Jump in PetroChina's pipeline gas auction price drives up domestic trucked LNG values

A nearly 50% jump in the auction price of wholesale pipeline gas sold by PetroChina in the domestic market has pushed up trucked LNG prices, despite sluggish downstream demand.

The auction price for PetroChina Natural Gas Sales Western Branch's latest round of 62.16 million cu m pipeline gas for delivery Dec. 1-7 was settled at Yuan 4.4-4.51/cu m Nov. 29 afternoon, up 49.25% from the previous round of Yuan 2.98-2.99/cu m for delivery Nov. 20-30, according to Chinese gas distributor ENN Group's China trucked LNG report.

This auction price equals to around Yuan 7,150/mt after processing into LNG, the data showed. As a result of the hike, LNG plants in the northwest region raised their trucked LNG prices by Yuan 580/mt, or 9.7%, to Yuan 6,570/mt on Nov. 30, ENN data showed.

The trucked LNG ex-plant price was at around Yuan 5,542/mt in Northwest China on Nov. 29, based on data from Chongqing Petroleum and Gas Exchange.

Coastal LNG receiving terminals in the Beijing-Tianjin-Hebei region, the Yangtze River Delta and the Pearl River Delta also raised their trucked LNG prices by Yuan 450/mt, Yuan 300/mt and Yuan 100/mt to around Yuan 6,350/mt, Yuan 6,250/mt and Yuan 5,920/mt Thursday, respectively, ENN data showed.

Gas-on-gas competition

PetroChina sells its uncontracted pipeline gas to domestic players through the auction mechanism and the price is one of the spot market indicators for domestic trucked LNG prices, which are not regulated by the government and reflect spot demand.

The Chinese gas market has two types of liquefaction plants – inland LNG plants that convert piped gas into LNG for distribution through trucks, and coastal LNG import terminals that import seaborne LNG for distribution through trucks and pipelines.

The inland LNG plants in the northwest sell via trucks to downstream buyers who are unable to access pipelines. Other downstream buyers that have signed annual supply contracts with PetroChina -- such as city gas companies, power plants, and factories -- do not participate in the piped gas auction, according to trade sources.

The auction price only comprises a small part of the feedstock for LNG plants in northwest, as most of their gas is purchased under annual contracts signed with PetroChina, trade sources noted.

However, the auction price still influences the feedstock cost for the inland LNG plants and the price difference between inland trucked LNG prices and the trucked LNG price of coastal LNG terminals is key to the gas-on-gas competition in the Chinese domestic market. This price spread can incentivize or disincentivize LNG imports into the country.

The auction for PetroChina's pipeline gas was previously conducted on Chongqing Petroleum and Gas Exchange once every 10 days, but has been changed to once every seven days since December.

Higher price helps PetroChina

The annual gas purchase contracts between city gas companies or major industrial users and the national oil companies have two components -- a base volume (80%-90%) and a flexible component (10%-20%).

Supply of the base volume must be strictly implemented in accordance with the contract, but supply or purchase for the flexible portion is not guaranteed. If suppliers are unable to meet the flexible demand, city gas companies have to buy this from the spot market, but they can also cancel offtake if they don't want the flexible volume.

Market sources said the price of trucked LNG has been lower than the flexible portion of PetroChina's downstream contracts, encouraging buyers to cancel offtake. The higher trucked LNG price may help PetroChina to sell more gas to domestic players, traders said.

One trade source in Beijing pointed out that the price hike was mainly led by PetroChina, aimed at pushing up domestic trucked LNG prices in a bid to promote the sales of its pipeline gas.

Market participants said that downstream industrial demand for LNG is weak except for some inelastic demand, and many downstream industrial users have switched to cheaper alternatives such as pipeline gas, LPG, and CNG. Hence, there is not clear market driver for a price hike.

In addition, mild weather has also dampened overall natural gas demand, including residential demand, which does not validate the higher auction price, sources said.

Platts JKM was assessed at $15.278/MMBtu on Nov. 30 for January, according to data by S&P Global Commodity Insights.