We are delighted to present our new Monthly publications, formerly known as Data Review, which will share our short-term forecasts. Users licensed for the data service can access our China gas balances and gas imports data.
China’s natural gas imports reached 7.62 Mt (10.36 bcm) in September, rising y/y by 1.68 Mt (28%) and inching down only slightly from August levels (7.7 Mt). Pipeline gas supplies increased by 0.76 Mt to 3.5 Mt (31% y/y), an uptrend that we expect to continue going forward. In mid-October, PetroChina signed a new supply deal with Kazakhstan to bring exports to 10 bcm/y in 2019—which we think is unrealistic but would still point to higher supplies—and has pledged to increase output from its upstream assets in Turkmenistan. LNG flows softened m/m in September due to Typhoon Mangkhut, which led to terminal closures, and due to maintenance at CNOOC’s Tianjin terminal. As the injection season is drawing to an end and temperatures were warmer than normal in early October, imports could slow sequentially again in October before surging in November and December, when the heating season kicks in. The majors’ efforts to debottleneck midstream infrastructure suggests that their supply capacity could surprise to the upside, but demand growth is now the key question in light of the escalating US-China trade war and winter curtailments of industrial output, which could weigh on industrial gas demand growth. We still expect demand to rise by over 20 bcm y/y in Q4 18 and Q1 19 combined, suggesting shortages will persist this winter but will not be as acute as last year’s.
China’s natural gas imports reached 7.62 Mt (10.36 bcm) in September, rising y/y by 1.68 Mt (28%) and inching down only slightly from August levels (7.7 Mt, 10.47 bcm). Pipeline gas supplies increased by 0.76 Mt to 3.5 Mt (31% y/y) despite ongoing works on a section of the 12 bcm/y Myanmar pipe and PetroChina’s reported maintenance on the 30 bcm/y WEP 2 between 25–30 September. The additional work on the WEP 2 (after a lengthy shut down between May and July) was likely a formal inspection rather than further maintenance and will allow flows to rise further going forward. PetroChina now seems to be doubling down on pipeline supplies, as the company inked a five-year contract with KazTransGaz in mid-October to import 10 bcm/y of Kazakh gas to China starting in 2019. While imports from Kazakhstan will likely rise, we do not expect them to reach 10 bcm/y next year, given that even plans outlined in an agreement signed in October 2017 to reach 5 bcm/y this year have failed to materialize. Moreover, pipeline capacity on WEP would likely need to be reallocated from another supplier like Uzbekistan. Nonetheless, PetroChina is eyeing higher pipeline flows and is also planning to increase exports from Turkmenistan as of early 2019 by increasing drilling in the Amu Darya basin, which should allow the company to increase pipeline sendout by 5.4 mcm/d. LNG flows in September reached 4.37 Mt, still growing strongly from 2017 levels (+0.92 Mt y/y) but falling m/m by 0.34 Mt.
The m/m fall was due to Typhoon Mangkhut (which led to terminal closures in mid-September), maintenance at CNOOC’s Tianjin terminal, and the steep depreciation of the Chinese currency, the RMB, which has raised import costs. That said, the September softness may also be the first manifestation of an off-peak season this year. While the summer months are typically the shoulder months, baseload demand has been higher than in previous years due to rising industrial demand—following the coal-to-gas switch—softening some of the usual seasonality. In addition, buyers have been restocking, blunting the impact of any seasonal slowdowns. But with injection season now coming to an end, September and October may be the only months of respite this year. Indeed, over the course of Q4 18 and Q1 19, we expect LNG imports to rise by around 8-9 Mt y/y (10.15-12.5 bcm), with potential upside to the majors’ supply capacity given the extensive amount of debottlenecking they have undertaken on midstream infrastructure.
A question of demand
We expect higher utilisation rates, especially at the southern terminals, will allow for an upside of as much as 7-8 bcm this winter (as we discussed in Data review: China, 24 September 2018). But the question is now increasingly turning to the potential strength of demand growth. Lagged demand data for August peg domestic gas consumption at 23.2 bcm, higher y/y by 2.6 bcm (15%), although that may include storage injections.
While industrial demand has been stronger this year, there are growing concerns in China that the US-China trade war will start to take its toll on the economy. The macroeconomic data has been pointing to a deceleration, with Q3 18 GDP growing by 6.5% y/y (the weakest quarterly print since 2009), down from 6.7% in Q2 18 and below market expectations of 6.6%. Industrial production growth slipped to 5.8% y/y, the lowest point since October 2015. Much of the economic slowdown is due to the government’s efforts to deleverage the financial system. But with the US-China trade war escalating rapidly, the government is likely to start easing rules around credit access in a bid to offset the impact of the trade war on growth.
That said, the economic slowdown has yet to show up in energy demand. In September, despite milder-than-normal temperatures, when total CDDs were 14% lower y/y and 5% below the five-year average, total Chinese power generation expanded by 26.3 TWh y/y to 548.3 TWh. Thermal generation—composed mostly of coal-fired output—stepped up the most (+16.4 TWh, 4.5% y/y), followed by wind generation (+3.4 TWh, 17% y/y). As we argued last month, low reservoir levels in mid-September limited hydro output, which was only 2.2 TWh higher y/y at 832.6 TWh, vs 10.3 TWh y/y growth recorded in August. As of 16 October, reservoir levels stood 16% higher m/m and in line with last year, which suggests that hydro generation should be similar in y/y terms. Additionally, Chinese nuclear generation in October should see a boost as the 1.25 GW Haiyang unit 2 nuclear reactor was connected to the grid on 13 October. Since the start of the year a total of six nuclear reactors have become operational, adding 7.8 GW of capacity with year-to-date nuclear generation 24.7 TWh higher y/y at 208.1 TWh.
An additional concern is that the government’s anti-pollution efforts could weigh on demand growth. The government wants to improve air quality and has ordered heavy industry in Beijing-Tianjin-Hebei to cut production between 1 October 2018-31 March 2019, which could also curb gas demand growth given that industry is the largest gas consumer in China. Local governments will have some discretion in enforcement and will opt to shut down industrial users that rely on coal first, but the government’s pollution mandate will also act as a necessary constraint on demand, given that when supply shortages hit, industry is typically the first to see cuts in supplies as residential users are prioritised. Moreover, PetroChina has already indicated plans to introduce a new pricing strategy whereby it will sell imported LNG and shale gas to end-users along the country’s affluent coastal provinces at premiums of 38-40% above city-gate prices, to reflect any supply shortages and dampen demand growth. All things considered, we still expect demand to rise by 22-23 bcm y/y in Q4 18 and Q1 19 combined, with modest upside to this number if the winter is extremely cold. Even if there are both average temperatures over the course of the winter and efforts to suppress industrial demand growth, we still expect gas supply shortages given the underlying demand growth so far this year, even if these are likely to be less severe than last heating season.
Domestic gas production continued to tick up y/y, rising by 1.04 bcm (+9%) to 12.18 bcm. A number of PetroChina gas fields in the west of the country (including Qinghai, Xinjiang and Shaanxi) have announced that they will not take their usual four-month winter break this year, suggesting a sustained increase in production through the winter months.