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Analysis: China's rush for LNG deals amid high spot prices signals strong gas demand growth

Highlights

Long-term contracts underpinned by gas demand growth: Platts Analytics

China likely to see more long term contracting activity in coming months

US likely to become second-largest LNG supplier to China in 2021

China's rush for long-term LNG contracts with the US has been triggered by record high spot LNG prices but the deals also reflect pent up demand for uncontracted volumes, attractive pricing offered by suppliers, the benefits of US LNG like destination flexibility and optimism about future demand growth.

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The deals come amid signs of cooperation between Beijing and Washington on issues such as trade, climate and energy, and with China effectively becoming the world's single-largest LNG importer surpassing Japan, even though a wider easing of geopolitical tensions is unlikely.

So far this year, at least eight Chinese companies, including state-owned national oil companies, have signed nearly a dozen long-term contracts with overseas suppliers, for a volume of nearly 25 million mt/year, more than half of which were signed in the September-November period when spot LNG prices hit record highs.

That almost equals a third of China's annual LNG imports, and does not even include the short-term deals and preliminary agreements signed this year. In comparison only one long-term contract was signed in 2020, by Chinese gas company Shenergy with UK's Centrica, when the COVID-19 pandemic had stalled buying interest across the industry.

Several aspects of these deals were notable – 15-20 year deals were common despite the market veering towards shorter durations for years, over 40% of all the deals were for US LNG and market sources reported surprisingly low tolling fees to entice buyers.

"The recent uptick in Chinese long-term LNG contracts is likely driven by the underlying increase in natural gas demand," Jeff Moore, Manager, Asian LNG Analytics at S&P Global Platts, said.

"Furthermore, it's likely that LNG along with natural gas are important parts of China's long term energy transition plan, which is likely underpinning the relatively long length of the contracts that we've seen," he added.

Moore said Platts Analytics estimates China is around 70% covered by long term contracts in 2021, and this is expected to expand slightly given the recent contract signings.

"However, Chinese LNG import demand is expected to continue to grow in the next 5-10 years so even with the new contract signings, China's coverage of supplies from long-term contracts is only expected to increase to around 75% by 2025," Moore added.

He said, there could be more contracts signed, especially given that long-term contracts elsewhere in the region are expiring and the amount of new supply coming online remains uncontracted, which could be viewed as a further opportunity for Chinese end-users to lock in supply.

US LNG diversification

The share of US in China's LNG imports has been relatively low, because of the recent trade wars and record low spot prices that disincentivized long-term contracting activity.

In the first 10 months of 2021, Australia was China's single-largest LNG supplier at 25.9 million mt, but its share of total imports dropped to 39.7% from 43% in 2020. Meanwhile, LNG imports from the US accounted for just 11% of China's total, up from 3% in the previous year. The US is set to be the second-largest supplier to China in 2021.

State-owned Sinopec, with its trading arm Unipec, and CNOOC signed the largest volume of long-term LNG in 2021 and scooped up more than half of the deals totaling over 15 million mt/year, mainly from US-based Venture Global and Qatar.

National oil companies like Sinopec expanded its term contract volumes this year to reduce its relatively high exposure to the volatile spot market, a company source said. With Qatargas and Russia's Novatek, accounting for 24% and 15% of new contract signings in 2021, there is stiff competition among suppliers for the Chinese market.

New players

Three new players -- Sinochem, Guangzhou Development and Shenzhen Gas -- emerged to sign long-term LNG contracts for the first time. Several other second tier energy firms like ENN, Foran Energy and Shenergy Group, also signed deals highlighting the importance of China's gas market liberalization for new LNG demand.

One of China's largest state-owned traders, Sinochem imported its first LNG cargo on behalf of downstream users in October, and said it wanted to leverage 40 years of crude oil trading and two overseas procurement platforms in London and Singapore to enter the LNG business.

Although Sinochem does not operate any LNG receiving terminals or gas pipelines, the introduction of third-party access by PipeChina allowed Sinochem to enter the LNG market, sources said, adding that while Sinochem has some refining capacity, most of its contracted LNG would be resold.

Second-tier gas suppliers have been increasingly active in the LNG market in recent years, but the lack of trading expertise and banking credibility forced them to rely on spot LNG markets. This is likely to gradually change.

City gas distributor China Gas' recent deal with Vitol to set up a joint venture in Singapore's commodity trading hub and Guangdong Development Group's agreements to resell contracted volumes to city gas companies in the Hong Kong-Macao Greater Bay Area signal a wider effort by non-NOCs to seek the protection of term contracts.

China's key LNG term contracts signed in 2021

Month
Seller
Buyer
Vol (mil mt/year)
Duration (in years)
Nov
Venture Global
Sinopec
4.00
20
Nov
Venture Global
Unipec
1.00
3
Nov
Venture Global
Unipec
2.50
1
Nov
Cheniere
Sinochem
0.9 - 1.8
17.5
Nov
Cheniere
Foran
0.30
20
Nov
Vitol
China Gas
0.8 - 5.0
NA
Oct
Cheniere
ENN
0.90
13
Oct
BP
Shenzhen Gas
0.30
10
Sept
Qatargas
CNOOC
3.50
15
Jul
Petronas
CNOOC
2.20
20
Jul
BP
Guangzhou Dev
0.65
15
Mar
QatarGas
Sinopec
2.00
10
Mar
Total
Shenergy Group
1.40
20
Feb
Novatek
Shenergy Group
3.00
15

Source: S&P Global Platts

Note: This list doesn't include all short-term contracts, HOAs and MoUs