PetroChina's new pipeline gas sales pave way for trading on Chinese exchanges

Singapore — State-owned oil and gas company PetroChina has sold pipeline natural gas on two Chinese commodity exchanges with new specifications that include permissions for reselling gas volumes, the use of warehouse receipts and volume lock-ins for winter supply—features that are key to the development of a financial market based on physical trades.

The pipeline gas sales were announced in a series of notifications through April by Chongqing Petroleum and Gas Exchange (CQPGX) and Shanghai Petroleum and Natural Gas Exchange (SHPGX), both of which have conducted auctions of LNG and pipeline gas in recent months with the aim of establishing gas trading hubs in China.

The specifications of the new gas sales by PetroChina satisfy several pre-requisite needs for the financialization of a physically traded commodity -- more trading liquidity, secondary and tertiary market participants, liberalized wholesale trading of physical volumes and standardization of trade through documentation.

New trade specifications

Specifications for pipeline gas sales on CQPGX have listed the use of warehouse receipts for the first time.

Warehouse receipts are normally used in the futures markets to guarantee the quantity and quality of a commodity, making it more standardized, flexible and easier to trade. This may pave the way for the launch of pipeline natural gas futures contracts that would also need warehouse receipts for delivery.

The volume of the gas sales was limited to 10% of the monthly contract volume sole by PetroChina to its existing contracted customers in 2021-22, according to exchange notices. What was notable was the pre-condition that the gas can be traded further between the company's existing customers, creating a secondary marketplace.

Prior to this, PetroChina's sales were limited to bilateral contracts, with a volume tolerance of around 3%-5% of the total contract that was non-transferable. A pipeline customer in Guangdong said it has previously needed to resell surplus volumes due to fluctuating markets, but its application was rejected; and changing requirements of market players may have pushed PetroChina to adjust its sales model.

A market analyst in Shanghai said if PetroChina received good feedback on the modified pipeline deals, it could expand the number of participants and trading volume.

"Other major suppliers such as Sinopec and CNOOC might also offer their pipeline gas for trading on open electronic platforms if PetroChina's attempt is successful, which will help price discovery and promote market-oriented gas trade," a Guangdong-based trader said.

Additionally, the pipeline sales have been conducted in advance, for delivery as far as the winter months, which is a significant departure from sales for just the following month.

This will allow suppliers to lock in upstream procurement, production, storage and transportation, which in turn helps stabilize gas supply and pricing in winter, PetroChina said on April 23, quoting an SHPGX official.

PetroChina's piped gas sales on CQPGX

PetroChina sold pipeline natural gas for delivery over June-November 2021 and February-March 2022 on CQPGX, with a minimum trading volume of 10,000 cu m, to be traded using warehouse receipts.

The gas was sold by PetroChina's southern branch for delivery in Guangdong, Hunan, Hubei, Yunnan, Guizhou, Guangxi and Jiangxi provinces, using Guangzhou's city-gate price as the benchmark at Yuan 2.04/cu m, and western branch for delivery in Xinjiang, Qinghai, Ningxia and Inner Mongolia regions used Xian's city-gate price as the benchmark at Yuan 1.22/cu m.

The advance sales were allocated during April 21-23, and could be traded among participating buyers from April 26 to the last trading day of the warehouse receipt.

PetroChina set a ceiling price for resales at Yuan 3.6/cu m and Yuan 2.69/cu m for cargoes delivered in the south and west, respectively, according to the notifications.

The resale trades can be conducted across industries during the non-heating season, but not during the heating season that starts in November and ends in March the following year, to reserve gas for winter heating purposes.

PetroChina's piped gas sales on SHPGX

PetroChina's eastern and northern branches made advance sales of pipeline gas on SHPGX for June-July delivery, which were allocated over April 21-23, and for August-November 2021 and February-March 2022 delivery, which were allocated over April 26-29.

These volumes can be traded among buyers from April 29, with the last trading day set on the 5th of the month before the delivery month, notifications showed.

Gas sales in the east are for delivery in Shanghai, Henan, Anhui, Jiangsu, Zhejiang and Shandong provinces with Shanghai's city-gate price setting the benchmark at Yuan 2.142/cu m, and northern sales are for delivery in Beijing, Tianjin, Shanxi, Hebei, Liaoning, Jilin and Heilongjiang provinces with Beijing's city-gate price setting the benchmark at Yuan 1.953/cu m.

PetroChina also set a ceiling price for resales at Yuan 4/cu m for cargoes delivered in the eastern and northern regions.

Corrects exchange using warehouse receipts, start date of SHPGX trades in first bullet and fourth paragraph of story published April 30