Notwithstanding electric power shortages in Sichuan province, China’s overall gas demand has fallen nearly 5 percent in the second quarter of 2002 due to a sustained economic slowdown, a stark rise in LNG import prices and political support for clean coal. Less gas-burn for power gen and more renewables further contributed to the absolute decline in volumes, explains WoodMac research director Maioru Huang.
On the supply side, domestic production increased by 4.9 percent year-on-year (yoy) in the first half of the year, while pipeline imports increased by 11 percent. LNG imports totalled 31 million tons, down 21 percent yoy.
Buyers cut down on spot LNG, turn to domestic coal instead
“Chinese buyers have minimised their exposure to costly spot LNG. “Spot purchases were muted, and reportedly, some Chinese players resold cargoes into the European market,” Huang commented.
Stable energy supply at affordable cost is at the forefront of China’s energy policy today, as policymakers try to shield households and industry from soaring global commodity prices. Hence, China’s national 14th five-year energy plan, published in March, re-emphasises coal as the backstop of energy security.
Keen to stabilise energy prices and rein in inflation, the Chinese government has “prioritised” gas demand from households and gas use of gas for space heating. Cost pass-throughs are becoming more frequent, allowing China’s state gas importer to push the high costs for imported LNG to end-users, which limits the attractiveness of burning gas for power generation.
In fact, prices for landed LNG imports in the first half of 2022 averaged $15 per MMBtu, nearly double the average landed prices in the same period in 2021. Prices of pipeline gas imports increased 40 percent, though this rise was more modest due to a substantial share of lowest-priced Russian pipeline gas which is adjusted to higher oil prices with a time-lag of three to six months, depending on the contract terms between Gazprom and the Chinese importer CNPC.
Pricing schemes for domestic gas favour coal-burn
In the summer 2022 and winter 2022-23 gas pricing plan of China’s upstream oil and gas suppliers, wholesale prices for regulated gas into non-prioritised sectors are reportedly 15-20 percent higher than city-gate benchmarks, and for non-regulated gas the prices are 40-80 percent higher. Some volumes are proposed to link to Asian spot LNG prices.
“Such price schemes, plus a relaxation on coal use, will limit downstream buyers’ appetites and plans for gas sales,” analysts commented.
As for LNG import prices, WoodMackenzie expects spot LNG cargoes delivered to east coastal provinces will average $43 per MMBtu in the second half of 2022 – way above the city-gate benchmarks of around $8 per MMBtu. Oil-linked pipeline gas and LNG contracts, as well as Henry Hub-linked LNG contracts, will see prices increase from levels in the first half of this year.
“Term LNG remains more economical than spot LNG though, with average delivered prices range between $13 and $20 per MMBtu,” analysts noted.
LNG imports could fall 14 percent this year
On the policy side, Huang believes “China is unlikely to change its coal policy as the backstop of energy security in the near future. National policy is unlikely to encourage gas demand in a significant manner due to concerns over supply chain pressure and affordability.
In consequence, China’s LNG imports to fall 14 percent year-on-year to 69 million this year. “This will be the largest decline since China began importing LNG in 2006. By comparison, in 2015 China’s LNG imports declined for the first time but by 1 percent only,” he said, forecasting:
“Japan will move back to becoming the world’s largest LNG importer this year.”
