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Natural gas, analysing trade flow trends of the cleanest fossil fuel

  • Production and price trend of the natural gas in the US
  • Consumption/import trend in China
  • Trade war’s impact on the natural gas

 

Natural gas constitutes 22% of the total energy supply mix globally. The fervent need for cleaner fuel for power generation and industrial purposes led to a 4% increase (~4624 billion cubic feet [bcf]) in the natural gas production in 2017. The carbon emissions from gas are 40% and 20% lower than coal and oil, respectively. This is a prime reason for the increasing adoption of the natural gas, especially over the last few decades and in the new millennium.

The US accounts for both the highest production and consumption of the natural gas at 28,814 bcf and 27,090 bcf, respectively, as of 2017. The below chart depicts production and consumption trends for the US since 2000. Moreover, up to 2013, the consumption was more than the production, which was met by imports. However, the trend changed thereafter and the annual production exceeded consumption with a relaxation for natural gas exports being one of the major contributors. This export relaxation created an incentive for the domestic players to produce more and earn high prices from foreign countries. The natural gas exports from the US more than doubled from 2014 to 2017 (as shown in the below chart). In fact, the US became the net exporter of the natural gas in 2017, with net exports averaging around 144 bcf.

Notably, the US was the first country which acknowledged the significance of natural gas as a clean fuel and developed an efficient infrastructure and technology for extraction. This was mentioned in Televisory’s earlier blog, ‘Natural gas industry with a focus on Shale Gas, development and present scenario in the US’. The shale gas extraction with the fracking technique transformed the scenario for natural gas production in the US. A robust supply of natural gas at low costs amid a competitive market has kept the domestic prices low in the US.

The below graph represents a drastic variation in the natural gas prices in the world, with the prices being the lowest and averaging around $3/mmBtu in the US. The reasons for higher prices in other regions were low production, higher transportation costs of LNG (liquified natural gas) and limited spot markets among others. In the Asian markets, the natural gas prices have been traditionally indexed to crude oil, thus, lacking the natural price discovery of natural gas. Additionally, the cost of transportation for the LNG, with low energy density is 7 to 10 times more than that of the crude oil and coal.

While the US is the largest producer of natural gas and the nation is followed by Qatar and Australia, it is China that surpassed Japan (June 2018) to become the largest importer of natural gas (Japan’s import of LNG is still higher, China stands at the 2nd position). China is expected to be the leading importer of LNG by 2019 as demand continues to rise in order to resolve the persistent air pollution concerns. Currently, China is the 3rd largest consumer of natural gas with a consumption level of 8,486 bcf, but the country falls behind the US and Russia. According to the report by the International Energy Agency (IEA), China’s demand for natural gas is expected to increase by 60% (2017-23). This is expected to cause a major global disruption in the demand-supply and export-import dynamics of the natural gas as against the current flow. The following graph represents the consumption growth of different regions across the world (2017-23), which contrasts China’s remarkable consumption growth vis-à-vis other countries.

Presently, China’s major sources of LNG are Australia, followed by Qatar, Malaysia, Indonesia, New Guinea and the US. However, most of these countries are facing internal issues, which is hampering exports to China. Australia, for instance, has shortage domestically while Indonesia’s internal consumption is expected to increase to reach its 100% electrification ratio goal. On the other hand, Qatar has had a moratorium on natural gas development in the North Field since 2005, which was only lifted a year ago. These factors might affect China to import more and more gas from the US, which simultaneously aims to become the topmost exporter of the natural gas. The US natural gas production continues to rise and to further broaden in scale for the export market, it is investing heavily in the LNG export facilities. According to the Hudson Institute’s research, with the completion of five LNG projects, which are currently under construction, the LNG export capacity of the US is expected to reach 11.9 bcf/d (2019) from 3.8 bcf/d (2017). Furthermore, the regulatory approvals were received for another 6.8 bcf/d capacity addition, but the construction is yet to begin.

Although, China has been expanding its domestic production, the glaring pollution crisis has increased the replacement of coal and oil with natural gas to the extent that the local production and storage capacity will not be able to meet the consumption. There are other difficulties that hamper the production such as the state control, difficult geological conditions and lack of advanced matching technology in the US. The below graph represents China’s increasing imports of gas, a rise of 44% was registered in the last 5 years. Currently, 30% of China’s natural gas consumption is met through imports, which is expected to reach 65% by 2030 (Energy Information Administration estimates).

This crops up an important question.

Will the natural gas trade flow be affected in the midst of the currently burgeoning US-China trade war?

Despite the anticipated export-import dependency backed by the above trend and the future expectations, China declared in August (2018) that the natural gas will no more be included in the list of exempted goods. This was in contradiction to its initial decision of excluding the natural gas from the tariff list as a retaliation to the US actions. President Trump has shown no intent to backtrack on the tariffs and hence, China decided to hit back by imposing tariffs on the commodity that the US intends to conquer in the realm of exports.

The following reasons could have led China to reach to this decision:

  • Current import volumes from the US are not so high that it will create a setback for China. Although, it was expected to rise significantly, China began to decrease its imports in July (2018) itself. China’s imports from the US were 17% higher in the first half of 2018 (Jan.-June) than the previous year, but then fell to the lowest levels for the year.
  • The domestic gas shortage in Australia is expected to be short-term as production increases in Gorgon and three more LNG projects get completed. Additionally, a moratorium in Qatar has been uplifted. Thus, China may try to further increase imports from these countries in the long run.
  • Russia can come to its rescue as its production of the natural gas reached a record high in 2017. There are already plans to expand the pipeline to export LNG to China.
  • The Middle East has been focusing on the production of oil and thus, it has neglected natural gas. However, with an increase in the global demand, the Middle East is also developing infrastructure for natural gas extraction. Presently, Qatar remains the largest producer in the Middle East with the UAE and Saudi Arabia expanding the production.
  • Iran and Qatar have proven reserve to production (R/P) ratios of 148.4 and 141.8, respectively, while they stand at 98.2 and 72.1 for the UAE and Saudi Arabia. Further, as compared to these countries, the US R/P ratio stands at 11.9. China could thus develop trade partnerships with Middle East countries to meet its growing consumption.
  • Even if China along with Japan and Europe were to import all their future natural gas requirements from the US, which is in tandem with the expected capacity increase in 2019, the trade deficit for the US with these countries would only decrease by 6.5% (Research: Hudson Institute).

 

Although it seems China could survive by not importing from the US, the US too can divert its exports to other Asian nations, where the demand has been surging concurrently. Though, the volumes required by other nations will not act as a substitute for the high demand from China. This would, in turn, hurt the producers of natural gas in the US. They were eyeing long-term natural gas contracts with China and were investing heavily in the capacity additions for the LNG exports, this was in anticipation of the demand from China. The entire trade flow will be now be displaced, which would add to the cost.

Further, other nations like Australia and Qatar would replace what could have been the contracts with the US producers. The proximity of the Middle East and Australia in terms of distance is also a significant factor, as lower distances would imply lower transportation cost. In the trade war for natural gas, the loss thus seems to be more for the US than China. Nevertheless, from a broader perspective, the US would remain the largest producer of natural gas as its reserves including probable are expected to last for 90 years and China will be the largest importer, but what remains to be seen is, would the trade war actually shatter the US’ dreams of being an export giant?

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