China's Coming Decade of Natural Gas?

EXECUTIVE SUMMARY

This essay examines the outlook for China’s gas market, the implications for the country’s sense of energy security, and the possible global impacts of China’s liquefied natural gas (LNG) policies.

Main Argument

Through 2020, China intends to undertake profound shifts in its energy profile. As part of this process, natural gas stands to benefit as the country seeks to move toward a cleaner energy mix and shift away from coal. Yet as the government continues to encourage the use of gas, the potential scale of China’s demand may be beyond expectations. At the same time, it appears that domestic gas production will be insufficient and that the country’s much-heralded unconventional gas development will not be easily achieved over the next five to ten years. These broad dynamics bode well for significant increases in gas imports in the interim, particularly of LNG. Given the scale of China’s energy demand, the growing appetite for gas will have profound effects on both gas markets and geopolitics more generally.

Policy Implications

• China’s dependence on natural gas imports could easily reach 50% over the next five to ten years. To promote a greater sense of energy security, Beijing is likely to prioritize pursuing a diversified base of stable and credible international suppliers. Beijing currently has a number of options that meet this criterion. This will likely also make its gas geopolitics different from its oil bids, in which China relied more on suppliers in so-called frontier markets with heightened political risk.
• Although China generally favors overland pipelines for gas supplies, it may lean more toward LNG imports. Price considerations, the desire to promote LNG-related infrastructure to bolster the Chinese economy, and concerns about the outlook for Russian and Burmese pipeline supplies may all favor China increasing its reliance on LNG.
• While the economics of U.S. LNG exports to China make sense in the current low-price environment, the prospects for this trade remain doubtful. Even if exports to China were to be approved by the U.S. Department of Energy, Beijing may view buying these supplies as fostering an unacceptable level of energy dependence on the U.S.