Chinese LNG imports set to falter as fuel is priced out of market [Gas in Transition]

China may struggle to sustain a recent surge in LNG imports over the summer, as record deliveries of Russian pipeline gas and a recent spike in Asian LNG prices will reduce the attraction of the fuel. But some uncertainty over piped gas exports from Central Asia could provide an opening for more LNG takes later this year.

China’s LNG imports in May increased year/year for the fourth consecutive month to 6.41mn metric tons, according to customs data released on June 18. LNG receipts last month clocked growth of 31.5%, the biggest year-on-year gain since May 2021.

It would be tempting to view last month’s growth as evidence that China – the world’s biggest LNG market – is finally showing signs of a revival. But the increase was flattered by a weak comparative base, as LNG imports in May 2021 were dismal.

Meanwhile the country’s pipeline gas imports edged up by 2% in May, a sharp deceleration from growth of 12.6% in April. Still, pipeline volumes remained elevated as the 4.23mn mt received in May was the second-highest level on record – an accolade previously held by the 4.21mn mt received in April, when piped imports grew faster than LNG volumes for the first time this year.

The strong momentum in China’s pipeline imports is likely to extend into June as Gazprom is pumping more gas than ever to China via the Power of Siberia (PoS) pipeline. “On May 30, China’s request for Russian gas supplies via the PoS pipeline was again in excess of the existing daily contractual obligations. Gazprom delivered all the requested amounts of gas and thus set a new all-time record for its daily exports of gas to China,” the Russian energy giant said at the end of May.

The stronger growth in May means China’s LNG imports were finally up on an aggregate basis in 2023, increasing by 4.3% yr/yr to 27.54mn mt in the first five months. Piped flows for January-May were up by 1.8% to 18.75mn mt.

May gas production meanwhile expanded by 7.2% to 19bn m³, the biggest jump since last November. China’s central government is targeting an output increase of at least 6bn m³ this year, which would be equivalent to 2.75% growth from 2022.

LNG priced out

But the pickup in China’s LNG imports could prove to be fleeting as a recent spike in Asian gas prices will reduce opportunistic buying among Chinese buyers, which can fall back on coal as a cheaper energy alternative. The Japan-Korea Marker, the regional gas price benchmark, spiked by 19% on June 14 to $11.58/mn Btu – the biggest one-day gain since last November – according to data from S&P Global Commodity Insights.

The sharp jump reportedly paused spot purchases among China’s smaller importers, which are reluctant to purchase spot cargoes because domestic gas prices in the country are cheaper at $8-9/mn Btu.

The average spot price for August declined from $12.59/mn Btu on June 16 to $11.20/mn Btu on June 20, according to a note from Rystad Energy’s senior analyst Lu Ming Pang. “Higher-than-normal inventories across much of Northeast Asia will help these countries cope with rising temperatures.  As a result, many utilities are waiting to see what further actions they will need to take before optimising cargoes.”

“An eye should be kept on the impact of warmer weather ahead, as its severity may play a part in influencing these buyers to return to the market to restock inventories later in the summer,” Pang added.

Actual Chinese gas demand this year is forecast to climb by 7% or 26bn m³ to 385bn m³, an LNG market analyst in Singapore tells NGW. “We see combined domestic production and pipeline imports growing by 18bn m³ year-on-year in 2023, leaving room for LNG imports to rise. We therefore think Chinese LNG imports will be up by around 7mn mt year-on-year, reaching 71mn mt this year. But the aggregate LNG take will be roughly in line with term supply of 70.8mn mt, implying little spot buying or term-cargo reselling,” says the analyst.

Uncertainties in the pipeline

In addition to price, the outlook for China’s LNG demand will also hinge on how pipeline imports perform. Gazprom supplied 15.4bn m³ to China last year through PoS and aims to raise this to 22bn m³ in 2023, eventually reaching the project’s full capacity of 38bn m³/yr by 2026.

This year’s planned export increase via PoS has proceeded to plan so far according to Gazprom officials, but industry sources have said the target will depend on compressor stations along the 800 km-long Kovykta-Chayanda section completed in late December and should perhaps be seen as the upper limit of potential growth.

Greater PoS flows will be partially offset by lower Central Asian volumes, with the extent of any reduction the biggest uncertainty. Turkmenistan sells almost all of its gas to China already, while Uzbekistan and Kazakhstan have decided to curtail gas exports to meet domestic demand after the shortages of winter 2022-2023.

All three countries completely or partially reduced exports to China in January and February to cover domestic market demand. Kazakhstan and Uzbekistan have even suggested completely halting exports to China because their production is insufficient to meet surging domestic consumption – particularly during the peak heating months from November to March.

Kazakh flows are a wildcard in particular. 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 is set to expire this winter, but it remains unclear when exactly and if it has been renegotiated or will be renewed.

A potential cut-off would be awkward after Chinese president Xi Jinping hosted the leaders of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan at a landmark regional summit in May. The countries agreed to support the establishment of a China-Central Asia energy development partnership, while Xi said in a keynote speech that “we should expedite the construction of Line D of the China-Central Asia Gas Pipeline” – a long-delayed project that may now receive fresh impetus.

But this is not the first time the Central Asian countries have announced supply cuts amid peak domestic heating demand. “We therefore expect flows to be lower during the peak-winter months before recovering in the shoulder season. A complete flow halt from these Central Asian countries would pose upside risks to Chinese LNG demand,” says the LNG analyst, who forecast pipeline imports to grow by just 6% or 4.0bn m³ this year from the scheduled ramp-up of Russian flows via PoS.

Lower pipeline imports by China from Central Asia in the early months of this year set the stage for an increase in supplies later in warmer months starting from May, which would be bearish for LNG imports going forward.

LNG is regarded as a marginal supply in China after domestic production and pipeline imports, a local gas analyst in Beijing with a European IOC tells NGW. “In our base case we think Central Asia will maintain its 2022 level and Myanmar at the 2020-2021 average. In our high case, 4-5bn m³ of decline from Uzbekistan and Kazakhstan could happen and result in more LNG need,” says the analyst.

The analyst forecast China’s gas demand to rise by 7% to 390bn m³, resulting in base-case LNG import growth of 8mn mt. “Depending on how much gas China will consume in total and how much alternative sources could supply, the year-on-year change could be plus or minus 12mn mt away from the base case,” the analyst added.

Fewer loading slots available

There are further signs that China’s spot LNG demand will not jump in the coming months due to weak industrial demand, with any spot procurement limited to summer power generation and trade optimisation.

Chinese buyers have booked new slots at import terminals owned by PipeChina for the second half of 2023, according to the latest data from the infrastructure aggregator. Freshly reserved capacity amounted to 590,000 mt, marginally outstripping the 540,000 mt cancelled in PipeChina’s May announcement. The Shenzhen terminal in Guangdong province added reservations for three cargoes, while two new slots were each booked at the Hainan, Guangdong’s Yuedong, and Tianjin terminals.

New reservations were made at Shenzhen terminal for the first time this year as cheap spot LNG may have attracted power producers. Yuedong and Hainan have repeatedly seen new bookings and cancellations in previous months, possibly arising from continuous trade optimisation. Even with new reservations, idle fourth quarter capacity at Tianjin is 580,000 mt above the same period last year.

A hot and dry summer is forecast for East Asia in the coming months, which should push Chinese gas demand over April-September to a new record high of 172.5bn m³. But supply from accelerated pipeline imports and stronger domestic production should outpace the overall increase in demand and limit the year-on-year recovery in LNG demand.

Hopes of a big post-COVID recovery for China, the world’s biggest gas importer, have faded since the beginning of the year. The industrial and commercial sectors are the main drivers of Chinese gas consumption growth, but their slower-than-expected recovery will continue to weigh on gas burn.