Implications of China’s Unprecedented LNG-Contracting Activity
Global gas markets are experiencing a period of unprecedented tightness that has worsened since the Russian invasion of Ukraine in February 2022, as illustrated by the record spot prices of well above $50/million British thermal unit (mmBtu) in Asia and Europe as of early September 2022. While the European Union (EU) is attempting to drastically increase its liquefied natural gas (LNG) imports to partially replace dwindling Russian natural gas supplies, European companies have signed very few long-term LNG contracts; they are caught between Europe’s strong need for LNG in the short term and the expectation that LNG imports will decline in the long term due to the EU’s decarbonization strategy.
Meanwhile, China has already replaced Japan as the world’s largest LNG importer in 2021. Chinese companies contracted record LNG quantities that year and have continued to do so in 2022. This strategy is in part driven by the record-high spot prices, which have pushed Chinese players to seek protection in long-term contracts. But the fact that half of these contracts have a duration of at least 20 years, and some only start in 2026 or later, indicates that China sees gas as more of a transitional fuel, compared to Europe, and anticipates a long-term need for LNG. In contrast to the previous decade, many Chinese LNG contracts have been signed with US companies, signaling a change in the China-US relationship on LNG and helping to balance the broader trade relationship between the two countries.
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China’s recent contracting activity will make the country increasingly dependent on both Russian gas (pipeline and LNG) and US LNG. The latter dependency in particular could be a security concern for China, especially absent signs that China-US tensions will abate anytime soon and in the context of polarization between the West and Russia over the war in Ukraine. But China has been making progress in alleviating gas import dependency concerns by boosting domestic production, expanding infrastructure, and diversifying import sources.
This commentary explores the rapid expansion of China’s LNG import portfolio against the backdrop of unprecedented tightness within global LNG markets and the implications of this development for China and the rest of the world.
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