall last winter.

New regasification terminals in China include the Sinopec Tianjin terminal with a capacity of 3 million mt/year, the 3 million mt/year Zhoushan terminal near Shanghai and the 4 million mt/year Shenzen Diefu terminal in the south. The 3 million mt/year Wenzhou LNG facility in the south is expected to start up in 2019-2020.

The Zhoushan terminal, which will distribute LNG through trucks and small tankers, is China's first fully independent LNG terminal, marking a key development in breaking up the monopoly of the large state-run oil companies, according to S&P Global Platts Analytics.

"Current balances indicate that all of China will consume roughly 5.9 billion cu m additional LNG supply this winter compared to last winter, implying total regasification utilization will fall roughly in line with last year's utilization rates of around 80% during the winter, but peaking above 90% during the heart of the winter," Platts Analytics said.

ENERGY SECURITY CONCERNS

Chinese gas demand is forecast to grow by 60% between 2017-2023, and the country alone accounts for 37% of the growth in global demand, according to the International Energy Agency.

The flip side is that China's dependence on imports goes through the roof, along with energy security concerns. In 2016, China imported around 34% of its natural gas demand, and this is expected to touch 50% in the next few years.

China's pipeline imports are lower than its LNG imports, but this changes once Power of Siberia comes online. Existing pipeline supply comes from Central Asia and Myanmar with a total volume of around 52.2 Bcm in 2018, out of total imports of 121.34 Bcm, according to Platts Analytics estimates.

The Power of Siberia pipeline alone will add 38 Bcm of gas supply, ramping up slowly by the middle of next decade.

But eventually, even this may not be enough.

"Despite Russian gas, we see a growing gas deficit in the China market from 2020 onwards, with a 90 Bcm gap by 2030," Neil Beveridge, senior analyst at Sanford C Bernstein research, said.

--Analysis by Cindy Liang, cindy.liang@spglobal.com

--Eric Yep, eric.yep@spglobal.com

--Edited by Alisdair Bowles, newsdesk@spglobal.com