Will China’s emergence from COVID lockdowns send European gas prices soaring?
Economics, geopolitics, both?
Today’s newsletter includes a discussion on Chinese LNG demand and its implications for Europe. I will be busy all this weekend and in Qatar next week for work, so there will be no additional China-Russia Report updates for some time. – Joe
Midjourney prompt: “LNG tanker heading into a port” (licensed under CC BY-NC 4.0)
Will China’s emergence from COVID lockdowns send European gas prices soaring?
China’s chaotic exit from its zero-COVID policy poses major uncertainties for energy markets – and Europe’s acquisition of liquefied natural gas (LNG) as it seeks to cut is dependence on Russian energy. While the balance of evidence suggests China’s economic growth and LNG demand will remain constrained, thus moderating European natural gas price pressures, economic uncertainties and geopolitical risks remain.
Two primary concerns highlight what’s at stake. China’s economy is something of a black box: estimates can always be wrong. Despite initial evidence of muted growth, China’s energy demand could nevertheless rise significantly as it emerges from COVID, resulting in greater competition between Europe and Asia for already-scarce LNG supplies. Perhaps more likely, Beijing’s increasingly blatant “pro-Russia neutrality” might lead it to step up LNG purchases for geopolitical reasons, lifting European gas prices and supporting the Kremlin’s war aims.
Given these risks, Western policymakers should hope for the best but prepare for another year of high LNG prices, responsibly expand hydrocarbon production, and deploy clean energy resources and their associated supply chains as quickly as possible.
European and Chinese LNG markets amid the war and zero-COVID
Almost exactly a year ago, Russia launched a full-scale invasion of Ukraine and, with it, an energy war against the West. In response, European countries reduced pipeline imports from Russia to post-Soviet lows. With access to non-Russian pipeline imports limited, Europe turned to LNG imports, which rose by 60 percent from 2021 to 2022. Europe’s surging LNG demand, combined with flat global LNG export capacity, led to an increase in world LNG prices.
Prices would have soared even further, however, but for limited Chinese LNG demand. China’s zero-COVID policy – despite the widespread availability of vaccines, beginning in spring 2021 – constrained its economy and limited world LNG demand throughout 2021 and 2022.
Beijing’s lifting of COVID restrictions, therefore, has led to fears that world LNG demand could soar in 2023 even as LNG supply remains constrained, leading to another surge in world LNG prices, which have retreated since setting records this summer.
Such fears may be exaggerated. While LNG prices will receive support from China’s lifting of COVID restrictions, an examination of supply-and-demand conditions suggest that the impact on world markets in 2023 will be limited.
Chinese LNG demand: following the indicators
China’s total natural gas consumption increased an astonishing 706 percent from 2000 to 2021, reaching nearly 379 billion cubic meters (Bcm) in 2021. Industrial demand and city gas comprised 40 percent and 32 percent of China’s natural gas consumption in 2021, respectively, with power generation and chemicals accounting for the remaining 18 percent and 10 percent.
China imported nearly 170 Bcm of natural gas in 2021, more than any other country, with about 65 percent imported via marine-borne LNG. China also imports natural gas via pipelines from Central Asia, Russia, and Myanmar.
China’s domestic natural gas production and pipeline imports are expected to continue to rise in 2023, implying natural gas demand must increase in order for LNG imports to rise.
While Chinese natural gas data is not transparent, north China’s LNG demand growth will likely remain muted in 2023. The region absorbs substantial domestic production, pipeline natural gas shipments from Russia are expected to increase, there are hints of additional imports from Central Asia, coal production and use is highest in the northern provinces, and regional policymakers may defer natural gas expansion after this winter’s mini-crisis in which gas shortages left many homes without heat.
Instead of the north, China’s 2023 LNG demand will likely hinge on central China and especially south China, which suffers from poor connectivity to pipeline gas. Seventeen of China’s twenty-four operating LNG import terminals are in Jiangsu province or regions further to the south, and account for over 60 percent of China’s import capacity by volume. China’s top three natural gas-consuming provinces in 2021 were Guangdong, Jiangsu, and Sichuan, located in the southern and central regions of the country, although Sichuan relies on local production.
Soft economic growth could constrain China’s LNG demand as well. Rhodium Group argues China’s actual 2023 GDP growth could be low as 0.5%, while preliminary 2023 data has largely been sluggish (some data has indicated stronger growth). While it’s early days in China’s post-COVID economic recovery, a weak real estate sector will likely continue to constrain Chinese consumption.
Some industry analysts see only a modest recovery in Chinese LNG demand in 2023, although others project a much sharper rise. China’s continued coal investments will also limit LNG demand.
China’s potential stockpiling play
On the other hand, China’s ability to import LNG will rise sharply this year. Import terminal capacity could rise by nearly 30%, while nine new LNG term contracts are due to start deliveries. Other estimates hold China’s LNG import capacity could rise by nearly 50% as storage capacity – traditionally a weakness in Chinese natural gas – expands by 86%.
Even with soft Chinese economic and LNG demand, Beijing might decide to inject substantial LNG volumes into its new storage facilities. Moreover, it may do so, in part or in whole, for geopolitical reasons. Doing so would help Russian President Vladimir Putin, as Beijing has repeatedly signaled it backs Moscow.
Speaker McCarthy’s anticipated visit to Taiwan will almost certainly produce a sharp reaction from Beijing, and there are significant risks surrounding Taiwan’s January 2024 presidential election. While a conflict over Taiwan in the near-term is highly unlikely, Beijing has a long history of employing economic coercion and has already announced a potential export ban on key solar components. Beijing might use its influence in energy markets to bolster Putin in 2023 by topping off its natural gas reserves. The PRC might fill its LNG inventories in order to raise energy prices, inflict pain on European consumers, and compel the West to resolve the war on Putin’s terms. While LNG is an indirect – and less useful – tool for Beijing than purchasing oil directly from Putin, if it seeks to further extend economic support for the war, there are significant risks that the PRC will reach for this lever.
Amid economic and geopolitical uncertainties, Western policymakers should prepare for another tumultuous year of high natural gas prices.
To prevail in the confrontation with Putin, Western policymakers should manage energy demand, responsibly bolster hydrocarbon production, maintain nuclear energy production, and invest in clean energy supply chains while accelerating deployment. Europe’s Green Deal Industrial Plan appears highly promising, especially if it accelerates permitting procedures.
The West has won the first round in the energy war with Putin, but there’s a long way to go. Western policymakers must continue to secure energy supplies amidst severe geopolitical tensions.
Joe Webster is a senior fellow at the Atlantic Council and editor of the China-Russia Report. This article represents his own personal opinion.
The China-Russia Report is an independent, nonpartisan newsletter covering political, economic, and security affairs within and between China and Russia. All articles, comments, op-eds, etc represent only the personal opinion of the author(s) and do not necessarily represent the position(s) of The China-Russia Report.