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China gas – the mighty moving parts and the mysteries


Chinese gas demand increased 15.4% YoY in 2013 to 169bcm, up 22.6bcm. Domestic production increased 12.8% to 121bcm, leading to a 22.6% growth rate in the import requirement to 48bcm. However, actual imports totalled 52bcm, up over a quarter YoY, implying a build in inventory of around 4bcm. Stripping out inventory movements, underlying demand increased 14.6% to 166bcm, we calculate.

Provided the inventory build is confirmed as the numbers are finalised, the most likely explanation would be the commissioning of some 12.5bcm/a of LNG import capacity across three new regasification terminals toward the end of the year, we believe.

Of domestic gas supply, some 106bcm appears to be conventional, we estimate, with around 15bcm from Coal Bed Methane (CBM) and 0.2bcm of shale gas.

LNG imports jumped 23% YoY, or 4.6bcm, to 25bcm at an average cost of USD 11.37/mmbtu (USD 402/kcm), while pipeline imports leapt 27% to 27bcm, up 5.9bcm at an average cost of USD 9.49/mmbtu (USD 335/kcm). However, transportation charges would add roughly USD 4/mmbtu to bring pipeline gas, all of which is delivered on the Western border, to the main markets in the East, while the LNG average price is distorted by two very low priced legacy contracts.

For 2014, China’s National Energy Administration forecasts an increase in domestic consumption to 193bcm, with gas as a percentage of primary energy consumption increasing to 6.5% from 5.9% in 2013. With projected domestic gas production increasing just 8% to 131bcm, the implied import requirement increases almost 30% to 62bcm. We expect that to be met mainly by growth in pipeline imports, reflecting what we understand to be the contractual position and because they are likely to be cheaper than incremental LNG supply, delivered in the East of the country.

The initial data for 2013 and the projections for 2014 highlight again the enormously rapid development in China’s gas position as well as some of the uncertainties. The projected growth in gas demand looks aggressive, given rising domestic prices, but is consistent with China’s drive to address its pollution problems. Shale gas production was minimal against the 2015 five-year plan target of 6.5bcm and CBM a fraction of its equivalent 30bcm target. Growth in conventional gas supply looks unlikely to match projected demand, which puts the onus on the growth of non-conventional supply to come through, despite currently being well below target. While developments at the Fuling shale have put a new optimism into China’s expectations for its shale gas potential, it is also notable that gas sourced from CTG is being ramped up the domestic gas agenda.

On present projections, China does not need new sources of gas import before 2020, however, the currently contracted supply cushion will have evaporated, current import prices are above the USD 360-400/kcm being talked in the market for Russian pipeline gas supplies and by 2020 38bcm of gas would look a much less daunting increment to an import requirement of around 150bcm than it would do today.
Kolin Smith, Marc Jacouris
VTB Capital analyst

China, gas

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