Chinese gas imports surged y/y in July by 1.63 Mt (28%), reaching 7.38 Mt, as a heatwave pushed up gas demand for power and higher industrial demand y/y will have increased underlying demand. LNG takes, at 4.15 Mt, grew by 1.03 Mt y/y (33%) while pipeline flows were also up y/y, by 0.61 Mt (23%). Stronger baseline demand from industrial users continues to raise concerns about how high winter demand and potential supply shortfalls might be. Suppliers are looking to increase supplies and improve their midstream infrastructure. In early August, two new import terminals—ENN’s 3 Mtpa Zhoushan and CNOOC’s 4 Mtpa Diefu—commissioned their first cargoes and the majors are working to link up their midstream assets to ensure greater flexibility of supplies. While higher pipeline utilisation rates will go some way to easing winter shortages this year, domestic supply has started to improve with July posting the highest monthly y/y growth of 2018, at 1.21 bcm y/y. However, there are concerns over how much gas has actually been injected into storage given the dearth of data. Sinopec’s 4 bcm caverns in Henan that were slated for a May start-up have been reported as delayed until October, so this facility could offer little relief this winter. Sinopec has pledged a massive 55 bcm of storage additions across a wide number of projects, albeit with a very vague timeline, likely supported by the government’s announced subsidies for gas storage.
China’s natural gas imports reached a strong 7.38 Mt (10.0 bcm) in July, up y/y by 1.63 Mt and only marginally higher m/m from 7.30 Mt. LNG flows reached 4.15 Mt (+1.03 Mt y/y), while pipeline takes dropped m/m. Still, pipeline flows remained higher y/y by around 0.60 Mt, at 3.23 Mt. PetroChina ended maintenance on parts of the West-East pipeline (WEP) network in late July, which will allow pipeline flows to rise in m/m terms in the coming months. PetroChina expects Kazakhstan will be able to supply up to its contracted 5 bcm in 2018 but expects imports from Turkmenistan to fall during the winter heating season, as the Central Asian country diverts gas for internal use.
Domestic Chinese supplies underwhelmed in H1 18. While they are now recovering, rising demand from end-users and for storage injections has still supported imports. Warm weather has supported inflows, as CDDs in July were 6% over the five-year average, albeit flat y/y. August LNG takes will be further supported by two new LNG receiving terminals, including ENN’s 3 Mtpa facility in Zhoushan and the 4 Mtpa Diefu in Guangdong province. As a result, we remain bullish on Chinese LNG takes across 2018 and forecast 19.3 Mtpa of y/y incremental takes in 2018 and another 14.8 Mtpa in 2019.
Lagged NDRC data for Q2 18 point to a 9.8 bcm (17%) y/y uptick in implied end user demand, but this would suggest China’s majors have only filled 3.0 bcm of storage in Q2 18, compared to 7.7 bcm in Q2 17. We suspect NDRC demand data also includes storage fills, suggesting that actual demand is lower and fills are higher, but the state of stock levels remains unclear and warrants further attention. Gas injections into Sinopec’s 4 bcm Wen 23 storage caverns have reportedly been pushed back from their original May start to October, so are unlikely to fill ahead of this winter.
The Chinese government continues to strongly emphasise the need to build additional storage facilities and is allocating RMB 1 billion ($146 million) to support the construction of gas storage facilities in the north. The funds will be distributed among the six provinces and multiple municipalities included in the Blue Skies Campaign Programme. Hebei province—a focus for coal-to-gas switching—will be eligible for RMB 290 million, followed by Shandong with RMB 220 million and RMB 210 million for Henan. Subsidies may encourage suppliers and operators to build and operate more tanks—as evident in Sinopec’s recent announcement that it intends to add 55.6 bcm of storage capacity across a wide range of projects—but these measures will offer very limited relief this winter.
Any remaining needed storage fills could be delayed if warm weather continues. Weather forecasts for August point to CDDs 15% above than the five-year average, which is supportive of higher cooling demand, power generation and call on gas imports through the month. In July, cooling demand due to higher temperatures translated into a 35 TWh (6%) y/y increase in total generation, with thermal generation meeting most of that (+20 TWh, +5% y/y). A recovery in hydro reservoir levels, which stood higher by 15% y/y and 6% m/m as of 15 August, will support further gains in hydro output. Hydro output in July was 4.5 TWh (4%) higher y/y, helping meet additional cooling demand in the month. If domestic gas demand remains supported by strong industrial and power sector gas demand, low storage injections could tighten the market further this winter, leading to significant curtailments to industrial gas supply and price spikes that the government is hoping to avoid.
Domestic output recovered in July, after a very weak start to the year, as maintenance at Sinopec’s Puguang field and at PetroChina’s Changqing field ended. PetroChina also delayed planned maintenance at its Sulige gas field. Domestic production in July reached 12.96 bcm (+1.21 bcm y/y, +0.75 bcm m/m). As a result, supplies between January and July rose y/y by 5.3 bcm, surpassing the 5.2 bcm gain seen in the first seven months of 2017.
Even if Chinese producers manage to match, or even exceed, last year’s output increase (+12 bcm y/y), PetroChina expects demand to surge y/y this winter by 15%. While PetroChina offered no baseline or further details, this rate would be almost double the 8% y/y growth recorded by the NDRC between November 2017 and March 2018—typically the winter season—and is higher than our already bullish forecast of a 12% (14 bm) y/y increase in demand this winter. As such, the call on imports will be strong once again. The two new regas terminals will ease some tightness, but domestic infrastructure bottlenecks remain a key challenge. To address this, PetroChina has earmarked almost $4 billion to connect its WEP II with CNOOC’s Guangdong terminals and the pipeline from Myanmar with Sinopec’s LNG terminal in Guangxi province. PetroChina expects these connections to supply an additional 30 mcm/d to the north over winter. The majors are increasingly highlighting their efforts to coordinate their midstream assets, especially as the government is pushing forward with midstream reforms (see E-mail alert: China's moves on third party access to midstream infrastructure will ease seasonal shortages over time; no impact on 2018 balances, 7 August 2018). These changes are unlikely to fundamentally alter this winter’s balances but could begin to ease seasonal shortages—and soften some of the seasonality in Chinese demand—over time.