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    China's winter outlook [Gas in Transition]


This year’s revival in Chinese gas consumption will extend into the upcoming winter that is tracking to be warmer than usual, but stronger pipeline flows from Russia and Central Asia will check seasonal LNG import growth. [Gas in Transition, Volume 3, Issue 10]

by: Shi Weijun

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Natural Gas & LNG News, Asia/Oceania, Insights, Premium, Gas In Transition Articles, Vol 3, Issue 10, China

China's winter outlook [Gas in Transition]

China’s gas consumption is set to continue growing for this upcoming winter as a recent upturn in economic activity will help domestic demand maintain momentum, but growth in LNG imports will be squeezed by other cheaper gas sources and levels are unlikely to return to the historical winter peak of 2021.

Chinese gas demand has been in robust recovery since the spring with apparent consumption in the first eight months of 2023 up by 7.4% year-on-year to 259.81bn m³, according to the country’s central economic planning agency. Demand for the full year had been predicted by senior energy officials in July to expand by 5.5-7.0% to 385-390bn m³.

The consumption rebound after last year’s unprecedented decline of 1.2% has come amid improving prospects for China’s economy, which beat market expectations to expand by a better-than-expected 4.9% in the third quarter (Q4) and lift growth for the first three quarters to 5.2%.

Estimates for China’s gas use this winter vary. Under a normal winter temperature scenario consumption could increase by 8.9% in Q4 to 106bn m³ compared with an estimated 87.5bn m³ in Q3, according to an outlook from Sinopec. Demand during the heating season – which traditionally runs for four months from mid-November to mid-March – under typical winter temperatures will rise by 7.8% to about 191bn m³.

In the case of significantly warmer winter temperatures, gas demand is expected to be about 104bn m³ in Q4, up 6.8% year-on-year, and by 5.5% to 187bn m³ for the heating season.

The base-case for China’s gas demand in the upcoming winter – defined as the six months from October to March – is an increase of 7% year-on-year to 214bn m³, supported by higher economic activity than last winter due to the lifting of COVID-19 restrictions and an anticipated fall in gas costs due to declining spot LNG prices, according to recent analysis from CNPC’s Economics and Technology Research Institute (ETRI).

The institute’s analysis was completed before China surprised markets with its Q3 GDP growth. If the economic recovery holds firm, a scenario with higher economic growth close to the optimistic forecasts given at the start of this year could add 3.0bn m³ to the base case.

More demand across the board

Residential and commercial gas consumption for the coming winter is projected to increase to 57bn m³, a 6% rise from a year earlier as gas grids expand and commercial activities resume.

Industry gas demand is estimated to see more modest growth of 4% year/year this winter amid the steady economic outlook both at home and abroad, with consumption on track to reach 81bn m³. The gas power and transport sectors, both of which experienced a 9% yr/yr drop last winter, are expected to resume growth this winter – a turnaround that can be attributed to lower gas costs and more economic activity than last winter.

Gas burn in the Chinese power sector meanwhile stands to expand by 4% over this winter from last year to reach 29bn m³. China is set to accelerate gas-fired power capacity construction in the coming three years, adding more than 10 GW every year. Lower fuel prices – which represent around two-thirds of operation costs – are also expected to boost gas consumption by power plants.

For example, in the southern province of Guangdong, the country’s biggest gas-fired power market, a gas price below $16/mn Btu may keep power plants profitable under the current gas power benchmark tariff. But for gas power plants to be competitive with coal-fuelled plants, fuel prices should be lower than $10/mn Btu. Gas burn in the power sector still depends on the availability and economics of other electricity sources, such as hydro and coal power.

Transport sector demand is likely to see a 35% year-on-year jump this winter to 21bn m³ due to the lifting of COVID-19 travel restrictions and favourable economics compared with diesel-fueled vehicles. Sales of CNG/LNG-fuelled heavy-duty commercial vehicles more than tripled in the first half of 2023 as LNG retail prices fell lower than 70% of diesel prices, which is considered a price threshold for LNG-fuelled vehicles to be more economically competitive than diesel ones.

But uncertainties loom as these two sectors are sensitive to fuel prices. Most gas demand by power plants and commercial vehicles is not prioritised by the government in the case of a gas shortage.

Total gas supply, excluding gas storage withdrawals, for the coming winter is expected to be 8% higher yr/yr, reaching 209bn m³. Domestic production will maintain steady yr/yr growth at 6% to reach 125bn m³ this winter as China’s continuous push for energy supply security is set to drive robust growth of local gas production.

LNG import outlook brightens

LNG imports this winter are expected to rebound 12% to 38mn tonnes or the equivalent of 52bn m³, up from 34mn t last winter. China’s LNG imports have roared back from pandemic levels for this year to date, expanding by 10.1% in the first nine months from a year ago to 51.13mn t – although volumes in September were down yr/yr for the first time since January, signalling that some softness remains.

The LNG import rebound has been mostly driven by lower spot LNG prices and the lifting of pandemic restrictions, although it should be noted that volumes still have not recovered to 2021 levels because of a weak global economy and competition from other gas supply sources and alternative fuels. But there is still upside potential this winter in the case of faster-than-expected economic growth in Q4.

State-owned importers PetroChina and CNOOC have a total of 5.6mn t/yr of LNG contracted with Chevron’s 15.6mn t/yr Gorgon and 8.9mn t/yr Wheatstone projects, and Woodside Energy’s 16.9mn t/yr North West Shelf facility. The threat of strikes at all three plants now appears to be in the rearview mirror after Chevron Australia and employees at its two plants reached an agreement on pay and conditions.

The prospect of industrial action had the potential to disrupt Australian LNG flows to China, especially as some portfolio players also take LNG from the three plants to supply the country. Based on data for the past three years, China stood to lose 400,000 mt to 1.6mn t on average depending on the duration of strikes ranging from two weeks to two months. With the impasse now resolved, a key risk for China’s LNG imports this winter has been removed.

More clarity on winter pipeline flows

Pipeline gas imports will also be a less of a wildcard for China’s gas supply than in past years, after CNPC struck two key agreements with Gazprom and QazaqGaz, Kazakhstan’s national gas company, on the sidelines of a high-profile forum for the Belt and Road Initiative held in Beijing in October.

Gazprom announced on October 19 that it will export more gas than planned to China this year via the Power of Siberia (PoS) pipeline after the Russian company and CNPC signed an addendum to the sales and purchase agreement for PoS supplies for “an additional volume of Russian gas supplies to China until the end of 2023.”

Further details were not disclosed but Gazprom had originally planned to export 22bn m³ to China this year, up from 15.5bn m³ in 2022. Gazprom’s exports to China for the year to date were up by 46.6% yr/yr, according to the announcement.

The additional agreement came two days after CNPC and QazaqGaz signed a new gas supply contract, one of 30 commercial documents signed between the countries with a total value of $16.54bn that included investment and trade agreements, technology transfers and new lines of credit. The deal will cover supplies from this year to 2026, according to QazaqGaz.

China started receiving gas from Kazakhstan in 2017 under a five-year supply contract for 5bn m³/yr, which was then followed by a commitment to double supply to 10bn m³/yr in 2019. The original contract from 2017 was set to expire sometime this winter and it had been unclear if it would be renegotiated or renewed.

The new contract will help ease Chinese fears of a plunge in pipeline gas flows from Central Asia this winter. Uzbekistan did not send any gas to China in Q1 2023, while Kazakhstan’s exports decreased to almost zero – both countries experienced surging domestic demand amid cold spells that drained gas supply. Turkmenistan – which accounts for the lion’s share of China’s piped gas imports – exported around 7.5bn m³ to China in Q1 this year, 7% lower than the 8.1bn m³ it sent in the same period of 2021.

With supply locked in and economic prospects improving, the key uncertainty for Chinese gas demand this winter will be weather. Extreme temperatures in the upcoming winter could either add 12bn m³ or subtract 7bn m³ of gas consumption from CNPC ETRI’s base-case demand of 214bn m³.

There could be less weather variation in Q4 2023 than in Q1 2024. Gas demand in the final quarter could vary from 105bn m³ to 111bn m³, while the range is likely to be 101-115bn m³ in Q1 2024. Northern provinces with central heating are more sensitive to winter weather variations, given the share of gas demand for heating.

Extremely cold weather could add an additional 1.8mn t of LNG demand this winter on top of the 38mn t in the base case. In the event of a warmer-than-normal winter, LNG demand would dip by 3.2mn t. China is set to experience El Niño in the coming winter, which might lead to warmer-than-usual weather, according to the National Climate Centre.