China Ban on Aussie LNG Should Have Limited Impact

Beijing in May verbally ordered several of its smaller liquefied natural gas (LNG) importers to no longer buy the super-cooled fuel from Australia for at least the rest of the year.

The unofficial ban only extends to so-called second-tier LNG importers, not the country’s three state run oil and gas majors that account for nearly 90% of China’s LNG imports, according to a Bloomberg news report.

These secondary buyers make up the remaining 10% of China’s LNG procurement and include both state-run and private companies that usually import cargoes utilizing terminals owned and operated by China’s three majors, or PipeChina. Newly formed PipeChina now owns 10 of China’s 22 LNG import terminals, which are mostly scattered across the country’s eastern seaboard.

China’s unofficial LNG ban came just a week after the National Development and Reform Commission, its top economic planning agency, suspended all activities under the China-Australia Strategic Economic Dialogue. Beijing’s decision to pull out of the forum appears to be a tit-for-tat response to Canberra’s decision in April to end infrastructure agreements between the state government in Victoria and Beijing.

These developments come amid a more than year-long diplomatic stand-off between the two sides that has seen Beijing increasingly target numerous Aussie imports, with both official and unofficial bans, including coal, barley, copper, wine, lobster, several meat products, and timber.

Beijing initiated the import bans last year after Canberra’s insistence that a formal investigation be launched over the origins of the coronavirus, an implication that still angers Beijing.

Pivoting away from Aussie LNG

Until earlier this month, most analysts thought that Aussie LNG imports would remain untouched – and with good reason. Australian producers make up as much as 40% of China’s LNG imports, with the remainder of that supply divided between Qatar, the U.S., Russia, Malaysia, and others, according to China’s General Administration of Customs.

In addition, China is in the midst of a major LNG infrastructure build-out that will help propel it to the top global LNG importer slot ahead of Japan as early as next year. Beijing also mandated that gas make up at least 10% of the country’s energy mix by 2020, 15% by 2030, with further earmarks after that. In light of its recent net-zero carbon emissions 2060 goal, gas as a percentage of its energy mix could increase even more.

Moreover, it’s unlikely China will directly target Aussie LNG any further since it would involve violating long-term offtake agreements. To do so on a large scale would be unprecedented in global LNG markets, while also forcing Chinese buyers to scramble to replace that supply – at least over the mid-term.

Beijing’s LNG ban is also limited because most second-tier importers are city gas distributors that already have limited buying power. As such, the unofficial ban’s impact will be more regional than nationwide. Impacted companies can replace Aussie volumes on the LNG spot market with cargoes from the U.S., Qatar, Russia, and a growing list of trading houses.

China can also turn to other suppliers for term LNG and gas supply deals to diversity against further over-reliance on Aussie gas going forward. Shortly after Beijing banned LNG imports for second-tier buyers last month, it initiated talks with Turkmenistan for gas supply.

Turkmenistan is the second-largest country in Central Asia. Though it’s a landlocked country that shares borders with Iran, Afghanistan, Uzbekistan, and Kazakhstan, it is playing a key role in China’s Belt and Road plans.

China can also maximize Qatar’s LNG infrastructure development as the legacy gas producer continues to push ahead with plans to increase liquefaction capacity from a current 77 million tonnes per annum (mtpa) to 110 mtpa by 2026 and a record-breaking 126 mtpa by 2027. As such, China will have even more procurement options that could be used as leverage to replace Aussie volumes.

“Australia’s LNG market share in China is likely to fall in the coming years, ceding market share to the U.S. and Qatar, should Canberra’s tensions with China continue,” Guo Jian, a gas marketing director at Sublime China Information Co., a Chinese commodity market information provider, told the Beijing-based Global Times in May.