Under-the-radar US-China gas trade will save the climate
There are few good news stories when it comes to US-China relations and growing bilateral gas trade is one of them. China has accelerated its hoarding of US liquefied natural gas (LNG), signing six new long-term contracts with US export facilities since September. These latest deals show that Beijing’s desperate need for additional gas supply will make future trade retaliations less likely and climate cooperation inescapable. China will soon become the largest customer of US LNG.
It also shows that the two titans can cooperate on climate as a greener US LNG will enable a faster demise of coal in China. US LNG exporters are working hard on making their molecule methane leak-free and low carbon thanks to the use of new technologies. This a work in progress. The Biden administration’s methane regulations will also help to make US LNG more appealing to clean up China and the world from coal and other dirty fuels. Recognizing the role of natural gas in China’s energy transition will keep Beijing engaged in the global methane negotiations and enable realistic actions to reduce greenhouse gas emissions.
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On the heels of COP-26 and the US-China climate agreement, the Biden administration should continue to reengage with Beijing by talking about the ever closer LNG partnership with a confident and humble mindset. Confident, because US LNG is enabling Beijing’s massive fuel switching, hence reducing Chinese CO2 emissions. Ironically, China is using the US as a model: China has taken note of US emissions reductions, which were partly due to coal-to-gas switching. Over the next decade, Beijing will need plenty of US LNG to guarantee supply security, reduce CO2 emissions, lower prices and ensure reliability as energy mixes shift with decarbonization.
Confident also because the US came to the rescue to balance a tight global gas market following the lifting of Covid-19 lockdowns. The US has filled a vacuum left by other gas and LNG suppliers which have not increased exports. This year’s winter energy predicament could have been much worse without US LNG exports worldwide (up 55% year-on-year). US LNG is exporting full swing this winter, becoming China’s second-largest LNG supplier after Australia, supplanting Qatar.
Humble, because the interdependency of the relationship is real and is not going away. China will replace South Korea in December or early 2022 as the largest destination for US LNG, also leap-frogging Japan, according to GasVista’s AI platform that predicts seaborne commodity flow and fuel-trading routes. So far this year, China has imported 9.1 million tons (mt) from the US, compared to 9.4 mt for South Korea. China’s escalating LNG demand will also spur new investments in US Gulf Coast export facilities. US exporters are better off with Chinese entities as customers, although the former will mitigate their dependence on Beijing—given recent Sino-US trade retaliations and China’s erratic buying sprees.
China’s LNG demand will keep rising as it will continue to be a cornerstone of Beijing’s energy transition. China has become the world’s second LNG importer behind Japan. Beijing will continue to support its use of gas/LNG as a transition fuel to accelerate coal-to-gas and fuel oil-to-gas switching and to improve air quality in cities. Air pollution in China remains a salient health issue, contributing annually to between 1.24 million and 2 million premature deaths.
Humble also because making US LNG greener is a necessity, and it will make its appeal more enduring to China and the rest of the world. The Biden administration will regain its climate leadership partly by imposing stricter methane emissions regulations (announced during Cop-26), while US gas companies are already taking tangible steps to reduce GHG emissions along the LNG value chain. The Chinese government has not joined the global methane reduction pledge and is not sensitive to the green credentials of US LNG but it’s only a matter of time before China requests a leak-free low-carbon fuel.
But unsustainable winter spot LNG prices--currently at mid-$30s/mmbtu for most of Asia-- leave the Chinese economy vulnerable and thirsty for dirty coal. Coal still contributes to around 60% of the country’s power consumption. Beijing announced the end of its financing of coal-fired plants outside China but it will continue to use coal at home as a balancing role especially in the current pricing environment.
China’s core priority is to bring gas prices back to ‘reasonable levels’ in order to achieve its coal-to-gas switching and blue sky agenda. US LNG can help with gas affordability by keeping the longer-term global gas market abundant. Beijing will deploy its market clout and political might to lower prices by contracting gas volumes from new liquefaction projects. At least two proposed US LNG export projects could take a final investment decision in the coming months thanks to Chinese appetite and, once built, China will absorb these new volumes (directly or indirectly). This is also beneficial to Europe because the more US LNG flows on the water, the less competition there is between Europe and Asia to attract cargoes (especially in a tight market like this year).
China needs ‘Made in America’ gas to clean up itself and the world. China’s coal alternative is the worst scenario in the fight against climate change. The Biden administration should acknowledge the role of natural gas in its bilateral relation with Beijing (along with renewable, nuclear, hydrogen and other low carbon or zero-carbon fuels) because the world needs realistic solutions and great power coordination to deliver a climate-friendly future.
Leslie Palti-Guzman is the president and co-founder of Gas Vista, a market intelligence and AI technology provider focused on energy trade flows and predictions. Palti-Guzman is also the producer and host of the Energy Vista podcast and a NYU SPS Center for Global Affairs senior fellow. She previously held senior advisory roles at Eurasia Group and Rapidan Energy.
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