Could Chinese gas demand shrink in 2022? [Gas in Transition]

China’s central government has confirmed that gas supply for the current heating season running from November to March is guaranteed, with the country’s three NOCs committed to boosting domestic output and building inventories amid expectations that gas demand will see limited or even negative growth during this heating season.

Gearing up for winter gas supply – which for this year has included ramping up domestic gas production, storage withdrawal capacity and pipeline imports – has been significantly less fraught this year than in previous years. Asia’s biggest gas producer is on track to produce 221.1bn m³ this year, an increase of 6.5% year-on-year, while it has continued to build up storage capacity in 2022 for both underground gas storage sites and LNG tank storage. The total gas available in storage for this coming heating season is likely to be more than 25bn m³, a historic high.

But probably the biggest reason why this heating season will be relatively smooth sailing is because China’s domestic gas demand is on track to shrink this year for the first time in at least two decades amid a sharp economic downturn. However the country’s biggest energy suppliers differ on the severity of the contraction and how long it will last.

Company officials in PetroChina and CNOOC – China’s largest onshore and offshore gas producers respectively – have predicted at industry events this month that Chinese gas demand will grow at a sharply slower than historic levels at a minimum, if not decline outright on an annual basis. Official statistics have pegged China’s apparent gas consumption at 299.93bn m³ in the first 10 months, down by 1.1% year-on-year.

Appetite for the fuel has been sapped by a weaker macroeconomic backdrop, with China’s GDP this year expected to more than halve from 8.1% in 2021, while COVID-related restrictions and elevated spot LNG prices have curtailed some price-sensitive industrial demand.

Historic low

China’s gas demand growth this year could be the lowest on record and possibly even negative, according to Wang Biao, director of PetroChina’s eastern sales operations department. This year will mark the second time since 2005 that China’s gas consumption will grow more slowly than its GDP, the last time being in 2015, Wang said at a recent gas industry summit in Shanghai.

China’s GDP is expected to expand by 3.5-4% in 2022, while domestic gas demand has grown by an average of 13% every year in 2005-2021, Wang said. His prediction for this year’s gas consumption change is more bearish than the National Energy Administration in its annual China Gas Development Report released in August, which forecast China’s apparent gas consumption to grow by 1-3% year-on-year to 375-380bn m³ in 2022.

But Wang’s downbeat prediction dovetailed with others from industry insiders given days earlier at a winter forum organised by the Chongqing Petroleum and Gas Exchange.

Total gas demand is likely to fall by 1% this year to 363.6bn m³, which would mark the first annual decline since at least 2002, according to Wang Jianping, an analyst at the technology research and development centre of Cnooc’s gas and power subsidiary. A more bearish forecast came from Yang Jianhong, chief researcher of Beijing-based BSC Energy Consulting, who projected demand to drop by 4.7bn m³ or the equivalent of 1.3% to a total of 353bn m³.

Soft gas demand on China’s industrialised eastern seaboard has been responsible for most of this year’s market weakness. “We saw gas consumption shrink obviously in eastern China this year, especially in the Yangtze River Delta region,” Wang Biao said at the Shanghai forum.

A two-month lockdown of Shanghai in April and May as the financial hub added thousands of COVID cases every day impacted the economy severely, with gas demand from industry, power generation, public services and transportation sectors falling significantly, he added. PetroChina’s gas sales in eastern China fell by 20% year-on-year in April, 12% in May and 9% in June, Wang said.

Winter chill

This winter may not bring too much respite for the market either with mixed outlooks for the peak season, when daily national consumption normally exceeds 1bn m³.

Wang forecast at the Shanghai forum that China’s gas demand will stand at around 187-190bn m³ for the current winter/spring heating season that began in mid-November and lasts until mid-March. This would be an increase of 5.5-7.2% from 177.3bn m³ in the 2021-2022 heating season.

But at the Chongqing-hosted event Yang predicted demand over the four months to edge down by 0.3% to 171.6bn m³. The difference is likely to be down to uncertainties over weather conditions and China’s economy for the next few months.

Soft market expectations for the upcoming heating season have been reflected by domestic LNG prices, which are not regulated by pricing authorities and therefore offer a clearer picture of supply and demand trends. A national LNG price index maintained by the Shanghai Petroleum and Gas Exchange fell to a nine-month low of RMB 5,646 ($811) per metric ton at the end of November. Prices have since picked up to just over RMB 7,000/mt as of mid-December but this is still well short of this year’s high of RMB 8,568/mt in early March.

“LNG prices are showing a ‘not so strong’ trend in the high season even amid the heating season in the northern region,” a source at the Shanghai exchange told NGW. The index monitors about 50 liquefaction plants and receiving terminals in 14 regions in China.

Sufficient upstream supply, weak demand and relatively warm weather for this time of the year are behind the price index’s downward slide, the source said. “This year PetroChina has sufficient gas supply, with pipeline gas supply especially higher than previous years.”

NGW understands PetroChina offered a number of preferential policies to downstream users in the first two weeks of November, including an offer of “the more you use, the cheaper it is”.

LNG imports have borne the brunt of China’s gas slowdown. LNG importers in China have stayed on the sidelines since the beginning of the Russia-Ukraine war. This is unlikely to change despite the start of the heating season. Spot LNG intake is projected to be the hardest hit. Contracted LNG could remain largely unaffected as NOCs are forbidden to resell LNG to foreign buyers during winter. Estimates from Cnooc’s Energy Economics Research Institute suggest China will likely take in around 54 cargoes in the heating season, less than half of last year’s figure.

Temperature swings

China’s winter gas demand could reach 187bn m³ if temperatures are average over the period and 190bn m³ if they are 1°C below average, according to Wang.

“Based on experience, a 1°C change in the average daily temperature will affect 2-3% of gas consumption, which means a 1°C change in the national average temperature will affect the total gas demand by 20mn m³ per day,” Wang said.

The National Climate Center under the China Meteorological Administration has forecast the country to see its third consecutive La Niña weather event this heating season. However this does not necessarily translate into a colder-than-normal winter for China as a whole – the climate centre has predicted temperatures in most parts of China to be close to average or higher than average over December-February.

PetroChina has secured c.110bn m³ of gas supply for the upcoming heating season, of which c.60bn m³ will be produced domestically, 38bn m³ imported natural gas and 13bn m³ filled into gas storage, according to Wang. This is up by 3.1% from the 106.2bn m³ guaranteed for the previous winter, a smaller increase from the 8% growth for the 2020-2021 winter.

China has so far established a gas storage capacity of 26bn m³, equivalent to 7% of total demand, to cope with peak winter heating demand, said Cnooc’s Wang Jianping.

The city gas sector makes up more than three-quarters of Chinese winter gas consumption as households ramp up use of central heating, but demand is expected to be steady year-on-year in 2022 as slower growth in northern provinces will be offset by greater southern use.

Coal-to-gas switching in northern provinces helped drive regional gas demand as authorities sought to address severe air pollution, particularly during winter. But the government has encouraged more coal-to-electricity switching and renewable energy for heating in the north in recent months, with authorities advocating for “appropriate gas use, appropriate electricity use, and local conditions”, according to Wang Biao from PetroChina.

But gas-fired heating demand is expanding in provinces further south that have traditionally not been major users, such as Shanghai and the provinces of Jiangsu, Zhejiang and Anhui. “There are nearly 3mn households with heating demand in these [southern] regions in winter,” Wang said, with gas demand exceeding 30mn m³/d.