Expensive pipeline gas to support China’s LNG demand

LONDON (ICIS)–China’s spot and term LNG demand will be supported for the rest of 2020 because of the discount LNG prices hold to imported pipeline natural gas, according to ICIS analysts.

The ICIS LNG Demand Forecast – available on the Edge platform – shows LNG imports into China will continue to rise year on year over the coming months, despite recent coronavirus-driven demand destruction.

ICIS expects China’s LNG imports across the second half of 2020 to reach 35.8m tonnes, up by 10% year on year.

This is up from the forecast 7% growth over the first half of the year, to 30.8m tonnes and comes despite China’s limited gas storage capacity.

A key reason for the forecast growth in LNG imports is the expectation that Chinese major CNPC will limit the import of pipeline natural gas from Central Asia.

This comes with pipeline gas holding a widening price premium to long-term LNG imports.

CNPC has a monopoly on all pipeline imports within China, with the majority of that volume delivered from Turkmenistan.

PIPELINE GAS OUT OF THE MONEY

ICIS currently estimates that relative to its long-term LNG contracts, CNPC is paying an additional $5.38/MMBtu for Central Asian pipeline imports, once that gas reaches the Chinese east coast.

A cost of $4.00/MMBtu is used to model the internal transit of the gas across China.

In 2019 the difference between pipeline gas and LNG was closer to an average of $0.52/MMBtu.

The fall in Brent crude prices earlier this year will filter through to both CNPC’s LNG and pipeline contracts but at different times.

The widening cost disparity has been driven by the extended window and lag within the Central Asian pipeline deals.

ICIS analysts estimate that both the Turkmen and Kazak contracts – which account for over 90% of the Central Asian delivered volumes – reference oil prices from as much as 12 months ago.

The long-term LNG contracts only reference oil prices within the last three months.

FORCE OR PRICE MAJEURE?

When the full impact of the coronavirus hit Chinese gas demand earlier this year, CNPC initiated force majeure clauses on both LNG and pipeline contracts. But only pipeline suppliers accepted the arrangement.

Latest import data shows that pipeline imports in general are trending towards a four-year low.

Provisional data for May shows that less than the equivalent of 2m tonnes of pipe gas was delivered. This is down from more than 3m tonnes at the beginning of the year.

While it remains unclear if the force majeure on pipe supply has been switched for another mechanism or arrangement to offset delivery, it is highly likely the cost incentive is driving the CNPC to keep those flows as low as possible.

There has been little change in the volume of LNG delivered into the three terminals – Dalian, Jiangsu Rudong and Tangshan Caofeidian – operated by CNPC’s international arm, PetroChina.

LNG imports would have been a lot lower in recent months if curtailments from Central Asian were insufficient to cope with the national oversupply of gas.

With spot LNG even cheaper than term LNG, there is a growing likelihood that CNPC will back fill the undelivered Central Asian gas with a saving of around $7.32/MMBtu for June.

Modelled forward curves show that Central Asian gas, when delivered to the eastern coast of China, will remain at least $2.00/MMBtu more expensive than contractual LNG until the end of the year.

The ICIS East Asia spot LNG Index will be at least $2.00/MMBtu cheaper than term LNG through to October.

This suggests that while it can, CNPC will continue to source LNG as much as possible to meet its overall import requirements for the remainder of the year.

With monthly granularity, the ICIS LNG Demand Forecast covers China, India, Japan, South Korea and Taiwan over a rolling 24-month horizon.

PHOTO: An LNG tanker (source: REX/ Shutterstock).