Wood Mckenzie said June 10 that Chinese national oil companies (NOCs) are assessing how best to optimize their diverse supply portfolios as gas demand disappoints, leading to an oversupplied market with weaker prices. Wood Mackenzie believes that there are three major levers China can focus on to adjust with market movements, and how these levers are used to manage oversupply will impact liquefied natural gas (LNG) prices and suppliers to China.
Gas demand growth in China has been reduced significantly with demand now expected to reach around 12.71 trillion cubic feet (Tcf) or 360 billion cubic meters (Bcm) and 19.77 Tcf (560 Bcm) in 2020 and 2030, respectively, compared to 14.83 Tcf (420 Bcm) and 22.59 Tcf (640 Bcm) previously. This is due to short-term and structural drivers.
Gavin Thompson, Wood Mackenzie’s principal gas consultant, explained, “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.”
Chinese companies have signed around 2.33 Tcf (66 Bcm) per annum of term LNG contracts. Of this total, new contracts will ramp up through 2015, ultimately supplying an addition of approximately 812.1 billion cubic feet (Bcf) or 23 Bcm per annum of gas into the domestic market by 2018. Given the significant downward revision in demand, China’s NOCs are now pursuing numerous channels to reduce volumes. This includes 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. “As a result, there is an oversupply of contracted LNG into the market, particularly during periods of low seasonal demand,” Thompson said. “We expect China will be over-contracted by about 635.6 Bcf (18 Bcm) from 2015 till 2017.”
Wood Mackenzie believes that Chinese NOCs will have three levers to manage in order to optimize supply and minimize losses: Firstly, they may restrict domestic investment in more expensive developments and defer investment until demand recovery. Secondly, 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. Thirdly, the NOCs will maximize 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.
Thompson commented, “With strong growth in contracted LNG and low LNG prices, we continue to expect that some volumes of LNG will be resold back into the broader market.” Some of this will be seasonal – in particular, LNG that might otherwise have supplied northern China during the warmer months – but, even at times of higher demand, it is unlikely that all contracted LNG will find a market in China.
An oil price recovery ought to stimulate Chinese gas demand and, hence, create more market space for LNG, but the timing of this is unsure. Thompson concluded, “Given the uncertainties around the market outlook, however, we believe that all options must remain on the table.”