By Rhod Mackenzie
By the end of 2023, Chinese regulators are counting on a recovery in demand for gas, which last year fell for the first time in a decade due to covid restrictions. Thus, consumption in the country by the end of 2023 may grow by 7%, up to 390 billion cubic meters. The PRC will ensure demand growth by increasing domestic production, increasing pipeline gas supplies from the Russian Federation, while LNG will play the role of a balancing supply source. At the same time, in the future, the country is going to cover more than 50% of demand through domestic gas production.
The volume of gas consumption in China in 2023 may grow by 5.5-7%, up to 385-390 billion cubic meters, follows from the report of the State Energy Administration of China (NEA, the regulator of the country's energy market).
The emand is expected to grow mainly in cities, where it is generated by the commercial sector, transport and heating systems. The second factor is the growth in demand from the energy sector, including from gas thermal power plants, as well as from the population in summer. At the same time, the industrial sector remains extremely sensitive to gas prices, and demand here will largely depend on price fluctuations in the second half of 2023.
“In the run-up to the second half of 2023, the global gas market is expected to continue to be affected by the rebalancing of supply and demand in the European market,” the report says.
Given the high stocks in storage in Europe (83.74%) and the US (62%), the availability of LNG from the global market "seems promising in the absence of cold weather forecasts."
In the six months of 2023, gas consumption in the country increased by 5.6% year-on-year, to 194.1 billion cubic meters. Domestic production increased by 5.4%, to 115.5 billion cubic meters, the growth of total imports amounted to 5.8%, to 79.4 billion cubic meters, of which 33.2 billion accounted for pipeline gas, and 46.2 billion - on SPG.
China's strategy involves increasing domestic gas production and supplies under long-term contracts, including deliveries of Russian gas to the northeast of the country through the Power of Siberia, as well as imports of spot LNG in order to maintain price stability, the report says.
Thus, in 2022, Chinese companies entered into long-term contracts for the purchase of LNG for 17 million tons per year, almost 60% of this volume includes the free-on-board (FOB) condition, which allows optimizing supplies amid LNG price fluctuations.
At the same time, as noted in the report, inflexible pricing built into long-term contracts in the first half of 2023 led to a high cost of LNG imports compared to world spot prices. This may provoke a decrease in domestic demand and stimulate an increase in LNG imports from the spot market, NEA states. In the long term, the PRC government expects to cover more than 50% of its gas demand through domestic production (in 2022, production in the country amounted to 220 billion cubic meters of gas).
Gas consumption in China in 2022 fell by 1.2%, to 364.6 billion cubic meters, primarily due to pandemic restrictions. Imports of natural gas to China in 2022 fell by 9.9%, to 150 billion cubic meters, the main suppliers (81% of imports) are Turkmenistan, Australia, Russia, Qatar, Malaysia. Gas imports from the Russian Federation through the Power of Siberia increased by 54% in 2022, while Russian LNG supplies fell by 19.5%, to 87.6 billion cubic meters, while its cost increased by 25%.
After the lockdowns were lifted, the market expected a rapid growth in consumption in China in 2023, but so far these expectations have not been fully justified. At the same time, the Asian premium has returned to the market, which is already contributing to the outflow of LNG tankers to Asia.
Thus, JKM Platts September futures, which reflects the cost of spot LNG supplies to Northeast Asia, is traded at $409, and LNG futures supplied to Northwest Europe is about $361.
At the same time, according to Bloomberg, LNG stored in tankers at EU ports jumped to its highest level since May. Thus, more than 3.1 million metric tons of LNG are now on the water for more than 20 days. There is no need for immediate supplies to the continent due to weak gas demand and high UGS stocks, but this could change quickly if the weather is colder than expected.
Gas production in Russia fell by less than 5% in June
Sergei Kondratyev of the Institute of Energy and Finance considers NEA's estimate to be rather conservative. In his opinion, growth rates in the second half of 2023 in China may be higher due to the base effect and faster economic recovery in the eastern regions. “I don’t think that this will have a significant impact on deliveries via the Power of Siberia, they are still more profitable for China than LNG imports, and the selection dynamics is determined to a greater extent by Gazprom’s capabilities and demand in the country’s northeast,”— he supposes. At the same time, supplies of Russian LNG, in his opinion, may grow, since in August-September the differential in JKM-TTF prices may increase due to lower prices in the EU. This, in turn, may lead to an increase in supplies to Asia from Yamal, especially considering Russia's involvement.
This article originally appeared in Russian at kommersant.ru