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Analysis: China's downstream gas market competition heats up with arrival of Western participants

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Platts European Gas Daily

Analysis: China's downstream gas market competition heats up with arrival of Western participants

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Western majors establish greater presence downstream

Possibility of third-party access at domestic LNG terminals

China's gas demand to continue growth in coming decades

Singapore — The competition in China's downstream gas sector is expected to heat up with the entry of more foreign participants vying for a greater presence in the increasingly open and growing market, sources and analysts said.

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Italy's Eni and China's Zhejiang Energy signed March 30 a memorandum of understanding on strategic cooperation, including potentially developing a long-term LNG supply agreement and joint participation in gas and LNG projects. This came a week after Total announced that it formed a marketing joint venture with Shenergy Group.

Both Zhejiang Energy and Shenergy are local government-owned enterprises that mainly engage in power generation and the gas industry. They supplied 11.8 Bcm and 9.8 Bcm of natural gas in 2019, accounting for more than 81% and 90% of total gas consumption in Zhejiang province and Shanghai, respectively.

"More and more Western suppliers wish to establish presence through the entire value chain, to get involved from upstream all the way to downstream, other than just supplying LNG," a Guangdong-based source said.

"The cooperation between Western suppliers and China's regional gas majors will enable the latter to obtain cheaper gas resources from the formers' global profiles, which is expected to intensify the competitions between them and other domestic gas majors," a Beijing-based market observer said, adding that the latter used to source natural gas from the three NOCs.

"These Western companies might be looking to be in the know about policies and regulations of the Chinese market through setting up JVs and increased strategic cooperation. It's possible for them to apply for windows at PipeChina's terminals with these JVs. There's definitely going to be more competition from the NOCs as they focus more on the downstream market, so linking up with these buyers would help in penetrating the downstream market," the Guangdong-based source said.

Prior to this, South Korean SK E&S made a comeback to the China gas market in 2020, after retreating from China Gas in 2019, to buy a 30% share in three subsidiary gas distribution companies of Beijing Gas Blue Sky Holdings in July 2020, and buying a 10% stake in ENN Energy's Zhoushan terminal in August 2020.

"10% stake of Zhoushan terminal will enable SK to bring in China 300,000 mt/year of LNG and sell to the downstream market through the three gas distributors," said a Shandong-based analyst.

BP has also been advancing into the downstream market, having signed regasified LNG supply agreements with ENN and Foran Energy in July 2020.

Shell signed a framework agreement with China's GCL in April 2020 for a proposed JV, while Russia's Novatek and Chinese state-owned Sinopec formed a JV in June 2019 to market LNG and natural gas to end-users.

Fierce competition

Competition in the domestic gas market has become increasingly fierce as PetroChina, Sinopec and CNOOC all focused on the downstream sector after transferring most midstream assets to PipeChina, market sources said.

PetroChina's subsidiary Kunlun Energy, the country's largest city gas supplier, further accelerated its pace of expansion in the downstream market by adding 44 new gas projects in 2020, which increased its total gas sales volume to 37.76 Bcm, surging 35% on the year.

Other NOCs and national city gas companies, such as Sinopec, CNOOC, ENN and China Resources, also have sped up their deployment in the downstream market by acquiring or cooperating with city gas distributors, S&P Global Platts reported earlier.

China has implemented a series of reforms in the natural gas market over the past years, including separating gas infrastructure operations from the three NOCs that allows more market participants access to gas pipelines, storages and LNG receiving terminals, lifting restrictions on foreign investment in its conventional gas upstream, and removing restrictions on foreign shareholding in Chinese city gas companies in cities with a population of more than 500,000, among others.

The country's natural gas demand saw a strong growth in 2020 despite the COVID-19 impact and is expected to maintain the pace in the coming decades, driven by its long-term carbon neutral target.

These factors have attracted more foreign companies to enter the China gas market, market sources said.

Forming a JV with domestic companies is still a faster and easier way to enter the Chinese natural gas market compared with setting up a solely owned company in China, the Shandong-based analyst said.

Shell set up a solely owned company in China in 2014 but its LNG sales volume has been limited even after several years' development, according to domestic trade sources.

"Shell has sufficient global natural gas resources, but these cannot be delivered into China as the company is difficult to make access to domestic LNG terminals," a source said, noting that without stable supply, it's not easy for Shell to penetrate the downstream market.

Shell failed to obtain a terminal slot from state-owned PipeChina this year, which could be due mainly to the limited downstream sales volume, he added.

City gas and industry use are the two main drivers of China's downstream gas sales.