China - Aug 2018

Published at 17:06 24 Sep 2018 by . Last edited 15:12 5 Nov 2018.

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Chinese gas imports surged again in August, reaching 7.7 Mt (+2,04 Mt y/y, 36%), as two new regas terminals received commissioning cargoes, and industrial demand continued to support gas consumption. LNG takes, at 4.71 Mt, were at their highest since peak winter flows and up by 1.57 Mt y/y (50%). In September, PetroChina’s plans to conduct additional maintenance on the West-East Pipeline could further limit pipeline takes. However, domestic production is recovering and is set to rise through year-end as the majors will invest heavily in the upstream. We have revised our forecast for domestic production growth higher by 1 bcm for H2 18, pegging it now at 7-8 bcm y/y. But while output is surprising to the upside, storage injections seem to lag year-ago levels. PetroChina has reportedly completed injecting gas into its 2.40 bcm Suqiao in Hebei province, but the storage site currently contains only 0.56 bcm of gas. The outlook for LNG demand for this winter remains extremely strong. While we currently expect LNG imports to rise by 10-11 bcm y/y in Q4 18 and Q1 19 combined, there is some upside potential as new pipeline interconnections and improved coordination between the majors could lead to higher utilisation rates at southern China’s regas terminals. 

China’s natural gas imports were their strongest since January 2018, at 7.7 Mt (10.5 bcm) in August, up y/y by 2.04 Mt (36%) and rising m/m by 0.32 Mt. LNG flows reached 4.71 Mt (+1.57 Mt y/y), their highest since peak demand in December 2017-January 2018, while pipeline takes fell m/m for the second straight month. Still, pipeline flows, at 2.99 Mt, were up y/y by 0.47 Mt.

Pipeline flows could disappoint in the coming months

While PetroChina finished maintenance on segments of the West-East pipeline (WEP) network in late July, a fire on the 12 bcm Myanmar pipeline likely limited flows. A landslide on 10 June in Guizhou province damaged the pipeline, leading it to leak gas and ignite. The resulting fire was put out the following day, but since the incident came less than a year after a similar blast, the provincial government of Guizhou has reportedly requested that PetroChina reroute the pipeline. The company plans to bring it back online in November, ahead of the start of peak winter demand. That said, flows on the pipeline were only 2.52 bcm in 2017 and are expected to rise to just 3-3.5 bcm this year.

Still, pipeline supplies could remain subdued over the coming months, leading to ongoing strength in LNG demand. PetroChina reportedly conducted additional maintenance between 17-21 September on the 17 bcm WEP 1, which delivers domestic gas from Xinjiang to Shanghai, and will undertake works on the 30 bcm WEP 2 between 25-30 September, limiting pipeline imports from Central Asia. PetroChina has downplayed expectations for pipeline flows this winter, suggesting that Turkmen supplies could be curtailed again this winter—much like last year, when supplies were diverted domestically when temperatures dropped, leaving only increased flows from Kazakhstan to support winter requirements. At the same time, talks with Russia for additional gas exports of 30 bcm/y through the ‘western’ route were reported to be progressing, with the potential for an agreement in Q1 19. China is looking to increase its pipeline supplies, with Russian imports into its Northeastern regions through the Power of Siberia 1 pipeline due to start in 2020.

Domestic production is taking a turn for the better

Domestic production has picked up strongly. At 12.90 bcm in August, output was up y/y by 1.15 bcm, bringing year-to-date production higher by 7.04 bcm y/y, compared to 6.15 bcm over the same period in 2017. In light of this recovery, and the majors’ earnings reports which suggest they are gearing up to boost output, we have revised up our forecast for H2 18 production and we now expect it to rise by 7-8 bcm y/y, an upward revision from 5-6 bcm y/y (see E-mail alert, Chinese majors' Q2 18 earnings suggest potential upside to production but call on LNG to remain strong this winter, 12 September 2018). PetroChina has also recently announced that it will be restarting production at over 200 wells at its Changqing gas field, which produced almost 20 bcm of gas in H1 18, aiming to boost output by an additional 100 mcm this year. In September, the government was reported to be considering extending existing subsidies for unconventional gas to the period between 2021 and 2025. The government said it will consider value-added tax rebates on LNG imports and grant subsidies for gas storage beyond state-set targets.

Storage injections: will they be enough?

Despite these gains, LNG demand has continued to surge even through the traditional shoulder months due to a higher baseload of industrial and commercial demand, and storage fills. And while importers continue to start up new storage tanks at the regas terminals, stocks at the main sites may well disappoint this year. PetroChina reportedly injected gas into Guxinzhuang, the fifth cavern of its Suqiao storage site (total working capacity of 2.40 bcm) in early September. But even after 10 days of injections, total inventories at Suqiao were 0.56 bcm and PetroChina is aiming for 0.60 bcm of fills by October, well below the site’s capacity, likely due to insufficient cushion gas at the site. Last year, PetroChina reportedly drew 7.4 bcm from storage and is aiming to supply 8 bcm this year, but it remains unclear where it stands on meeting this target.

For its contribution to winter flexibility, Sinopec now expects to have its Wen 23 storage site ready for next injection season, after it was delayed from this year. The firm plans to complete injections at its 0.59 bcm Wen 96 facility in the first half of October, before the heating season kicks in, and is targeting 20 mcm/d of aggregate peak shaving capacity.

Lagged NDRC demand data, at 22.4 bcm (+0.40 bcm y/y) in July, suggest storage injections accelerated to 1.77 bcm, compared to a 0.71 bcm fill in June, bringing January-July storage injections to 5.7 bcm, still below 2017 fill rates. At the same time, underlying demand has remained strong. The warmer weather in August—CDDs were 4% higher y/y and 6% above the five-year average—prompted higher power demand for cooling needs, with total power generation stepping up by 45.9 TWh (8%) y/y. Thermal generation led the increases and was 29.2 TWh (7%) stronger y/y. Wind output was only 0.5 TWh higher y/y, the slowest gain since 2015, but reservoir levels were 15% higher than last year, supporting a 10.3 TWh (9%) increase y/y in August. However, Chinese hydro stocks were only 3% higher y/y as of 15 September, which could limit hydro generation during the month.

Upside for LNG from midstream debottlenecking

The outlook for LNG takes remains extremely bullish. August LNG imports, at 4.71 Mt, were bolstered by the slowdown in pipeline flows and the start-up of two new LNG receiving terminals—ENN’s 3 Mtpa facility in Zhoushan and the 4 Mtpa Diefu in Guangdong province. With an additional 3.2 Mtpa of regas terminals (Guanghui, Shell’s Qidong and CNOOC’s Putian) still planned to start up before year-end—although there have been no updates recently on the status of these projects—we expect LNG imports to rise in Q4 18 and Q1 19 by a combined 10-11 bcm y/y. There is some upside potential to this number given the majors’ work on connecting their midstream infrastructure and opening their terminals to third-party access.

PetroChina is planning to spend RMB 26 billion ($3.8 billion) on pipeline interconnection projects in 2018-2019, allowing it to move 30 mcm/d of gas from the south and 7 mcm/d from the northeast pipeline system to the Beijing-Tianjin-Hebei area by November 2018. The company expects these volumes to double for next year’s winter season. Sinopec has also stated its intention to connect its pipelines to PetroChina's China-Russia and Shaanxi-Beijing lines, and to link its 3 Mtpa Beihai LNG terminal in Guangxi province to PetroChina’s Myanmar pipeline network. PetroChina and CNOOC last December connected PetroChina’s WEP 2 to CNOOC’s 6.7 Mtpa Dapeng import terminal, allowing CNOOC to supply LNG to North China. In addition, CNOOC is also completing a pipeline between Dapeng and the Diefu terminal, which should allow it to divert as much as 17 mcm/d of LNG to the North. All these announcements may not fully materialise in time for this coming winter. But even if only some interconnectors are ready and operational, it will allow importers to raise utilisation rates at the southern terminals from their average 53% in 2017. In Q4 17, utilisation rates in the South peaked at 59%, dropping to 55% in Q1 18, compared to 103% and 98% in the northern terminals over the same periods respectively. While we do not expect the southern terminals to run at full capacity this year, even a small increase in utlisation rates in the South could allow Chinese buyers to source an incremental 7-8 bcm y/y.

Finally, in their latest efforts to allow third-party access, CNOOC auctioned a delivery slot at its 2 Mtpa Yuedong LNG terminal on the Shanghai gas and petroleum exchange (SHPGX), for RMB 0.265 per cubic metre (excluding regasification and transportation costs). ZhenHua Oil will take delivery of an imported LNG cargo between 22-26 October and while it will give priority to the Yuedong terminal, according to the SHPGX statement, ZhenHua will also be able to arrange flexible delivery at CNOOC’s other southern terminals.

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