Natural Gas Demand - LNG to China

[dan_s]

Andy Meng, CFA – Morgan Stanley
June 11, 2019 9:00 PM GMT

If the US and China reach a trade deal, it could include a large Chinese purchase of US LNG. We believe this would be a win-win outcome for China and the US, but could add long-term headwinds to natural gas growth for Russia and Australia.
China has a strong appetite for LNG: On the back of China's strong policy support for energy mix optimization, we believe the country will achieve rapid gas consumption growth in 2019-2025 – at 8-10% the highest pace of growth globally. Meanwhile, as China's local gas production cannot satisfy such rapid demand growth, the import reliance ratio will continue to increase, implying strong appetite for LNG. In 2018, China's LNG import volume posted 40% growth to 53mn tons and we expect it to reach 111mn tons by 2025, making it the largest LNG importer globally. Abundant low-cost gas in the US means it is well positioned to meet additional demand globally: US natural gas prices have remained low despite a prolonged period of structural demand growth due to innovation across shale, which has substantially driven down supply costs. We think this growth cycle is coming to a close as we see a period of demand stagnation post-2020, while supply growth, driven by gas "associated" with oil production, shows no sign of slowing. The result is an oversupplied market and structurally depressed prices, well suited for additional LNG exports. In May 2019, the US Henry Hub gas price averaged US$2.58/mmbtu, a 38% discount to EU and 49% discount to Asian natural gas prices. A large Chinese purchase of US LNG could be a win-win deal: If China procures 75% of its incremental LNG needs from the US by 2025 (~40 MTPA), it could reduce the trade deficit by ~US$17bn annually. Meanwhile, given US gas prices are very competitive, such a purchase could save China ~US$1.8bn/year in annual energy costs relative to other sources of supply - a win-win transaction for both China and the US, in our view.