The US has been steadily ramping up LNG export capacity from nothing in early 2016 to now being the world’s sixth largest supplier. Meanwhile, China is set to become the world's second largest LNG consumer.
In this video, S&P Global Platts senior director for global gas and LNG Madeline Jowdy looks at the relationship between these two emerging LNG giants.
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US and China: Partners in global LNG growth?
by Madeline Jowdy, Senior Director for Global Gas and LNG
Welcome to The Snapshot, a series examining the forces shaping and driving global commodities markets today.
This year has seen the US steadily ramping up LNG export capacity from nothing in early 2016 to become the world’s sixth largest supplier. Meanwhile, China is set to move into second place as an LNG consumer. How the relationship between these two emerging LNG giants develops will become critical to keeping the market in balance as soon as next year.
While the US attempts to maintain full export capacity utilization as it continues to bring on new trains, exports to China have taken on an increasingly larger place in the US buyer mix. China accounted for 8% of US LNG exports this year, becoming its third largest buyer. This has occurred despite the fact that the US and China have no direct LNG capacity sales agreements.
Here’s where it gets complicated: China to date has imported LNG primarily on a long term, take or pay, contract basis, going to the spot market mainly in the winter peaking months. In what could be viewed as an extreme planned growth spurt, contracts to China jumped by 50% this year, as did imports, driving its exceptional growth.
Next year is a different story: China’s contracted obligations will grow at a small fraction of projected global LNG supply growth. While this year, China’s incremental contracts accounted for around 40% of total supply growth, next year, that shrinks to around 9%. The question is what will China do? Will it depart from this steady purchasing model to play a critical role in balancing the market?
Platts LNG Analytics forecasts China’s LNG demand growth will amount to a substantial 25% of total supply growth next year and will keep growing. That can only mean one thing: China will have to rely on the spot market. Such a move by China would require a significant leap of faith into the broader global LNG market – a faith that has gradually been adopted by some of Asia’s most conservative LNG buyers . China has taken initial steps to allow for such a course of action, though it is by no means a given.
China will take on this role of global LNG balancer, as long as the price is right. The US, in its goal of becoming a key global LNG supplier, will be there to place volumes on the water to support upstream production, even should margins become squeezed. The needs and goals of these two market behemoths is clearly on a path to convergence. Beyond that, the next generation of US supply will rely on the buy-in either directly or indirectly of Chinese consumers.
Until next time on the Snapshot – we’ll be keeping an eye on the markets.