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Analysis: China's gas buyers shun high-priced spot LNG despite energy shortages

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Analysis: China's gas buyers shun high-priced spot LNG despite energy shortages

Highlights

Buying interest fades after JKM price surge at end 2020

NDRC steps in to control domestic price surge, market manipulation

Importers severely underestimate winter procurement

Singapore — China's natural gas companies have backed off from purchasing high-priced spot LNG for February deliveries as they are unable to sell downstream at high prices, and after the government cracked down on domestic price surges in recent weeks.

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This is despite energy shortages in northern China and efforts to shore up supplies of electricity and feedstocks like coal, pipeline natural gas, domestic gas and LNG imports. It also comes after record high LNG imports by China in December, according to S&P Global Platts Analytics.

Asian spot LNG prices climbed over the $15/MMBtu mark at the end of 2020 and there has since been a noticeable decline in buying interest, with no spot purchases by Chinese end-users reported since the Christmas holidays, Singapore-based traders said.

China LNG imports

Several purchase tenders issued in mid-December by importers such as CNOOC, PetroChina, Guangzhou Gas and Guangdong Energy for January-February deliveries were also left unawarded when spot prices started climbing over the $11/MMBtu level.

"Chinese second-tier buyers are trembling just looking at the price surge each day; no one will buy at this price level," a Shenzhen-based end-user said.

The S&P Global Platts JKM, the benchmark for spot deliveries into North Asia, has hit a record high of $32.50/MMBtu this week, a price level at which LNG is likely to see demand destruction, especially in many markets like China where end-users cannot pass on their import costs to the downstream.

PRICE CONTROL

China's domestic gas prices rose in early winter, with trucked LNG prices in the Beijing-Tianjin-Hebei region surging as high as Yuan 10,000/mt, or $24/MMBtu, in December and early January.

But sales at such high prices were low as most end-users retreated to the sidelines, especially after the National Development Reform Commission stepped in to control the price surge.

An NDRC representative told state-run Xinhua News on Dec. 21 that trucked LNG prices should not exceed 20% of the city gas price guideline, while a few LNG import terminals received notices from the NDRC saying that ex-factory trucked prices should not exceed Yuan 5,500-6,000/mt, sources said.

The government has stepped in despite wholesale prices for imported LNG and unconventional gas being liberalized. China's city-gate prices for domestically produced natural gas and imported pipeline gas are mostly regulated by the government.

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On Jan. 8, a State Council executive meeting chaired by Premier Li Keqiang said the government was ensuring stable energy supply and fighting new outbreaks of COVID-19. It said in a statement that priority would be given to meeting winter heating demand as large swathes of the country experienced sharp temperature drops, and price violations should be investigated and dealt with promptly.

China's three national oil companies or NOCs have since increased gas supply to northern China by raising imports, suspending supply to non-prioritized sectors and reducing supply to southern regions, sources said.

UNDERESTIMATING DEMAND

One of the reasons for the gas shortage is China's energy companies getting caught offguard by the strength of demand during the most severe winter weather in decades after months of volatility caused by the pandemic, as were other major end-users in the region including Japanese utilities and South Korea's Kogas.

China's actual gas demand in November rose 14%-15% year on year, according to a PetroChina executive, but supply, excluding inventories, rose by only 4.9% over the same period, with 11.8% growth from domestic production and imports falling 3%, official data showed.

China's pipeline gas imports fell 13% on year in November, with imports from biggest supplier Turkmenistan falling 22.2%, according to customs data, which opened up a supply gap from Central Asia of tens of millions of cubic meters per day just as winter began.

The three NOCs -- PetroChina, Sinopec and CNOOC -- had planned to increase gas supply by 5%-11% for the current winter, according to state media. But this fell woefully short as demand surged due to multiple cold waves and an economic rebound.

City gas distributors had failed to raise winter contractual volumes on concerns over economic growth and COVID-19, sending a wrong message to upstream suppliers about winter demand levels.

Meanwhile, state-owned infrastructure operator PipeChina, which took over much of the gas infrastructure from the NOCs in 2020, lacked expertise in winter procurement and emergency energy supply.

Gas-fired power plants ran at full capacity to make up for coal-fired plants that fell below capacity. Zhejiang Energy supplied a total 400 million cu m of gas over Jan. 1-9, up 33.6% year on year, of which gas consumption for power generation surged 73.7% over the same period.

PetroChina had prepared 98.67 Bcm of natural gas for the current winter, up 10 Bcm or 11.3% on year, while CNOOC and Sinopec planned to supply 24 Bcm and 20 Bcm, up 11% and 5% on year, respectively, Xinhua reported.

Sinopec supplied more than 12 Bcm of natural gas over Nov. 1-Jan. 7, up 20% on year, and said it plans to receive 30 LNG cargoes totaling over 2 million mt in January.

CNOOC supplied 11 Bcm of natural gas over Nov. 1-Dec. 26, up 20% on year, according to a Xinhua report on Dec. 28.