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High LNG prices dampen China's buying interest; winter could be swing factor

Highlights

Term cargoes sell in spot market for better margins

Pipeline gas inflows from Russia to rise during heating season

Elevated gas prices prompt coal to electricity switching

  • Author
  • Christel Goh    Staff
  • Editor
  • Ankit Ajmera
  • Commodity
  • Coal Electric Power LNG Natural Gas
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  • Asia-Pacific Energy Crisis LNG Commoditization

High LNG spot prices have dampened Chinese buying interest, forcing buyers to increasingly rely on domestic production, lower-priced pipeline gas, or even other sources of energy such as electricity and coal to meet demand, industry sources said.

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However, winter could lift LNG imports, which have slumped 20% year on year over January-July.

"There is a huge disconnect between upstream and downstream prices. If we import, we will be making huge losses," a Chinese importer said, adding that the spread between domestic and international LNG prices was wide at $40/MMBtu.

JKM, the benchmark for spot LNG prices in Northeast Asia, averaged $57.85/MMBtu over Aug. 16-Sept. 7, while trucked LNG prices in North China hovered in the Yuan 6,350-Yuan 6,400/mt range, or about $17.5/MMBtu Sept. 7, trade sources said.

While most importers have shied away from the spot market in the wake of high prices, some have sold their term cargoes in the spot market for better margins.

Beijing Gas, a local government-owned city gas distributor, will likely postpone the operation of its newly built 3 million mt/year Tianjin LNG terminal in North China due to high LNG prices, a source close to the company said.

"The terminal is scheduled to complete construction in November, but they haven't bought a commissioning cargo yet because the current LNG prices are too high," the source said.

NOC demand weakens

Storage levels at some LNG terminals in North China are about 70% of capacity, a market source in Beijing said. High inventory levels are weighing on demand from national oil companies, or NOCs.

Sinopec and CNOOC will likely buy lower LNG volumes for winter than a year ago due to high LNG prices, sources close to the two companies said.

Sinopec has swapped some FOB US LNG cargoes for DES China cargoes in the spot market, a source close to the company said. Sinopec's lower spot LNG purchases mean its imports could fall to levels seen two years ago, even though the company increased term volumes in 2022, the source said.

Sinopec's LNG imports are estimated at about 15 million mt in 2019, comprising around 10 million mt in term contracts and about 5 million mt in spot volume.

CNOOC will likely add an additional 2 million mt term LNG supplies in 2022, a company source said, even though the increase under its 2022 term contracts is estimated at about 5 million mt.

"There is an incremental period for the contracts, so it's unlikely to reach full capacity in the first year," the company source said.

Pipeline gas reliance

PetroChina, China's largest natural gas producer, domestically produced about 63.82 Bcm natural gas in first-half 2022, up 4.4% year on year, accounting for 58.2% of China's total gas production, data from the company and the National Bureau of Statistics showed.

The National Energy Administration has estimated China's domestic gas production will exceed 220 Bcm in 2022, rising over 10 Bcm year on year.

China's pipeline gas imports are estimated to have risen about 10.8% year on year to 26.28 million mt in the first seven months of 2022, accounting for 42% of the country's total inflows, according to S&P Global Commodity Insights calculations based on Chinese customs data.

PetroChina is the main importer of pipeline gas in China and currently operates the Central Asia natural gas pipeline, the China-Myanmar natural gas pipeline, and the China-Russia natural gas pipeline eastern route.

Pipeline gas inflows from Russia are expected to increase further during the heating season but at a limited pace as the construction of the southern section of the China-Russia gas pipeline has not been completed, market sources said.

Russia's natural gas supplies to China via the Power of Siberia pipeline surged 60% year on year over January-August, Gazprom CEO Alexei Miller said.

Winter a wildcard

While China's LNG demand is expected to be muted, a harsher winter could usher a recovery.

"Chinese LNG deliveries are expected to pick up during the winter months to meet peak seasonal demand, and total natural gas demand is expected to remain nearly flat at 375 Bcm compared to last year," analysts at S&P Global said Sept. 9.

NOCs -- Sinopec, PetroChina and CNOOC -- each bought a spot LNG cargo from Russia's Sakhalin LNG terminal for August delivery.

"We bought some spot cargoes to stock up our inventories in preparation for the winter supply," a source with one of the NOCs said.

Industry players are also monitoring fresh COVID-19 lockdowns in China that could weigh on economic activity. "This could hit gas demand once there are resurgences," he said.

A source at one of the major city gas distributors in China said LNG price uncertainty has added more perplexity. Downstream users can only afford a natural gas price of about Yuan 6,000/mt, and $20/MMBtu is the likely ceiling for them, the source said.

The Beijing Development and Reform Commission is encouraging coal-to-electricity switching in 2022 over coal-to-gas switching, according to a post on its WeChat account Aug. 29.

"If it's a cold winter, there's a gap in heating supply and natural gas prices are too high, China may further relax its environmental protection requirements to allow coal to be used for heating," a market source said.