ICIS ANALYST VIEW: Expect weakness in Chinese summer gas demand

Author: Tom Marzec-manser

2020/03/12

• Coronavirus impact on LNG to worsen

• China’s big three will have sought some LNG volume deferrals as another means by which to deal with the mounting oversupply

• Incremental demand for gas and LNG this summer will be unusually low

LONDON (ICIS)--China imported just over 4m tonnes of LNG in February, which was higher than most analysts had re-forecast following the outbreak of the coronavirus.

Seemingly, the assumed severe impact of the virus on natural gas demand did not immediately feed through to shipments of liquefied gas. Rather in all probability – for suppliers of LNG – the worst is yet to come.

While force majeure clauses were quickly invoked by importer CNOOC to manage its mounting oversupply, it is now becoming clear that other supply- and demand-side tools were being used much more extensively to keep the Chinese grid in balance.

And it is the use of these tools that are going to have repercussions on global LNG demand right through the summer.

Although it was not immediately clear at the start of February, pipeline imports that are usually considered a baseload supply to the Chinese gas market were soon cut, and more importantly conventional storage was aggressively optimised.

China’s CNPC – which owns the country’s pipeline import contracts as well as the majority of the storage capacity – has confirmed all its stores had by the end of February halted withdrawals. In some cases injections are now already underway, in an effort to absorb the gas glut.

CNPC has said it had expected withdrawals over the winter to hit 9.6 billion cubic metres (bcm), but had only achieved 72% of this target.

In essence this means almost 2.9bcm of gas – equivalent to about 1.9m tonnes of LNG – does not need to be reinjected over the summer ahead of next winter.

The fact that injections are already taking place only adds to the summer-time demand-destruction. ICIS is aware of at least two CNPC sites at which injections have happened in recent weeks, although the duration of these tank in-fills is unclear.

But assuming Liaohe Shuang 6 continued to inject its stated 10 million cubic metres (mcm)/day from the confirmed date of 23 February until the end of March, that could be 370 mcm already in stock at this site which does not need refilling over the summer.

A similar assumption for Xiangguo where at least some injections of 8mcm/day have been confirmed, could add 250mcm to stock levels ahead of the normal injection cycle. Adding these early injections to the gas not withdrawn brings the total to around 3.5bcm, an equivalent to 2.5m tonnes of LNG.

By way of comparison, in 2019 China’s average monthly LNG import volume for April-September was 4.7m tonnes. Some 2.5m tonnes spread evenly over the summer months would lower those imports to 4.3m tonnes.

PRODUCTION CUTS

Although storage optimisation has been utilised to keep the grid balanced, in practical terms production cuts would have been far simpler. Yet both CNPC and peer Sinopec have both made clear that while output may have been temporarily halted in the immediate wake of the coronavirus outbreak, production was brought back to normal levels as quickly as possible.

As state-owned majors anything else would have been politically and socially unacceptable.

However, it is likely that CNPC did curtail its production, just not in China. Towards the end of February the company said 7.2bcm of gas had been imported from Central Asia and Myanmar since the start of the year.

Analysis of surrounding data suggests CNPC may have significantly curtailed its own production at the Amu Darya project in Turkmenistan since the beginning of February, while at the same time continuing to honour its 17bcm per year deal with state-owned Turkmengaz.

FORCE MAJEURE

Last week’s decision by CNPC to initiate force majeure on both LNG and pipe imports suggests that the company’s initial plan to manage the oversupply through a combination of storage optimisation, LNG re-routing and decreased production of its own assets in Turkmenistan has been insufficient in matching the cut in demand. The company has used all the immediate tools at its disposal and therefore now has to take more severe action.

CNOOC was forced to reach the same conclusion much sooner, as it is the main offshore producer with little access to storage or other flexibility tools.

Sinopec is likely finding that its planned winter-time break in injections of cushion gas into its massive Wen 23 storage site has been a blessing, as like CNPC, it too has been able to restart the storage campaign much earlier in 2020 than expected. This additional demand, potentially of 326mcm through March alone, may literally be cushioning the immediate impact of the consumption-fall and limiting Sinopec’s need to also declare force majeure.

SUMMER BLOWOUT

Any successful application of force majeure by definition should not result in undelivered LNG or gas re-emerging later in the year. But it should be assumed that China’s big three will have also sought some LNG volume deferrals as another means by which to deal with the mounting oversupply as the severity of the glut ratchetted-up.

Which when considered along with the curtailed storage withdrawal season and associated early injection cycle means incremental demand for gas and LNG this summer will be unusually low.

Without granular and timely data on storage fullness or demand it is too difficult to call by how much. But the evidence is mounting that if international suppliers of LNG are finding it hard to place their spot cargoes in spring, it is likely they will find it even harder to do so in a few months’ time.