China to face weak gas demand and oversupply to 2017

Jun 10, 2015 12:00 AM

Chinese national oil companies (NOCs) are assessing how to optimise their diverse supply portfolios as gas demand remains weak, leading to an oversupplied market with weaker prices.

According to Wood Mackenzie, there are three major levers China can focus on to adjust with market movements. How these levers are used to manage oversupply will impact LNG prices and suppliers to China.

Reduced gas demand
Gas demand growth in China has been considerably reduced with demand now expected to reach approximately 360 billion m3 and 560 billion m3 in 2020 and 2030 respectively, compared to 420 billion m3 and 640 billion m3 previously. This is largely due to short-term and structural drivers.

Gavin Thompson, Wood Mackenzie’s Principal Gas Consultant, noted: “Short-term drivers include low oil prices and high domestic gas prices, reversal of environmental policies, competition from coal and hydro and warmer winter weather. Structural factors include the switch from industrial production to the service sector as a driver of economic growth.”

LNG contract
Chinese companies have signed approximately 66 billion m3/yr of term LNG contracts. Of this total, new contracts will ramp up through 2015, supplying an additional 23 billion m3/yr of gas into the domestic market by 2018. Given the significant downward revision in demand, the country’s NOCs are now pursuing a number of options to reduce volumes.

These options include efforts to renegotiate ramp up schedules and pricing terms and reselling volumes into the Pacific market where agreement can be reached with suppliers. Despite weakening demand growth, Central Asian volumes into China also continue to rise. Thompson added: “As a result, there is an oversupply of contracted LNG into the market, particularly during periods of low seasonal demand. We expect China will be over-contracted by about 18 billion m3 from 2015 till 2017.”

Three options
Wood Mackenzie believes that Chinese NOCs will have three levers to manage in order to optimise supply and minimise losses:

  1. They may restrict domestic investment in more expensive developments and defer investment until demand recovery.
  2. PetroChina will manage overall volumes of pipeline imports using take-or-pay provisions, with the potential for spot volumes above take-or-pay during periods of peak demand.
  3. The NOCs will maximise contracted LNG volumes to sell into the domestic market as term and spot prices look competitive against regulated City Gate tariffs due to low oil prices.

Oil price recovery?
Thompson continued: “With strong growth in contracted LNG and low LNG prices, we continue to expect that some volumes of LNG will be re-sold back into the broader market.”

Some of this will be seasonal, however even at times of higher demand it is unlikely that all contracted LNG will find a market in China.

An oil price recovery should stimulate Chinese gas demand and consequently create more market space for LNG, however the timing of this is uncertain. “Given the uncertainties around the market outlook however, we believe that all options must remain on the table,” Thompson concluded.

Adapted from press release

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