China’s LNG imports are likely to remain in their seasonal soft spot in April, but y/y gains will still be around 1 Mt. LNG imports in sequential terms should start picking up in Q2 19 as a VAT cut on imports, which took effect on 1 April, combined with an equivalent reduction in city-gate prices will support imports at the margins. Given the reportedly high level of LNG stocks, however, importers will return to the market gradually as injection season begins. We expect that Chinese LNG imports will rise by 2.8 Mt y/y in Q2 19 and then by 3.3 Mt y/y in Q3 19 due to peak cooling demand and pre-winter stockbuilding. PetroChina has reportedly started injecting gas into its underground storage facilities and Sinopec is filling its newly opened 10.4 bcm Wen 23 storage cavern. LNG imports through Sinopec’s Tianjin terminal are set to increase as it is connected to Wen 23 through the Erdos-Anping-Cangzhou pipeline.
China’s total natural gas imports fell sequentially in March to 6.94 Mt (-0.62 Mt m/m) but recorded a 1 Mt (17%) y/y increase, bringing Q1 19 arrivals to 24.3 Mt. Gas flows into China softened from the record 25.7 Mt seen in Q4 18 and the y/y growth (3.7 bcm, 18%) was the weakest in six quarters. LNG imports fell m/m by 0.30 Mt to 4.06 Mt, which was still higher y/y by 0.82 Mt. The slowdown in LNG arrivals was expected given the natural seasonality in Chinese gas demand and the strong increase in imports seen throughout H2 18, and especially over the period November 2018–January 2019 when gas flows topped 9.0 Mt for three straight months.
Pipeline imports fell m/m for the second month in a row, to 2.88 Mt (-0.33 Mt), even as they ticked up y/y by 0.17 Mt (6.4%), bringing Q1 19 pipeline flows to 9.32 Mt (+1.08 Mt y/y, 13%). While pipeline imports have been rising consistently for the past two years, monthly arrivals have been volatile and growing by less than LNG imports. Supplies from all sources dipped m/m, with flows from Turkmenistan down the most (-0.22 Mt m/m) and were also down y/y by 0.08 Mt, reaching 2.04 Mt. Kazakh arrivals reached 0.41 Mt, more than doubling y/y. Overall, in Q1 19, Turkmen arrivals hit 6.54 Mt (+0.47 Mt y/y), flows from Myanmar rose by a massive 0.59 Mt to 0.88 Mt, imports from Uzbekistan fell by 0.65 Mt y/y to 0.73 Mt, and flows from Kazakhstan slid by 0.10 Mt to 1.17 Mt.
With the government announcing its intention to create an independent pipeline company later this year, with the aim of encouraging third-party access to midstream infrastructure, the majors’ focus this year could increasingly turn to LNG imports, given the uncertainty surrounding their midstream asset and revenue structures.
The Chinese majors are at least paying lip service to the government’s liberalisation goal, with the Shanghai Petroleum and Gas Exchange getting ready to launch pipeline capacity trading. The launch will see private companies offered unused transmission capacity, although the launch date has yet to be announced and trading appetite will likely be limited to begin with as it will take time for market participants to emerge with upstream assets that can use the capacity. Still, a number of new entrants are getting involved in securing supply. Zhejiang Energy announced a 20-year, 1 Mtpa contract for LNG supply with ExxonMobil, with gas supply to start in the early 2020s and delivery to the company’s 3 Mtpa receiving terminal in Wenzhou. Guanghui Energy also announced a 10-year, 0.7 Mtpa LNG SPA with Total, with the gas being delivered to Guanghui's regasification terminal in Qidong, Jiangsu Province. Third-party pipeline access will be important for both deals.
At the same time, LNG stocks are still reportedly high after a milder-than-average winter that saw Q1 19 HDDs falling by 6% y/y. As such, there was little urgency by Chinese buyers to return to the LNG market in March, with many likely holding off for the 1 percentage point VAT cut that came into effect on 1 April, before resuming incremental purchases. LNG imports reached 4.06 Mt in March, the second consecutive m/m decline (-0.29 Mt) on the seasonal ebbing of demand but they were still up y/y by a strong 0.82 Mt (25%). Similarly, in Q1 19 LNG imports moderated from a record 16.88 Mt in Q4 18, reaching 14.99 Mt (+2.64 Mt) y/y. At 21% y/y, the growth rate was also the weakest since Q4 15, although that in part reflects the much higher base against which growth is now being measured.
Australian LNG flows into China surged y/y by 0.82 Mt, to 2.04 Mt, more than offsetting a 0.46 Mt drop in Qatari flows and a loss of 0.13 Mt from the US (the latter reflecting the sixth consecutive y/y decline in imports due to the ongoing trade war. LNG from Russia was up y/y by 0.13 Mt, from zero this time last year. Combined imports from Indonesia and Malaysia reached 0.65 Mt in March, half their January 2019 levels, but the combined Q1 19 level was a strong 2.64 Mt, higher y/y by 0.73 Mt.
We expect LNG imports to rise y/y by 4 bcm in Q2 19 before increasing further to 4.5 bcm y/y in Q3 19 as the majors will buy for the peak cooling season and be looking ahead to winter needs.
Demand data for March have yet to be released, but there are few signs of domestic tightness given that domestic prices averaged 12.3 $/mmbtu in March and further softened to 11.7 $/mmbtu in early April. That said, the Chinese economy fared better than expected in March, with industrial production jumping by 8.5% y/y, its biggest y/y increase in over four years. Fixed asset investments in Q1 19 expanded by 6.3% y/y, ticking up by 0.2 percentage points from January–February and Q1 19 GDP coming in at 6.4% growth y/y, stable from Q4 18 levels, and beating market expectations.
This relative strength was also reflected in power consumption. In March, power generation rose m/m by 54 TWh to 570 TWh, higher y/y by 7.8%. Thermal generation—mostly by coal-fired plants—went up (+20 TWh m/m, +3.6% y/y) to 416 TWh. Nuclear generation rose m/m by 6.0 TWh to 28.7 TWh, higher y/y by 6.9 TWh. Hydro output rose strongly (+17.3 TWh m/m, +21.7% y/y) to 80.9 TWh with reservoir levels stayed 1.6% higher y/y in March. As of 14 April, major reservoir levels were down by a significant 10.7% m/m and 8.5% y/y, suggesting a decline in hydro power generation in April. Wind generation recovered m/m by 7.3 TWh to 34.2 TWh, adding 3.6 TWh y/y increase to the power system.
Storage season begins
Some underlying demand support is also emerging from the majors reportedly injecting gas into their underground storage facilities, with PetroChina starting to inject gas into the Xiangguosi site in southwest Chongqing on 1 April. PetroChina is aiming to inject 1.4 bcm into the site this year, compared to 1.68 bcm in 2018, given that the site supplied 1.36 bcm during the 2018-19 heating season, below its 1.65 bcm target. Gas injections into the Jintan and Suqiao sites began late March, while injections into Jing 58 began on 1 April. The three sites supplied a combined 1.15 bcm over the course of the winter but reportedly received 1.64 bcm before winter started. The Dagang and Bannan sites started receiving gas injections from the Dagang gas field in late March, but they supplied 1.8 bcm this winter out of the 2.2 bcm available.
In March, Sinopec started gas injections from local wells into the Wen 23 site, and reportedly received LNG through Sinopec’s 3 Mtpa Tianjin terminal in late April, which it also injected into the Wen 23 storage site using its newly built 7 bcm/y Erdos-Anping-Cangzhou pipeline. Sinopec now expects the Tianjin terminal to receive 5 Mt of LNG this year, compared to 2.9 Mt in 2018 as it expands supply capacity at the terminal and uses it for its higher underlying demand including storage injections.
Domestic production growth to slow on maintenance
At the same time, domestic production growth is set to slow seasonally on annual field maintenance. CNPC announced that four fields in Xinjiang, including Ke75, Pen5, Mahe and Kelameili, went offline on 15 April and will resume production on 22 June. In Q1 19, domestic output reached 43.8 bcm, a strong y/y increase of 3.8 bcm (vs a 1.7 bcm uptick in Q1 18). In March alone, output hit 15.1 bcm, the third-strongest production on record (+1.51 bcm y/y). With high Capex spending planned for the E&P segment this year, domestic output is set to rise in 2019, but guidance from the majors still points to a 5-8 bcm y/y increase in their domestic gas output, suggesting an overall increase of 9-10 bcm y/y for the year (see E-mail alert: Chinese majors plan higher spending but natural gas output growth will slow, 4 April 2019). As a result, while China is unlikely to meet its 200 bcm production target for 2020, it will be getting closer (for more details, see Insight: China’s production outlook, 11 April 2019).