LNG Sector Dangerously Dependent On Chinese Demand | OilPrice.com
This little article give a little glimpse into how the O&G industry thinks about growth.
“We are becoming too reliant on China in the last couple of years,” the chief executive of Australia’s Woodside Petroleum said. “It worries me because we’ve seen others drop off in the same period for demand.”
“I would caution the LNG industry not to make linear extrapolations of Chinese LNG demand based on what you’ve seen in the last two years,” the chairman of Japan’s JERA, Hendrik Gordenker, said.
“We need to continue to develop a broader market base, or else we run the risk that other commodities have had of just becoming so focused on Chinese growth that it can become extremely addictive,” Woodside’s CEO, Peter Coleman, added.
There is abundant caution that growth cannot be extrapolated linearly. Exponential grow is not even a question, but maybe linear growth is. This, of course, makes sense for this context, but it also illustrate how difficult it is for the industry to contemplate that other energy technology are in fact growing exponentially and have done so for decades. It's just not in their mathematical tool box.
What they are missing is that renewables and EVs are the fruit of technology and manufacturing processes which support experience curve declines in cost as production increases. This is the secret sauce that enable these technologies to scale exponentially, at least until they are taking serious market share from everything else in the field.
Natural gas and LNG are not getting exponentially cheaper each year. So there is no expectation that LNG will be able to keep taking more market share year after year. There is no meaningful experience curve for LNG. So at some point China will be tapped out and the industry will need to look elsewhere for growth.
In China specifically, it would pay to note the reasons for the demand slowdown. These include, “Economic slowdown, a more considered approach on coal-to-gas switching and increased domestic infrastructure availability will mean LNG demand will slow in 2019, from the 40-45% growth we have seen in 2017 and 2018,” Wood Mackenzie said in its 2019 LNG
outlook in early January.
So notice the limits to growth that the industry is comfortable acknowledging. Nowhere on this list is the fact that China is the number one country for growing wind and solar capacity and a powerhouse for battery and EV manufacturing. The thinks that really are growing exponentially and at serious scale are not even named by WoodMac. This is a huge blind spot. Indeed the "more considered approach on coal to gas switching" is that it is considerably cheaper to convert from coal directly to a mix of wind, solar and storage. Let's be clear here, LNG in China sport prices in the $8 to $15 range per mmBtu. Moreover, new plants have to be built out to generate power from LNG. So the cost of electricity even an efficient combined cycle plant is very expensive. I don't have specific numbers at hand, but easily wind and solar beat the fuel cost ignoring the capex for gas infrastructure and generation.
China needs disoatchable power which coal and gas provide, but batteries and storage will soon eat into demand for dispatchable power. So as the advanced battery industry scales up in China, we will see multiple GWh of storage capacity flowing into the power grid each year. And this will sustain exponential growth in solar and wind capacity. I believe this is what will kill LNG demand growth in China.
But this is a huge blind spot for the industry. They just can't comprehend it. Some think they can just keep promoting gas a a lower carbon alternative to coal. Nope, it's cheaper to replace coal with even lower carbon technologies manufactured domestically. Others think the LNG industry should focus on developing demand in other countries. Nice try, but China will be pouring surplus PV panels and grid batteries into those markets too. Failure to perceive the competitive threat gives a false sense that there are other growth opportunities to exploit. Meanwhile the LNG industry is making massive longterm bets on infrastructure that require multiple decades of strong global demand growth. They need to be contemplating peak LNG demand, globally and not just in China.
