China's crackdown on burning coal may have the residents of northern industrial cities breathing easier this winter, but it will also have a similar effect on the big LNG producers who have been struggling with chronically low prices.
- LNG prices to China +80pc since June
- Demand for LNG +40pc since last year
- China wants to boost LNG consumption to cut air pollution in the industrial north
LNG is a fossil fuel too, but lower carbon intensity and soot pollution levels have made it the logical and economic short term alternative for coal consumption, which has been restricted in 28 of China's largest cities including Beijing, Tianjin and the smog-shrouded province of Hebei.
North Asian LNG spot prices are now up around 80 per cent from the middle of the year, ploughing through three-year highs.
While the pick up in demand is in part seasonal, Wood Mackenzie's senior China gas and LNG consultant Wen Wang said the pollution restrictions looked like driving up import demand by 20 million tonnes this winter, a 40 per cent increase on last year.
Under the so-called '2+26' cities policy, coal for both residential heating and industrial uses will be restricted to cut the the most hazardous, fine airborne particles by 15 per cent from October to March.
Ms Wang said with domestic piped gas facing production challenges, LNG imports become the next most viable solution, with two large terminals operating in the Beijing-Tianjin-Hebei area.
"Tianjin terminal was largely under-utilised last winter due to relatively weak demand growth, running at 20 per cent in most winter months and 50 per cent in December," she said.
Under Wood Mackenzie's analysis, while large scale shortages can largely be avoided with trucked LNG, daily shortages will almost certainly happen during cold snaps.
RBC's Ben Wilson said combatting air pollution was now the single biggest driver of LNG growth in China.
Mr Wilson said President Xi Jinping's speech at the Communist Party Congress provided an interesting insight that he mentioned "the environment" more than "the economy".
"The longer history shows this is the first time the environment has been mentioned more than the economy – a high level but insightful commentary on the general direction that Chinese policy is taking," Mr Wilson said.
"The comments from President Xi are particularly pertinent as a reflection of public opinion of social issues and his power base and hence ability to enact policy is only increasing."
Spot LNG prices to rise
Ms Wang said, compared to last winter, there will be more reliance on spot purchases.
"PetroChina had imported around 70 per cent of its annual contract quantity (ACQ) by September, while it had only imported around 50 per cent of its ACQ between January and September 2016.
"This means lower contracted offtake is left for the winter, and higher demand for spot," Ms Wang said.
"A colder-than-normal end of winter could further boost local LNG demand, and the global LNG price."
That will be welcome news for Australia's big LNG producers, which have spent in the order of $200 billion on export terminals only to see prices tank as a flood of export capacity hit the market from not only Australia, but the US and Middle East as well.
However, the window of opportunity may be narrow.
The IEA's recent World Energy Outlook noted, "With 140 billion cubic metres of LNG capacity still under construction, gas markets remain well supplied for the next few years," with over-capacity likely not to be absorbed before the mid 2020s.
As part of its policy to shift to cleaner forms of energy, China plans to increase gas usage from around 6 per cent of the its total energy mix currently to 10 per cent by 2020.
While part of that will be picked up by Australian producers, China has many other options as evidenced by recent reports it has committed to invest around $60 billion to develop Alaska's LNG sector.