The world’s factory [NGW Magazine]

China’s gas demand made a quick recovery from the Covid-19 crisis in April after Beijing’s aggressive handling of the virus helped the country emerge from lockdown early. But a sharp slowdown in recent months has divided the industry on the outlook for the rest of 2020.

Gas in China took less of a hit from Covid-19 than other energy sources as the fuel is typically supported by solid household demand. Consumption continued to grow in the first three months – albeit by just 1.6% year-on-year – and then picked up in April and May, rising by an average of 9%.

But a recent deceleration in demand has raised questions about the short-term outlook for Asia’s largest gas market and the fastest-growing major demand centre for LNG amid uncertainties about economic growth, global market conditions and secondary waves of coronavirus lockdowns.

China’s central government weighed in recently with its latest official forecast for domestic demand this year. China is expected to consume 320bn m³ in 2020, according to the 2020 China Natural Gas Development Report jointly released by three government agencies on September 18. This would be just 4.4% higher than 2019, the lowest annual gain since 2015.

The report found that Chinese gas demand grew just 1.5% in the first half of this year. This implies that Beijing is betting on consumption to grow significantly this winter – when gas use typically rises to meet heating needs – in order to reach 4.4% for all of 2020.

A recent deceleration in China’s demand momentum suggests this could be ambitious. Apparent gas consumption in July was 24.6bn m³, with year-on-year growth of 0.6%, the lowest daily apparent consumption and the lowest growth rate since China restarted economic activities in late March, according to the country’s powerful state economic planning agency (NDRC).

Apparent consumption from January to July increased by just 3.3% from the same seven months of 2019 to 180.2 bn m³, according to the NDRC.

The modest national growth has masked more unflattering data that reveals gas use decreased in some key parts of the country. For example, consumption in China’s largest provincial gas market of Jiangsu during January to August contracted by 5.6% year-on-year to 16.7bn m³, according to NGW calculations based on official data released September 18.

Jiangsu had been targeting consumption of 32bn m³ in 2020, a goal that appeared achievable when it was released in March 2019 but which now looks remote.

The subdued market activity was reflected by the first half-year earnings of China’s independent city gas distributors. Results announcements from gas utilities such as ENN Energy Holdings, China Resources Gas and Towngas China confirmed slower annual growth in demand across all sectors – particularly in the commercial sector as Covid-19 disrupted offices and businesses until April.

While China’s major gas utilities continued to connect new customers to their grids in the first half, they recorded fewer new connections than a year ago. ENN Energy managed to increase residential customers by a tenth but achieved an 18% jump in commercial and industrial users, However, these increases were down from last year’s performance. The slowdown in new customer connections this past spring is expected to lead to reduced demand growth rates for the coming winter.

Storage injections supported demand

The NDRC’s headline figures claim that Chinese gas demand has improved so far this year from 2019, but they do not tell the whole story. The modest consumption growth to date has been driven primarily by more aggressive storage of gas underground, rather than underlying demand from consumers and industry.

As China became the first major economy to emerge from Covid-19, its economic rebound coincided with a crash in LNG prices to record lows. Chinese LNG importers took advantage of the buyer’s market, lifting LNG inflows by a fifth year-on-year in the April-June quarter, compared with just 2.9% in the previous three months. At the same time, Chinese state-run gas producers aggressively increased domestic output to please their political masters in Beijing who are fixated on energy security.

Much of the imported and domestically produced gas, however, went to underground gas storage or stayed in the reception terminal tanks as actual gas demand remained weak amid the pandemic. That resulted in China filling storage tanks faster than usual, with injections into underground sites starting in March – one month earlier than normal – and a subsequent rapid buildup of gas stocks.

Now, with almost all domestic gas storage tanks full, Chinese gas suppliers have had to slow down the growth of both imports and politically important domestic gas production. The nation received 5.03mn mt of LNG in July, the lowest level since March when the economy was largely shut due to Covid-19.

There are reports that PetroChina, Sinopec and China National Offshore Oil Corp are close to fulfilling their restocking demand for the winter, while gas output in August grew by just 3.7% year-on-year – the smallest increase since March 2018.

Winter outlook

The slowdown across China’s gas indicators means market fundamentals look shaky in the run-up to winter, creating significant uncertainty for the approaching heating season. This four-month period from mid-November to mid-March sees the switch-on of urban gas heating systems in northern cities, and represents China’s peak gas demand season.

The outcome will depend largely on economic growth in the second half of the year and whether Beijing offers any stimulus to buttress its recovery. US-China tensions and the slow reopening of global economies have weighed on China’s post-pandemic revival, stymying its gas demand.

The primary concern among Chinese policymakers is that secondary waves of infections this winter will result in renewed lockdowns around the world, suppressing global economic growth and Chinese manufacturers’ demand for gas. If confidence remains brittle, policy-makers may have to choose either lower growth or more stimulus.

The likeliest scenario for China’s gas demand is that it will follow a bumpy trajectory in the

coming months, with growth remaining weak from July to August and September, before recovering modestly in November and December once the heating season starts.

A gas analyst at a European oil company in Beijing offered a more upbeat view for the third quarter, telling NGW that China’s gas consumption growth could hit a year-to-date high in September. The analyst cited internal data that found gas demand in August rebounded from July’s meagre growth. Volume growth could accelerate in September as preliminary data pointed to strong demand momentum in the first week of the month.

At stake is a longstanding official target for gas to meet around 10% of China’s total energy consumption this year. Analysts have estimated a 10% share would equivalent to 360bn m³, which would be up 17% from 2019’s demand level. Gas made up 8.3% of China’s primary energy mix in 2019, rising from 7.8% in 2018, according to PetroChina.

Imports seen slowing

The unsettled outlook leaves little visibility on the trajectory for China’s gas imports, both LNG and pipeline. This will affect global LNG suppliers with exposure to the Chinese market and long-haul players such as pipeline gas producers in Russia, central Asia and Myanmar.

Beijing’s gas development report on September 18 forecast China’s imports to reach 140bn m³ this year, with LNG shipments accounting for 90bn m³. This would be equivalent to around 64% of the total, up slightly from 62.4% of 2019’s total imports of 135.2bn m³.

The expectation is that China’s LNG import growth will slow in the third quarter as there will be no room for more injections to underground storage by early September after this year’s earlier-than-usual injection campaign.

Winter is also likely to be when state-owned Chinese importers will retreat from the spot LNG market, as they are expected to finally take delivery of long-term pipeline and LNG volumes that were deferred during the peak of the Covid-19 pandemic.

The Beijing-based analyst predicted China’s LNG shipments in the third quarter to increase by 5% year-on-year compared with 20% in the second quarter. Fourth-quarter imports could be up as much as 20%, but this growth would be flattered by comparisons with a weak October 2019 when PetroChina’s Rudong LNG terminal in Jiangsu suffered a weeks-long outage.

Another threat to LNG imports in the remaining months is the possibility that pipeline imports from central Asia will return to normal or even increase year-on-year. PetroChina declared force majeure on several of its piped gas contracts in March amid soft domestic demand at the time, and pared pipeline imports down to minimum levels in recent months to make room for spot LNG volumes.

But the NOC is unlikely to cut piped imports any further this winter as most of the reduction came from deferrals allowed under contract flexibility, and the leeway for deferrals has been exhausted.

The incentive to take LNG ahead of pipeline gas is also due to weaken as spot prices have ticked higher recently owing to supply outages and should continue to gain ahead of winter in the northern hemisphere.