China’s natural gas imports via pipeline and LNG reached 7.3 Mt in October, rising y/y by 1.49 Mt (26%). LNG flows reached 4.6 Mt (+1.03 Mt y/y) and rose m/m by 0.23 Mt. The sequential uptick was due to a combination of limited September arrivals—due to terminal closures because of Typhoon Mangkhut—while October flows were supported by the commercial start-up of ENN’s 3 Mtpa facility in Zhoushan (Zhejiang). October flows may also have benefited from additional LNG coming in under PetroChina’s 22-year 3.4 Mtpa term deal with Qatar, which was signed in early September and under which flows were set to start immediately. Pipeline flows reached 2.7 Mt (+0.46 Mt y/y, 20.4%) in October, although they fell from September levels (-0.55 Mt). While September-October pipeline flows tend to dip seasonally, the October fall was slightly steeper than usual, with September imports likely backfilling for the temporary closures of southern regas terminals. But with a warmer-than-usual start to the winter and demand growth softening as economic growth decelerates and industrial users are plagued by environmental inspections, China’s winter spot buying is unlikely to be spectacular.
With the winter season officially starting in mid-November, China is looking increasingly better prepared to meet peak demand. We still expect LNG imports to rise strongly by 10-11 bcm y/y in Q4 18 and Q1 19 combined, but spot demand from China is likely to be limited, barring a severe cold snap. Already in the year to October, flows into China have been extremely strong. October LNG imports reached 4.6 Mt (+1.03 Mt y/y), largely on stockbuilding and the commercial start-up of ENN’s 3 Mtpa terminal in Zhoushan (Zhejiang province). Pipeline takes were similarly strong, reaching 2.7 Mt (+0.46 Mt y/y) even though they were lower than September flows.
The majors are stepping on the gas
Domestic production has also picked up, reaching a strong 13.4 bcm in October (+0.95 bcm y/y, 8%). The majors are all pledging higher natural gas output this winter, heeding president Xi’s call to prevent winter shortages and boost energy security. The government is keen to avoid last winter’s supply shortages—which affected both industrial and residential users—and price spikes and has put substantial pressure on the majors to avoid a repeat of last winter.
According to the majors’ latest earnings reports, total gas production increased by 2.6 bcm (9%) y/y in Q3 18, exceeding the soft 0.6 bcm (2%) y/y growth in Q1 18 and eclipsing the 1.6 bcm (5.5%) y/y rise in Q2 18. CNOOC registered the highest y/y growth (11%) as it brought new gas fields in Bohai on stream in Q3 18, while PetroChina (9%) and Sinopec (7%) continued to leverage the potential of shale gas in Sichuan as well as tight gas in Changqing and Xinjiang. Production usually increases in the winter, and this year we expect a 6 bcm y/y rise over Q4 18 and Q1 19 combined, compared to a 4 bcm y/y rise in the same quarters in 2017, given that the majors have announced that they will suspend the annual winter break in the gas fields in the North, allowing them to sustain production.
A well-supplied winter?
As a result of the strong supply picture in the year to date, and the majors’ ongoing announcements of additional storage fills and midstream interconnections, the government is increasingly confident in its ability to meet residential heating demand this winter. The NDRC stated in mid-November that the country had secured 264 bcm of supply this year—including domestic output and imports—although it did not give a detailed breakdown. That said, this number still falls short of expected demand this year (NDRC had previously forecast demand of 270 bcm) and, more importantly, does not factor in seasonality. On our balances, Chinese demand this year is set to reach 280 bcm while supplies are set to come in at around 280 bcm too. But getting supplies to consumers in northern China during peak winter has been the main challenge for China and will be the case again this year.
That said, we do not expect a significant supply crunch this year—barring a protracted cold snap. In addition to improved midstream interconnections, local gas consumers throughout the country have settled annual supply contracts with major producers for the winter season, accounting for 120 bcm. Our own forecast for winter demand between November 2018 and March 2019 is 140 bcm. And as we have highlighted previously, the upside for demand growth from industry could be limited. This is because environmental inspections will weigh on industrial activity this winter, although users with coal-fired boilers will likely see greater scrutiny than those that have switched to gas. At the same time, manufacturing activity is set to slow in Q1 19, as many exporters have likely frontload current orders, in anticipation of 1 January 2019, when the 10% US duties on $200 billion worth of Chinese goods is set to rise to 25%. The Chinese government is now increasingly looking to support industrial growth through 2019, but its efforts, while likely enough to cushion the slowdown, are unlikely to trigger a massive stimulus.
In October, alongside the slowdown in economic growth, power generation fell m/m by 15.3 TWh to 533 TWh but was still higher y/y by 5.8%. Thermal generation—mostly by coal-fired plants—remained strong (+15.4 TWh, 4.4% y/y), while nuclear generation logged a 5.1 TWh y/y increase, as the new 1.25 GW Haiyang unit 2 nuclear reactor came online on 13 October. Hydro output recovered compared to year-ago levels, adding 4.3 TWh y/y but falling m/m by 2.3 TWh. As of 15 November, reservoir levels were flat m/m but 1.7% lower y/y, suggesting hydro generation could fall slightly in November in y/y terms. In addition, the falling costs of solar photovoltaic (PV) panels have boosted the competitiveness of solar power plants and the first project without government subsidy was approved in August, reflecting another step towards grid parity. Between January and September, China added 34.5 GW of new solar capacity, according to China’s National Energy Administration. Year-to-date solar power generation stood at 74.6 TWh, a 48.9% y/y increase.
Gas in power remains an open question
This winter, the government is also making back-up plans for the power sector and it has already stated that the areas that do not have supply contracts will be able to use coal. The Beijing municipal government even restarted a coal-fired power plant in November. According to NDRC, China had 76 GW of gas-fired power capacity in 2017, consuming almost 47 bcm of natural gas. Yet power generators have been asked not to install utility-scale gas-fired power plants this year to ensure gas supplies for households this winter.
Going forward, the role of gas in power generation in China remains an open question as the government pushes for more renewables in the system. The government is reportedly mulling a mandatory renewable power quota, which will set minimum targets for each region starting in 2019 based on their renewable energy resource potential. Renewables could be required to account for 80% of total power consumption in hydropower-rich Sichuan, for example, though coal-dependent provinces would see their quota requirement at around 10%. We do expect that the promotion of renewables will eventually come at the expense of coal, but we still do not see much in the way of any concerted effort yet in China to push gas into the power sector.