Over the past month, U.S. LNG has encountered something unfamiliar: a steady stream of (mostly) good news. Pfizer and Moderna have announced an apparent breakthrough in a vaccination for COVID-19, Northeast Asian markets continue to control COVID, European LNG demand is steady, and, finally, Chinese buyers have even inked an agreement with Cheniere. In this article, we discuss implications of Chinese and Indian LNG demand for the United States LNG complex, and prospects for additional agreements.

China and India are the world’s two largest countries by population, and the two most important sources of future LNG (and energy) demand. We expect that rising demand in these two countries will have a sizable, but only indirect, impact on U.S. LNG exports. The Chinese market will likely remain semi-closed to U.S. exports due to structural political tensions, and geographical distance/transportation costs will limit Indian imports of U.S. LNG. The rate of coal adoption in China and, to a lesser extent, in India, is of great concern for the future of LNG.  

Chinese and Indian LNG demand is growing

Nearly every indicator suggests that future Chinese and Indian LNG demand will increase. Despite some of the worst economic conditions in living memory, the most recent import data shows Chinese and Indian LNG demand has grown by ~13% and 1%, respectively, from year-ago levels. With LNG demand showing resilience during the pandemic, imports will likely pick up in future years once macroeconomic growth improves.

Indian and Chinese agreements with U.S. producers

Indian and Chinese companies have also expressed interest in discrete contracts with U.S. LNG producers. Although the Petronet/Driftwood LNG deal appears to have fallen through, Petronet is reportedly considering inking a deal with other U.S. projects. Chinese buyers are also considering offtake agreements with U.S. projects, with Foran Energy agreeing to a 26-cargo purchase with Cheniere from 2021 through 2026.

We are somewhat optimistic about long-term LNG deals between Indian buyers and American sellers. Both sides share geopolitical and environmental interests in expanding bilateral LNG trade, and Indian demand could grow significantly post-vaccine. Still, geographic distances will constrain U.S.-Indian LNG trade, particularly since Qatari, Eastern African and Australian LNG producers enjoy advantages on shipping costs.

The Cheniere-Foran agreement between a U.S. seller and Chinese buyer didn’t surprise us. As we wrote in February: 

“Few market participants believe Chinese buyers will sign medium or long-term contracts with US buyers. Given the probable recurrence of US-China political and economic tensions, most Chinese buyers will likely continue to avoid long-term contracts with US LNG exporters, particularly when they can buy pipeline natural gas or LNG from alternative suppliers. Chinese buyers could, however, pursue short-term (12-60 month) contracts with some US exporters or buy more on the spot market… Cheniere may be well-positioned to benefit from greater Chinese short-term/spot market purchases.”

We think our February analysis has held up well. Structural political tensions between the U.S. and China will likely preclude long-term agreements, although Chinese buyers might purchase volumes on the spot market. The U.S. will likely ship more LNG volumes to China, but pre-FID projects will still have a very hard time securing SPAs with Chinese buyers.

Coal Uptake in China and India

While Chinese and Indian direct demand for U.S. LNG is important, their fuel mix choices will determine the future of coal and gas. Notably, Chinese construction of coal capacity is the greatest threat to future LNG demand. China is not only the world’s largest consumer of coal, but it is rapidly building out coal infrastructure. The world’s second-largest economy currently operates over 1,000 GW of capacity, or a little under half of the world total. If China continues to choose coal over gas, world LNG markets will suffer.

Despite promises to meet climate goals by 2060, China is rapidly expanding its coal fleet, as nearly 100 GW of coal-fired projects are currently under construction on the mainland. If all under construction projects reach operational stages, China’s share of world coal capacity will actually increase. Within one or two years, China could have more coal capacity than the rest of the world combined.

New coal capacity obviously competes with natural gas-fired generation for baseload power requirements. We roughly estimate that new coal capacity under construction will remove approximately 8-10 Bcf/d of gas demand from natural gas markets, or theoretically up to 60 – 75 MTPA of LNG exports (for reference, total world LNG trade totaled about 355 MTPA in 2019, per the IGU). If announced and permitted coal projects are constructed, gas demand destruction will increase.

Chinese and Indian LNG Demand: Indirect but Important

Chinese and Indian LNG demand could exert a strong, indirect influence on the future of U.S. LNG. While Chinese buyers may buy spot and medium-term cargos from U.S. producers, long-term deals remain highly unlikely due to structural political tensions between the two sides. India will likely forego U.S. imports due to considerable transportation costs from the U.S. Gulf Coast. While U.S. LNG producers likely won’t ink large-scale, long-term contracts with Chinese or Indian buyers, these two markets remain hugely important. Chinese and Indian LNG demand could pull competing supply from other markets, leaving U.S. LNG with more opportunities to expand into niche markets in Southeast Asia and Latin America. Whether or not China and India increase their LNG demand depends, of course, on their willingness to forego coal projects for cleaner-burning natural gas power generation.