2017 was a bumper year for natural gas, with consumption (3.0%, 96 bcm) and production (4.0%, 131 bcm) both increasing at their fastest rates since the immediate aftermath of the financial crises, according to BP’s statistical review of world energy. The growth in consumption was led by Asia, with particularly strong growth in China (15.1%, 31 bcm), supported by increases in the Middle East (Iran 6.8%, 13 bcm) and Europe.
The growth in consumption was more than matched by increasing production, particularly in Russia (8.2%, 46 bcm), supported by Iran (10.5%, 21 bcm), Australia (18%, 17 bcm) and China (8.5%, 11 bcm), says BP’s Chief Economist Spenser Dale.
Surge in China’s gas demand
The single biggest factor driving global gas consumption last year was the surge in Chinese gas demand, where consumption increased by over 15%, accounting for around a third of the global increase in gas consumption.
Much of this rapid expansion can be traced back to the Environmental Action Plan announced in 2013, which set targets for improvements in air quality over the subsequent five years. With that five-year deadline looming, the Chinese authorities in the spring of last year announced an enhanced set of measures for Beijing, Tiajing and 26 other cities in the North-East provinces of China, designed to meet the environmental objectives.
These measures, which were further reinforced in the autumn of last year, were focused on the use of coal outside of the power sector. In particular, a combination of very sizeable carrots and sticks were used to encourage industrial and residential users to switch away from coal to either gas or electricity, with the vast majority opting for gas. Although most attention has focused on the 3 million households affected by this policy, the biggest factor driving the expansion in gas demand was switching within the industrial sector. The resulting increase in gas demand was greatly compounded by the switch into gas reaching a peak just as winter heating demand was ramping up.
Chinese gas demand looks set to continue to increase strongly this year, but it seems unlikely that the extent of the surge in gas demand seen in China last year will be repeated in 2019 and beyond.
Growth in LNG trade
The other central factor supporting the strength of global gas markets last year was the continued expansion of LNG, which increased by over 10% in 2017, its strongest growth since 2010, aided by the start-up of new LNG trains in Australia and the US. China’s increased need for LNG accounted for almost half of the global expansion, with China overtaking Korea to be the world’s second largest importer of LNG after Japan.
The tidal wave of LNG projects that were sanctioned between 2009 and 2014 led many to predict the emergence of surplus LNG as it took time for demand to catch up with the rapid growth in supplies. But many observers have so far been surprised by the apparent absence of such a glut. There is certainly little evidence of LNG facilities standing idle due to a lack of demand. This absence partly reflects that, due to a variety of technical issues, actual LNG supplies have come on stream less quickly than originally planned, moving supply more into line with the original demand profiles. However, the apparent absence of a glut also reflects the fact that the surplus LNG supplies which did emerge resulted in bouts of unsustainably low prices rather than a build-up of idle capacity.
This is illustrated by Asian spot LNG prices – shown by the Japan Korea Marker (JKM) – over the past couple of years fluctuating in a range between US LNG exporters’ full-cycle costs and their short-run operating costs. Exporters of US LNG have been willing to supply LNG as long as they covered their operating costs, even if that was less than their full-cycle costs. So there has in fact been an LNG glut of sorts in recent years, but this has manifested itself in periods of unsustainably low prices rather than idle LNG capacity.