China gets back on its feet [NGW Magazine]

China’s gas market appears to be picking up speed, as industrial and commercial activities continue to recover from the impact of the Covid-19 pandemic in the first quarter of 2020. But a slow economic recovery could stall the momentum and require action from policy-makers to ensure longstanding targets for gas are fulfilled this year.

Recent data suggests China’s gas market strengthened from the January-February period, when apparent consumption grew by just 1% year-on-year to 52.7bn m³, according to the state economic planning agency, the National Development and Reform Commission (NDRC).

Industry indicators have painted a more positive picture of the market. Gas production was robust in Q1 as well-head operations were largely unaffected by the virus, according to official statistics. Output grew by 9.1% year-on-year to 48.3bn m³ in Q1, with March alone surging by an eight-month high of 11.2% to 16.9bn m³.

Combined imports of pipeline gas and LNG were steady in March, down by just 0.2% year-on-year to 6.92mn metric tons, according to preliminary customs data published April 14. For the first three months, imports were up by 1.8% to 24.66mn mt, or 33bn m³ in pipeline gas-equivalent terms.

The first US LNG cargo to reach China since April 2019 should also be taken as a positive sign as it signals Chinese buyers are firmly in the market for supplies to serve the world’s largest LNG importer after Japan.

The Maran Gas Vergina tanker from Freeport LNG in Texas docked on April 20 at the northern port of Tianjin, where national oil companies (NOCs) Cnooc and Sinopec each operate an LNG terminal. The LNG carrier is expected to be followed by at least another five from the US until May 8.

These upbeat developments aside, however, the longevity of China’s gas market rally will depend on how quickly the economy can bounce back from the devastating financial impact of Covid-19. China’s economy shrank in Q1 for the first time since it started releasing such data in 1992, and many economists are predicting a so-called ‘U-shaped’ recovery.

A pandemic-induced economic slowdown outside of China looks certain to lower demand for Chinese exports for at least Q2 and potentially much of Q3. This will weigh on domestic gas demand in the near term.

Covid-19 has come at a difficult time for China’s gas industry, which was already suffering from slowing growth last year. China’s apparent gas demand rose by just 9.4% to 306.7bn m³ in 2019, compared with growth of 18% in 2018.

Commercial gas demand looks set to be the most severely impacted by Covid-19 outbreak, as weak demand for Chinese exports outside of China will lower gas use by manufacturers.

This year also marks the end of the 2016-20 five-year plan (FYP), the country’s 13^th such national policy blueprint covering economic and industrial development. Central government authorities had banked on gas to supply up to 10% of China’s primary energy needs by the end of the period, up from around 7-8% in 2019.

Analysts have estimated a 10% share would be equivalent to around 360bn m³/yr of demand, but that looks optimistic given weak prospects for economic growth at home and a deepening global recession.

Potential policy action

If the recent improvement in China gas indicators stutters, then policy-makers may step in to boost demand for gas.

One approach Beijing could take is to implement wholesale gas price cuts that should be technically forthcoming under the way China prices natural gas.

The NDRC sets city-gate tariffs for each of mainland China’s 29 administrative regions. They are regarded as the wholesale price in the Chinese gas market and used as a benchmark when upstream suppliers and downstream end-users negotiate gas supplies.

The city-gate tariff is ostensibly linked to the cost of imported fuel oil and LPG in Shanghai by means of a complicated pricing formula that was introduced in 2013, when there was little reliable spot market price discovery. Over the years, however, the NDRC has for social and political reasons been slow to raise or lower prices.

City-gate tariffs in China’s biggest provincial gas markets on the eastern seaboard are more reflective of a $60/barrel oil price environment than the current $15-20/b range, so there is plenty of scope for the NDRC to cut tariffs.

However, the NDRC may choose to do so slowly in order to mollify China’s big three NOCs PetroChina, Sinopec and Cnooc, which will incur even greater losses on the domestic resale of imported gas if city-gate tariffs are cut.

There are longer-term factors for Beijing to support gas demand in 2020. China pledged in late 2014 that carbon emissions would peak by around 2030, but it will have its work cut out achieving this if coal use continues to grow – as it did in each of the last three years.

Another possible step that Chinese policy-makers could take is to double down on coal-to-gas conversion, which could be welcomed by industry if it coincided with gas price cuts.

Last year, environmental policies – primarily in the form of coal-to-gas switching– softened in the face of weaker economic growth and energy security concerns, which led to much lower gas demand growth.

The softer policy stance towards gas became evident in the summer of 2019, when China’s National Energy Administration said it would encourage regions to choose the most accessible form of energy that would guarantee heating supply during winter.

The policy adjustment was reinforced at a meeting of the National Energy Commission in October 2019, where Chinese Premier Li Keqiang said in a speech that coal should be used if appropriate to ensure winter energy supply.

The remarks were widely seen as a shift from previous statements and a strong sign coal is regaining favour in China amid government fears about stuttering economic growth and energy security – both prompted by the bruising trade war with the US.

Firmer coal-to-gas support from Beijing would encourage more end-users to convert, providing new demand for the gas market.

How much support Beijing provides for gas in the coming months will be important for determining whether the fuel will continue to be a focus for China in its upcoming 14th FYP period, covering 2021-2025.

China is due to enter its 14th FYP development period in eight months, but the specific plans for the coal and gas industries and overall energy development are unlikely to be released until the second half of 2021.