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China's new Russian natural gas pipeline won't worry LNG, oversupply will

A new pipeline from Russia that will eventually be capable of delivering more than a quarter of China’s current level of natural gas imports sounds like the last thing embattled liquefied natural gas (LNG) producers need.

The Power of Siberia pipeline was scheduled on Monday to start delivering natural gas from Russia to China’s northeast, bringing the cleaner-burning fuel some 3,000 kilometres (1,865 miles) to a region that up to now has been heavily reliant on coal.

The pipeline is due to reach its full capacity of 38 billion cubic metres (bcm) a year by 2025, which is equivalent to about 28.1 million tonnes of LNG.

China’s total natural gas imports from LNG and existing pipelines from central Asia were 77.1 million tonnes in the first 10 months of 2019, meaning they should be around 93 million tonnes for the full year.

This means the new pipeline will be able to boost the current level of imports by around 30%, a substantial figure even when viewed in the light of China’s supercharged natural gas demand growth in recent years.

This may look concerning for LNG exporters, who are already battling low prices caused by a supply surplus and slowing growth in China, the fastest-growing major market for the super-chilled fuel and the number two importer behind Japan.

But the new pipeline is unlikely to have much of an impact on China’s LNG demand, as it will effectively serve a market not currently reached by LNG imports.

The pipeline goes to northeastern Heilongjiang province, which borders Russia, and then it continues to Jilin and Liaoning, China’s top grain hub.

While some of these provinces, Liaoning in particular, do have industries, they have mainly been powered by coal up until now, and the region’s industry and 68 million urban residents consume just 14 bcm of natural gas annually.

What this means is that the fuel from the Power of Siberia pipeline is likely mainly to displace coal, especially in industry and residential heating during winter.

This will fit in with Beijing’s vision of improving air quality across the northern provinces in winter by replacing coal-fired boilers with natural gas.

It’s also worth noting that the pipeline is expected to deliver only 4.6 bcm in 2020, equivalent to just 3.4 million tonnes of LNG, rising to 10 bcm in 2021 and the full capacity by 2025.

This gives the marketer of the pipeline gas, China National Petroleum Corp, time to build the market in the provinces where the gas is being delivered.


LNG exporters to China should perhaps be more worried by the slowing rate of demand growth in their main existing markets in the coastal provinces, especially the heavily industrialised southeast.

While it appears LNG imports bounced back in November from a weak October, it’s likely that full year growth will only just make double digits, down from rates above 40% for the past two years.

China imported 6.13 million tonnes in November, according to vessel-tracking and port data compiled by Refinitiv.

This was up sharply from October’s 3.94 million tonnes, but still only in line with the 6.17 million imported in November last year.

For the first 11 months of the year, Refinitiv data shows China’s LNG imports were 53.2 million tonnes, putting then on track to come in around 60 million for the full year, assuming this December is similar to the same month in 2018.

This would be about 13% higher than the 53.1 million tonnes China imported in 2018, which is a strong rate of growth but a rapid cooling in the rate of growth from the previous two years.

The problem for major LNG exporters such as Australia, Qatar and the United States is that quite a bit of their demand hopes are built around China continuing to grow rapidly, especially since Japan and number three buyer South Korea are mature markets with limited growth prospects.

The surge in supply from new projects in Australia and the United States this year, coupled with slower demand growth in China, has already resulted in the spot price in Asia LNG-AS dropping to its lowest for this time period on record.

Spot LNG ended November at $5.60 per million British thermal units (mmBtu), compared with $9.80 at the end of November 2018 and $9.85 at the end of November 2017.

The supply surplus has effectively done away with the usual winter price spike in Asia, apart from a brief little blip higher to $6.80 per mmBtu in mid-October.

With a surge of new LNG projects being approved, or likely to be approved in the near future, the industry will need to see faster demand growth than is currently happening.

The silver lining is that if buyers can be convinced that long-term LNG prices have shifted structurally lower, they may be convinced to take a bet on the fuel. (Editing by Christian Schmollinger)

Copyright © 2019. All market data is provided by Barchart Solutions. Futures: at least a 10 minute delay. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice. To see all exchange delays and terms of use, please see disclaimer.

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