Chinese city gas operators have struggled to fulfil the recent spike in gas demand caused by a rebound in industrial activity and strong heating needs in an exceptionally cold winter. Fitch Rating says suppliers largely managed to cater to the demand spike which propelled up sales and profits, though the sharp rise in spot LNG prices has put pressure on dollar margins.
Growth in China’s gas demand increased at a staggering rate, rising from 5.9% in October to nearly 13% in the three months between November 2020 to January 2021, data from the Chongqing Petroleum and Gas Exchange shows. Though these growth rates are impressive, Fitch Rating said the current supply pressure is lower than it had been in winter 2017/18 given that demand spikes could be “fulfilled to a large extent” and translated into “strong gas sales for local distributors.”
Taking some precautions, the Chinese government had urged national oil companies (NOC) and local gas distributors to build additional gas storages after the 2017 shortage, and supply from these facilities reached above 100 million cubic meters per day, or 9.7% of total daily gas consumption in the peak season this winter. Some NOCs also moved some of their long-term contract deliveries to the winter and new LNG terminals and pipelines also contributed additional contracted supply.
LNG price surge impacts dollar margins
Strong seasonal demand – not only in China but also in Japan and South Korea – created some supply shortages and pushed up prices, notably for spot LNG cargoes which shippers rushed to bring in from the Atlantic Basin. In northern China, prices for imported LNG jumped by more than 100% at the height of the cold spell and by 60% in southern parts of the country. In Hebei, Jilin, Liaoning, and Shandong provinces, prices for landed LNG cargoes jumped to more than CNY 10,000 per tonne (US$1,545 per tonne) in late December, from an average of CNY 2,700 per tonne in June-August 2020, according to trading data.
Still, Fitch Rating reckons “the impact of rising spot LNG prices on gas distributors' dollar margins should also be lower this winter than in 2017.” Overall dollar margins of the rated gas distributors were flat or slightly better yoy in 2020.
Analysts pointed out that Chinese city gas operators are often partially or fully owned by the county’s large oil and gas importers and can hence source their fuel needs at a favourable price. Kunlun Energy, for example, can count on its parent, CNPC, to secure stable gas resources. ENN Energy can utilise the Zhoushan LNG terminal to secure low-cost LNG with long-term contracts signed at a 20-30% discount to the city-gate price.
Binhai Investment's higher gas demand has been satisfied by additional supply from its strategic investor, Sinopec, at a reasonable cost. Beijing Gas has a sufficient piped-gas supply from NOCs to ensure energy security for the capital and fuel cost pass-through has usually been timely in Beijing. Shenergy has its own LNG terminal with long-term contracts, which supplies over 60% of total gas procurement.
Most rated gas distributors have signed long-term gas supply contracts which are typically oil-indexed, and less volatile than spot prices. China’s gas sector reform has also given large national gas distributors better access to midstream assets, notably LNG import facilities and pipelines.
“Distributors need to bear a sharper increase in fuel costs from their spot market purchases, although we think the fuel cost pass-through has become smoother since the reform of the gas distribution price mechanism,” analysts said. Gas distributors can now better identify target customers to optimise cost structures and have ways to communicate with the government on tariff adjustments.