China Emerging as New Poster Child Of Energy Dependence

China Emerging as New Poster Child Of Energy Dependence

This is really nothing new. China has stagnant air and water pollution that has its populace taking to the streets in protest, with mortality rates increasing and the central government worried. The country’s insatiable energy demand matches and exceeds its stellar 20-year plus economic miracle and amid all of these dynamics, the country aims to replace dirty coal burning power plants with cleaner burning natural gas fired power plants, starting in several major cities including the country’s capital – Beijing. Additionally, by government edict natural gas will have to grow from 4% of the country’s energy mix to 10% by the end of the decade.

New poster child of energy dependence

What is new however is China’s growing vulnerability to global oil and now natural gas markets. The US, once the poster child of foreign oil dependence, is changing its energy future due to its oil and gas shale boom, and now China (with all of the media hype and reports that it will replace the US on so many fronts) is poised to be the new poster child of energy dependence.

China passed the US in 2010 as the world’s largest energy consumer, while it became a net importer of crude back in 1993 and hasn’t slowed down in the past 20 years. As crude prices have increased so has pressure on China, and the flow of wealth once pouring into the country’s coffers from every corner of the earth for inexpensive-cheaply made goods, propelling the country, its rising middle class (and its corresponding consumption of consumer goods) and its economy in record fashion, is now starting to leave the country. It’s a transfer of wealth the US labored under for decades as it sent trillions of dollars abroad for oil, mostly to the Middle East.

Zhang Guobao, a former director of China’s National Energy Administration, said in September that China’s imports of crude oil this year is expected to hit 300 million tons, making the country’s foreign dependency rate at 60%. That figure is likely to keep growing as China’s oil fields keep maturing, the country’s oil consumption increases while its state owned oil majors scramble to cut deal across the globe, from Africa, to Latin America, to the Middle East, North America, Australia, Asia and back home again.

Frigid winters projected for China

Now, much of the country’s 1.35 billion are bracing for even more frigid winters due to natural gas shortages. China, which often experiences gas shortages during the winter, will be even colder, at least for the rest of the decade, according to a Wood Mackenzie report released November 22. “Northern China will see residential winter gas demand this year increase up to tenfold from non-peak requirements in some cities,” the report states.

Chinese state media is also reporting on this problem. On November 14, Xinhua ran a report “Severe shortages ambush a gasified China.” In response to the impending shortage, the country’s National Development and Reform Commission (NDRC) banned construction of gas-fired plants that haven’t secured full gas supply contracts. This is a type of catch-22 for China. The government has mandated increased gas usage however since supplies are limited, it has to pull back on those plans and in effect postpone much needed overhaul of its coal powered plant sector that is responsible for so much air pollution.

Not that China doesn’t have some options to meet that much-needed gas supply, but help will have come from a problematic source, the liquefied natural gas (LNG) spot market in Asia. As we reported last week, spot LNG prices in the region are expensive, hiking even more since that report. On November 22 Reuters said that Asian spot LNG prices continued to climb toward $19 per million British thermal units (mmBtu), supported by strong winter demand from China, Japan and South Korea, while Argentina’s second tender award tightened global supplies. “China is facing a gas shortage which has sent it trawling for LNG cargoes just as top importers Japan and South Korea are stockpiling supplies for winter,” the report said.

Trade sources said with extra Chinese demand (some due to new import capacity coming) LNG prices may reach $20 per mmBtu before the end of the year, more than five times the price of the commodity traded in North America. On November 22, natural gas futures in the US traded at $3.768/mmBtu.

What about China’s fledgling shale gas industry that received so much media attention last year? How does it factor in the supply side of the equation? The Wood Mackenzie report said that China’s gas production will not grow in line with demand, while domestic shale gas is unlikely to provide relief earlier, in spite of recent gas price reform announcements. “The implications are a tighter seasonal spot LNG in North East Asia; increased opportunities for suppliers; and further reforms needed to accelerate shale development.”

The report said “the pace of unconventional gas development, particularly shale and coal bed methane (cbm) will play a critical role but we still do not foresee significant production of domestic shale before 2020.”

Wood Mackenzie added that orders for additional spot LNG cargoes are rising in an attempt to balance the gas market in northern China.

Gavin Thompson, head of Wood Mackenzie’s Asia Pacific Gas & Power Analysis, said this will increase competition among Asian spot LNG buyers during peak demand periods and allow suppliers to drive spot prices upwards during winter months.

These realities may be hard for China to digest but nonetheless point to the country’s growing and troubling energy dependence, something Beijing has to grabble with in both the short and long term.

Move over America, China is taking your place in one area that you should be more than happy to cede.

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