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Analysis: China's rationalized coal-to-gas policy crimps winter gas demand growth

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Analysis: China's rationalized coal-to-gas policy crimps winter gas demand growth

Highlights

Coal-to-gas policy adapted to local conditions, fuel choice based on merit

Gas unable to replace coal in heating demand without policy support

Weaker heating demand to impact gas and LNG import volumes

China's relaxation of its coal-to-gas switching policy, meant to overcome logistical bottlenecks and prevent supply disruptions, is supporting coal consumption and proving to be a drag on natural gas demand growth this winter.

This is contributing to weaker gas demand from other sectors.

In the first nine months of 2019, China's natural gas demand rose 10.3% year on year, according to state planner National Development and Reform Commission, slower than the 18.2% growth in the corresponding period last year.

China's natural gas imports rose by just 7.9% and 7.7% year on year in September and August 2019, respectively, compared with more than 30% in September and August 2018, according to S&P Global Platts calculations based on data from the NDRC and China customs.

Weaker heating demand will also feed into LNG import volumes, although other factors at play here include higher domestic gas production and the startup of Power of Siberia, which will initially feed northernmost provinces like Heilongjiang that border Russia.

Several executives from power utilities, terminal operators and gas distributing companies, including at least one source with city-gas distributor Towngas China, told Platts recently they expect softened coal-to-gas conversion to affect gas demand this winter.

China's natural gas consumption by sector

WINTER GAS DEMAND

China's winter heating, mostly in central and northern provinces, accounts for roughly 9% of overall gas demand, according to Sinopec's 2018 data. This is relatively smaller than industrial use that accounts for around 40% of the total gas demand, and 17% from the power sector.

While a slowing economy has affected industrial and power sector demand for gas, heating demand is influenced by Beijing's coal-to-gas policies, the severity of North Asia's winter and centralized heating infrastructure.

Over the last five years, Beijing has implemented a series of policies for switching centralized heating from coal-to-gas to combat pollution, such as the "Blue Sky Defence" plan in mid-2018 that expanded gas switching to over three dozen cities.

However, in July 2019, the National Energy Administration streamlined the policy, saying it would allow cities to choose the most accessible form of energy, to guarantee winter supply. This was partly done to avoid shortages that previously drove inland trucked LNG prices to as much as $25/MMBtu in winter, twice the price of landed seaborne gas.

The rationalization of supply sources was reinforced by Premier Li Keqiang in a speech in October where he stressed on energy security this winter.

"Based on what is practical, we should use electricity where electricity is available, gas where gas is sufficient, and coal where coal supply is ample," Li, who is also the director of the National Energy Commission, said.

GAS PRICE TOLERANCE

Last week, Ling Xiao, the vice president of state-run PetroChina and chairman of gas supplier Kunlun Energy, echoed Beijing's view to ease from a blanket enforcement of coal-to-gas switching.

China's energy policy is based on fundamental realities, so the choice between coal and gas should be adapted to local market conditions, Ling said in Singapore.

He said market prices were the decisive factor in determining China's gas import and consumption volumes.

For winter heating, at a coal price of Yuan 600-800/mt ($85-$114/mt), natural gas prices have to be as low as Yuan 1.1-1.4/cu m, to make coal-to-gas switching possible, Ling said. This gas price tolerance level equates to an LNG import price of $4.50-$5.70/MMBtu.

Comparatively, the gas price tolerance level in the power sector could be higher, making it difficult for LNG to replace coal in heating.

At a renewables-based electricity price of Yuan 0.2-0.4/kWh, and a coal-fired electricity price of Yuan 0.35-0.45/kWh, natural gas has to be priced in the range of Yuan 1.0-2.3/cu m, to be competitive. That's an LNG import price of $4.10-$9.40/MMBtu for the power sector.

Natural gas penetration remains very low in China's heating and power sectors.

POWER SECTOR DEMAND

China's power sector has also slowed gas consumption, on the back of subsidy cuts and low electricity margins this year, sources at power utilities said.

In March, state-run power utility, State Grid Corp, reduced electricity charges for industrial users by 10% this year, in response to a slowing economy. This was on top of a similar cut for commercial users in 2018, and reflects wider goals of power sector reforms.

The move, however, squeezed power sector margins, forcing them to cut gas consumption.

China could fall short of its gas consumption target in the 13th Five-Year Plan at the current rate, market sources noted.

Beijing plans to increase the share of natural gas in energy consumption to around 10% by 2020, and in 2018, this was still at 7.8%, according to the government's 2019 report.

-- Eric Yep, eric.yep@spglobal.com

-- Analyst Cindy Liang, cindy.liang@spglobal.com

-- Edited by Aastha Agnihotri, aastha.agnitori@spglobal.com