China, the third-largest LNG importer, is forecast to have a surplus of gas in the near term and will therefore become less reliant on spot LNG imports, possibly raising questions about the viability of China as a destination for some US LNG exports up to 2020.This, combined with the overall narrowing of the oil and gas price ratio, will make it harder for some projects to move forward with a Final Investment Decision in the coming year.

As a result of a weaker economy and rising natural gas prices over the last couple years, Chinese demand for natural gas has been muted according to a recent in-depth report titled China's emerging natural gas supply surplus - tailwinds and headwinds, by our Asia Equities colleagues.

Their expectation is that an expected increase in domestic output, with a focus on unconventionals, as well as term contracted LNG and pipeline deliveries will create a supply surplus in the next few years, peaking at some 23 bcm (2.2 Bcf/d) in 2017.

With pipeline supplies increasing, there will be less need to construct new LNG terminals and higher utilisation of those that already exist, or where construction is already underway.

As the third largest importer of LNG globally, China’s reduced reliance on spot LNG cargoes is also likely to add additional downward price pressure on global LNG prices.

China’s improved gas supply sufficiency is predicated on the assumption that unconventional supplies grow from 5bcm in 2014 to more than 40bcm (3.9 Bcf/d) by 2020, of which around half is from shale plays and the rest from CBM and coal to gas supply.

If this outlook for unconventional gas and term LNG and pipeline deliveries materializes, there are several implications:

-First, it means that China would become less reliant on spot sales of natural gas.

- Second, the surplus would reduce the upward pressure on natural gas prices, helping to accelerate gas market liberalization, thereby spurring more gas-on-gas competition.

- Third, US LNG exports were supposed to have provided an opportunity to bring flexibility and cheaper natural gas into the Asian gas mix, assuming a wide oil-to-gas ratio (ie if Henry Hub was around $3/mmbtu and Brent was at $100/b).
Source: Barclays