China tightens grip as dominant LNG buyer with long-term deals

by RYOSUKE HANAFUSA & SHUNSUKE TABETA, Nikkei staff writers [1-24-2023 published].

Sinopec leads way with Chinese companies locking in 40% of recent contracts.

HOUSTON, U.S./BEIJING -- China is quickly becoming the dominant force in liquefied natural gas, with Chinese buyers accounting for 40% of recent long-term LNG contracts among global players.

Chinese energy major Sinopec Group reached a 27-year agreement with state-owned QatarEnergy late last year to buy 4 million tonnes of LNG annually. The imports are due to begin around 2026.

As a key client, China is also negotiating to invest in a massive Qatari project to expand LNG output.

A private sector Chinese energy company, ENN Group, signed a contract last year with Texas-based Energy Transfer to buy 2.7 million tonnes of LNG annually for 20 years. ENN increased its purchasing agreement with NextDecade, also headquartered in Texas, to 2 million tonnes a year for 20 years as well.

In addition, NextDecade has agreed to supply 1 million tonnes of LNG yearly to China Gas Holdings, whose principal shareholder is an investment vehicle controlled by the city of Beijing. Imports are to start in the latter 2020s.

Over 2021 and 2022, China closed long-term LNG purchasing contracts worth nearly 50 million tonnes a year, European research firm Rystad Energy reports.

China has tripled the scale of purchases through long-term contracts in just two years, up from the annual volume of roughly 16 million tonnes from 2015 through 2020.

In 2020 and 2021, spot transactions accounted for 40%-50% of China's natural gas imports, well above the estimated 30% for Japan. But China appears to have changed strategy to fit long-term demand. Long-term contracts offer more stability in supplies compared with spot contracts.

In 2021, China surpassed Japan as the world's top LNG importer. But last year, imports apparently dropped 18% to around 65 million tonnes on the economic fallout of the coronavirus pandemic. Yet China's demand for natural gas in 2030 is projected to be over 50% higher than in 2021.

Amid global efforts to reduce carbon emissions, many countries have converged on natural gas as a relatively clean bridge fuel. The Institute of Energy Economics, Japan predicts annual worldwide LNG demand will reach 488 million tonnes in 2030, up about 40% from 2020. But global supply is on track to fall short of demand by 7.6 million tonnes a month in 2025.

The China contingent are addressing the risk of being cut off from the LNG supply chain at a time when U.S. and allies work to create China-free supply chains for semiconductors. Long-term contracts are seen as a hedge against such disruptions.

The U.S. is already China's biggest LNG supplier based on long-term contracts. Beijing imposed a 25% tariff on American-made LNG in 2019 during the trade war, then started issuing waivers on the duties in 2020. Since 2021, Chinese and U.S. companies have signed a series of massive LNG deals.

China now imports about 90 million tonnes of LNG through long-term contracts, with the U.S. responsible for around 25 million. Australia ranks next at roughly 17 million tonnes, while the Middle East supplies 14 million and Russia contributes about 6 million.

Beijing intends to avoid dependence on American LNG.

China "is ready to expand cooperation with Qatar in natural gas and other traditional energy sectors," President Xi Jinping said during a December meeting with Qatar's Emir Tamim bin Hamad Al Thani in the Saudi Arabian capital of Riyadh.

Beijing is carefully diversifying suppliers in the name of energy security. Beyond tanker-borne LNG, China also brings in natural gas via pipelines. China covers just over half of its natural gas demand through domestic output, and the rest comes from Russia and Turkmenistan. The natural gas supplies are supplemented by LNG from the U.S. and other sources.

"It's best not to rely on any one country for 30%-40% of our needs," said an executive at a large Chinese oil company.

As China emerges as a dominant LNG buyer, the role of Japanese purchasers has diminished.

In 2021 and 2022, Japanese companies agreed to less than 10 million tonnes of LNG per annum in long-term contracts. Utilities are wary of large LNG contracts due to uncertainties about future demand amid the decarbonization movement, Japan's shrinking population and the restart of nuclear plants.

Japanese LNG importer JERA, a joint venture between utilities Tokyo Electric Power Co. Holdings and Chubu Electric Power, decided at the end of 2021 not to renew a 25-year contract with Qatar to buy 5 million tonnes of LNG annually. Sinopec appears to be Qatar's replacement buyer.

Before LNG developers start production at new projects, they sign long-term contracts with importers to secure income and take in financing from lenders. Japanese power and gas companies once took leading roles for projects in Southeast Asia and Australia, but now Chinese players are looking to fill that function.