Chinese LNG imports sink as massive regas buildout nears finish [Gas in Transition]

A sharp slowdown in China’s gas demand growth this year could not have come at a worse time as major gas players are set to complete a massive buildout of new regasification capacity, which will likely be under-utilised amid a double-digit slump in LNG imports.

Up to nine new import terminals and four expansion projects at existing terminals are set to be finished this year, potentially adding as much as 38.9mn metric tons/year of new regasification capacity, according to company disclosures and media reports compiled by NGW. This compares with additions of 13.7mn mmt/yr in 2021 and 8.9mn mt/yr in 2020.

The launch of these terminals and expansions stands to bring China’s total receiving capacity to 143.9mn mt/yr, from 105mn mt/yr at the end of last year. But only a fraction of the capacity will be commissioned. NGW understands that at least five new terminals will postpone their start dates from this winter to next year, meaning that operational capacity may rise to just 116mn mt/yr for 2022.

A number of projects also have opt-out options for the upcoming heating season, targeting mid-to-late 2023 instead. The heating season sees the switch-on of gas-fired district heating systems in northern China typically from mid-November to mid-March.

The delays come from pressure on both ends, as Chinese buyers outside of China’s three NOCs find themselves priced out of the Asian spot LNG market, while downstream users struggle with weak demand at major coastal hubs. This is a major reversal from the last several years, when China rapidly expanded its capacity on the back of gas market liberalisation, easier approval processes and surging gas demand that drove up LNG imports.

China overtook Japan in 2021 to become the world’s largest LNG importer but is likely to concede the title to Tokyo this year. Apparent consumption edged down by 0.6% in the first eight months of this year to 242.9bn m³, according to the National Development and Reform Commission (NDRC) – lagging a full goal of lifting demand this year to 375-380bn m³.

The Yangtze River Delta region comprising Shanghai and the neighbouring provinces of Jiangsu and Zhejiang continues to be China’s receiving capacity hotspot. The country’s new LNG terminal – a 3mn mt/yr project in Jiangsu province owned and operated by Cnooc – received a commissioning cargo from Qatargas in late September.

Around the same time, a joint venture between Cnooc’s gas and power subsidiary, and the main energy companies of Shanghai and Zhejiang received approval to build its second import terminal in Shanghai to meet increased gas demand. The company said the Shanghai and Zhejiang arms of the NDRC had given the go-ahead to build the 6mn mt/yr terminal that will require investment of 17bn yuan ($2.4bn) terminal. Building could start in November.

Zhejiang is set to contribute most of this year’s additional capacity, adding 6mn mt/yr of receiving capacity this year across three new terminals – a 3mn mt/yr terminal in Wenzhou jointly developed by Sinopec and Zhejiang Energy, a 2mn mt/yr project at Damaiyu Port between Shenergy and Junan Energy Insurance, and a 1.0mn mt/yr development in Jiaxing by a joint venture of city gas distributors Hangzhou Gas and Jiaxing Gas.

Singapore’s Pavilion Energy sealed a sales-and-purchase agreement (SPA) at the end of last year to supply 0.5mn mt/yr to the Jiaxing terminal, starting next year.

Significant growth will also be seen in the northern port city of Tianjin, where the second phases of existing terminals operated by Sinopec and PipeChina will add 6mn mt/yr and 5mn mt/yr of capacity respectively. The neighbouring province of Hebei should see Hong Kong- and Shanghai-listed Suntien Green Energy start up its 5mn mt/yr terminal, which will be initially supplied by a 15-year SPA for 1mn mt/yr signed between Suntien and Qatargas in December 2021.

Liberalisation encourages new entrants

 Of the nine new terminals, seven with combined capacity of 34.5mn mt/yr are either fully or partially owned by so-called second-tier players, which are non-NOCs with limited trading experience. Many of them are city gas distributors who have only purchased a few, if any, LNG cargoes before.

 The emergence of these new terminal owners underlines how liberalisation is making Asia’s biggest gas market more dynamic. These players can now directly import gas and more effectively move supply around with third-party pipeline access granted by PipeChina, the country’s midstream operator.

 The number of Chinese companies that imported LNG into the country in 2021 doubled year-on-year to 20, thanks to PipeChina’s access. But with more players building their own import projects, overall utilisation rates at China’s LNG terminals look set to decline going forward.

 Rates have hovered around 80% since 2017 but as new players start using their own terminals instead of those owned by the NOCs or PipeChina, they are expected to drop across existing import terminals to below 60% next year. This, however, would still be higher than utilisation rates in Japan, South Korea and until recently, Europe.

Regasification buildout quickens

The issue is that China’s LNG import deals – a number of which were struck last year – are still going to fall considerably short of regasification capacity. Booming receiving capacity construction, record-high spot prices, and burgeoning LNG demand led to an unprecedented rush for term contracts last year. Domestic importers signed 23 SPAs last year to supply the country with 27 mt/yr of LNG, with 11.3mn mt/yr of supply beginning this year and then the remainder from 2023 onwards.

This was bigger than the total contracted volume signed by Chinese players over 2015-2020 – some 25 SPAs were signed during the six-year period for a combined 21.8mn mt/yr, 29% of which were bought by second-tier players.

Last year the share of second-tier buyers in total contracted volume jumped to nearly 40%, and included the likes of city gas distributors Guangzhou Gas and Shenzhen Gas, and state-owned chemicals group Sinochem.

 But the buying spree has not been matched this year amid anaemic gas market growth, meaning the gap between China’s contracted supply and regasification capacity has widened. The gap is on track to grow from 45mn mt/yr in 2021 to 81.9mn mt/yr this year, and then rise to as much as 93.5mn mt/yr by the middle of this decade.

Reduced needs

At the same time last year’s intense contracting activity and current high spot gas prices means China’s dependence on cargoes from the spot LNG market has dropped significantly this year.

Chinese importers have curtailed their spot procurement this year due to the weak demand growth coupled with ample long-term contractual volumes and high Asian spot LNG prices.

The slump in China’s LNG needs has been reflected by record resales by Chinese importers including CNPC, Cnooc and Sinopec back to the spot market, with at least some of these volumes going to energy-starved Europe. Even second-tier buyers such as ENN Energy and Jovo Group have been actively offering to sell shipments for delivery to ports in Asia.

CNOOC’s Yangpu terminal on the southern island province of Hainan re-exported a cargo to Italy in late January – the first re-exported shipment sent outside China since July 2019, when the same terminal shipped a cargo to Chita in Japan. It also marked the first time China exported a cargo to Europe.

China re-exported 274,349 mt of LNG in the first eight months of this year to countries including Japan, Spain, South Korea, Malta and Thailand, according to official customs data. This was a tenfold jump from re-exports of 26,053 mt for all of 2021, and nearly four times higher than the previous record of 74,018 mt in 2019.

 Cargoes for delivery to China that were resold before they were loaded at the export facility or while they were on-route are likely to be much higher, as Chinese media reported Sinopec alone had resold 45 cargoes amounting to 3.15mn mt in the first several months of this year.

The resales make economic sense as selling term cargoes can yield higher netbacks under current TTF prices compared with selling the volumes into China’s domestic trucked LNG market, which is not price-regulated by local authorities.

As the winter months approach it is likely that more second-tier players in China will resell cargoes back to the market to strengthen their balance sheets – most are listed companies and domestic gas sales growth has slowed so far this year. Smaller players with few domestic end-users but a big focus on the domestic trucked LNG market may take the opportunity to maximise their profits.

For this heating season, China is forecast to import 20.3mn mt of LNG during the coldest months of November, December and January, of which 19.3mn mt will be supplied by long-term contracts and tenders, according to CNPC’s Economics and Technology Research Institute.

Chinese companies are incentivised to exercise buyers’ flexibility if it is available in their contracts and NGW understands some contracts may have winter-heavy loading profiles. Therefore, spot requirements will remain limited even for the peak-winter months.