Oil and Gas

China's drive for cleaner energy is causing a gas shortage for winter

Key Points
  • China is facing a shortage of natural gas this winter as Beijing curbs coal use
  • Domestic natural gas prices are jumping despite a global supply glut due to infrastructure, logistical challenges
  • Even with a global oversupply, the natural gas market is prone to seasonality
Farmers watch their sheep graze on a farm near a coal power plant in Baotou, Inner Mongolia, China.
Ryan Pyle | Corbis | Getty Images

China's push to clean up its environment may have had an unintended consequence: a shortage of heating fuel supply is hitting some regions in the dead of winter, sending prices of domestic liquefied natural gas (LNG) to a three-year high.

To combat air pollution, Beijing this year implemented stringent measures restricting the use of coal for residential and industrial heating, sending demand to the cleaner alternative — natural gas.

However, even with a supply glut of natural gas globally due to mega-projects coming online, infrastructure constraints — such as slow pipeline construction — within the country limit gas use.

"Our supply-demand balance analysis shows that shortages on a large scale could be avoided if all supply sources and infrastructure are running perfectly, however, daily shortage will almost certainly happen if there are cold snaps," Wen Wang, Wood Mackenzie's China gas and LNG senior consultant, wrote in a recent note.

While the China National Petroleum Corporation — a massive state-run energy company — can guarantee gas in key areas by diverting the supply from domestic gas-production regions, it also needs to "balance regional interest," added Wang.

The supply shortage is particularly acute in northern provinces relying on central heating supplied by the government, Chinese media report, and that's sparking resentment among residents.

These sectors could benefit from China's appetite for LNG
These sectors could benefit from China's appetite for LNG

While boosting LNG imports is a viable solution, affordability is a factor, Wood Mackenzie's Wang added. LNG terminals are also facing capacity bottlenecks and logistic constraints, energy information service Platts reported recently.

According to data from Reuters, China's domestic LNG price has risen to its highest since 2011.

This is even as domestic natural gas output rose 9.7 percent in the first 10 months of the year, official data show, according to Reuters. Pipeline imports from central Asian suppliers were also up, rising 5.9 percent in the first 10 months of 2017. LNG imports surged almost 50 percent in the same period.

The social and political fallout from inadequate heating have prompted official action. The country's National Development and Reform Commission warned market players to keep prices stable and ensure adequate supplies, state news agency Xinhua reported on Tuesday.

Seasonal demand overshadows glut

The shortage in China may baffle market observers who are expecting a glut that will tip into a supply surplus as major projects in the U.S. and Australia come online, but it's all about seasonality.

"There's a misconception about what oversupply means," said Charif Souki, chairman of gas producer Tellurian.

Are LNG markets really oversupplied?
Are LNG markets really oversupplied?

Although a supply glut has driven natural gas prices down to multi-year lows, the price slump has also prompted a demand response, said Souki. That phenomenon is magnified in winter.

"Nobody has real demand for 12 months," said Souki, who is known for exporting the first U.S. LNG cargoes ex-Alaska during his stint at Cheniere Energy.

"You are going to have very significant demand in winter months, less so in shoulder months, a little bit of make-up in summer months too because some places are hot," Souki told CNBC recently.

Spot prices of LNG in Asia reached $9.85 per million British thermal units (mmBtu) in the week that ended on Dec. 1, surpassing the previous $9.75 peak last winter and almost double the $5.40 low in summer, Reuters reported.

—Reuters contributed to this report.