China LNG Winter 2021 Outlook

Chinese monthly LNG demand between March and July 2021 rose by an average 24% year on year and along with low European storage has been one of the key driving forces behind the rally in LNG spot prices through the summer. It would appear, that the unprecedented high demand caught many global LNG market participants off guard.

Given the year-on-year increase in Chinese summer-time demand in 2019 and 2020 was just 16%, questions have been raised as to whether the consumption growth in 2021 can extend through the second half of the year and push winter LNG demand to abnormally high levels.

At least 6m tonnes of additional gas inventory will be available for winter this year

Although there is limited data concerning Chinese gas and LNG storage, ICIS Analytics has investigated company reports for inventory statements to shed some light on an otherwise opaque section of the market. We estimate storage injection this summer – from March to October – to be 5m tonnes greater than a year earlier, bringing total additional stocks to 6m tonnes more than a year earlier.

This amount includes additional capacity across CNPC’s underground storage units, PipeChina’s Wen-23 unit – which is the country’s largest facility – as well as newly commissioned LNG storages at expanded LNG import terminals, such as those at Jiangsu Rudong, Zhejiang, Qingdao and Caofeidian.

Increased storage injection demand partially explains the stronger Chinese summer demand witnessed this year. It also has significant implications on any assumptions concerning import demand for the upcoming winter.

Xu Fei, ICIS Analytics Senior Gas Analyst said: “2021 marks the year where China can feasibly shift some of its winter demand to the summer, due to the increased availability of storage capacity. We can expect more of this in the coming years as storage capacity increases even further.”

ICIS forecasts total Chinese gas consumption between November 2021 and January 2022 to be 77m tonnes. An additional 6m tonnes of gas in storage therefore represents an 8% reduction in this year’s winter-time gas demand.

Increased LNG imports for power in East and South China during summer driven by severe drought and decreased hydro generation

ICIS Analytics considers this an ad-hoc summer event, and therefore does not expect it to affect LNG imports in the upcoming winter. It is, however, worth scrutinizing for indicators in case precipitation dwindles again in future years.

China has two distinctively different power grids, operated by the State Grid in the north and Southern Grid in the south. These two systems are not interoperable and unable to exchange power in either direction.

Therefore, when drought hits Yunnan province – the biggest hydro power provider of the southern electricity grid – utilities in the south have little option but to turn to LNG for an immediate fix.

Why LNG, and not pipe gas?

Since the change of midstream assets and operatorship to PipeChina, ICIS has observed a shift in behaviour by the China’s two largest domestic gas producers.

CNPC and Sinopec – as major asset holder of the north-western fields and the key operator in the Szechuan basin, respectively – now both tend to sell their output closer to source, rather than flowing the gas through PipeChina’s trunklines to coastal areas in the far south.

CNOOC, meanwhile, with the least amount of domestic gas production is responsible for securing gas for the southern Guangdong, Guangxi and Hainan regions and therefore is unable to cover part of the shortfall with its own production base.

As a result, there is a close relationship between the drop in Yunnan hydro generation and the southern terminals’ increased LNG imports.

Ongoing coal-to-gas switching policy in the Shandong, Jiangsu and Zhejiang regions, but no evidence of increased nor decreased policy implementation in China overall

Beijing officially ended its five-year coal-to-gas policy on 1 January 2021. Since then, at a national level at least there has not been a new target or policy announced.

At a regional level, however, ICIS has observed a continuation of coal-to-gas switching particularly across the industrial and residential heating sectors. The ceramics sector has often been singled-out as effectively fully converted into a gas consuming industry, while the switching-out of smaller coal boilers has consistently been implemented on both industrial use and residential heating purposes.

The continued switching is in line with China’s longer-term goal of trying to achieve carbon neutrality by 2060. As such, ICIS does not expect winter 2021 demand growth to be any lower than a year earlier. But given the policy (while still active) is no longer in full swing, we do not believe it will add much incremental growth demand either.

Other factors considered:

Winter demand curtailment on industrial gas use

As with previous winters, ICIS expects some form of winter demand curtailment to be enforced upon the industrial sector. The national-level natural gas utilization policy has stipulated that only the residential, public facilities and transportation sectors be prioritized, while all other sectors’ use of gas will be curtailed during winter, if required. The curtailments vary from province to province, but typically involve phased gas supply cuts that last for a few days. The affected industrial areas will have to halt operations during these periods.

Another form of curtailment is price setting, where the regulator sets a much higher industrial gas tariff to shut-out those who cannot afford to off-take. Past years have recorded a sharp drop in industrial operation rates from the normal 70-80% throughout the year, to 20-40% during winter due to these measures.

At the national level, the regulator publishes an energy consumption intensity target (energy use per unit GDP) for each province, which serve as a warning should any province exceed the ratio. Using the latest H1 2021 report, ICIS believe the following provinces – which have exceeded the energy use intensity target – will likely incur some form of curtailment in the coming winter: Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Xinjiang, Yunnan, Shaanxi and Jiangsu.

Domestic production and pipe imports to be stable

The supply of these two other sources of gas have been relatively stable and are expected to flow at similar rates to previous winters. ICIS expects domestic production to grow by 9% this year, while Russia and Turkmenistan to achieve their annually contracted deliveries of 10bcm and 30bcm, respectively. Imports from Kazakhstan, Myanmar and Uzbekistan are expected to remain in decline.

Barring any unforeseen circumstances, ICIS has no reason to believe that our output projection will change significantly in the upcoming winter. Therefore, domestic production and pipe imports do not majorly affect our winter outlook.

Temperature – An average to warm winter projected (for now)

The latest forecast according to the Beijing Climate Centre indicates temperature anomalies will range from -0.5°C to +1°C. At the time of writing (mid-September), we expect a warm winter in Asia. This weather outlook is consistent with other forecasts from the likes of NOAA and NASA.

Beijing Winter Olympic to start in February 2022

The Winter Olympics is scheduled to run 4-20 February 2022, just after the expected peak LNG demand months of December and January. By February, LNG consumption is expected to fall due to the spring festival lull, which takes place next year on 1 February 2022.

While CNPC – the appointed sole energy provider of the event – will have to manage a relatively tight timeline of storage withdrawal/injection and pipe gas flow allocations, ICIS does not consider the sporting event will bring about a significant change to the expected winter demand outlook. The current global situation with regards to covid, indicates the Olympics should be relatively subdued.