We see growth in China’s 2020 LNG import demand easing to 9.3 bcm (6.8 Mt) y/y, which would follow 10.5 bcm (7.7 Mt) y/y in 2019. Import infrastructure limits will slow y/y growth in Q1 20 (see Monthly: China, 26 September 2019). Increases in China’s domestic production and new pipeline imports through Russia’s 38 bcm/y Power of Siberia project will then cut LNG import growth over the rest of 2020. Moreover, Chinese economic growth has slowed, limiting climbs in industrial gas consumption.
An acceleration in domestic gas production growth in recent months has meant the supply gap below aggregate demand has been expanding less quickly. We see production in 2020 rising to 195 bcm, up from our 177 bcm estimate for 2019. This is broadly in line with the 10% y/y monthly production climbs in January–September 2019, up from 8% over the same period a year earlier.
This output growth is a result of a substantial increase in upstream spending this year from China’s main suppliers. CNOOC increased its upstream capital expenditure in January–September by 46.8% y/y and posted Q3 19 domestic gas output of 2.4 bcm, which was up from 2.1 bcm a year earlier (18.1% growth y/y). CNOOC expects to beat its 2019 hydrocarbon output target of 1.34 million barrels of oil equivalent per day.
Sinopec’s targeted 2019 exploration and production spend of 62 billion yuan ($8.3 billion) this year, which is up from 51 billion yuan in 2018, is the highest annual target since 2014. The firm ploughed much of its upstream gas spend this year into its Weirong and Fuling shale gas fields. Fuling currently produces 15 mcm/d (5.5 bcm/y), but Sinopec believes the field can produce up to 10.5 bcm/y.
PetroChina has targeted total upstream spending this year of 53 billion yuan, which is up from 23 billion yuan in 2018 and a record high for the firm. The company accounts for the majority of unconventional output in China and is targeting steady increases in production from these reserves this year and next. It is targeting unconventional production of 41 bcm this year, and 46 bcm in 2020, up from 36.1 bcm in 2018. It is investing in stabilising conventional output at its Chongqing field and is also looking to add 5 bcm/y of shale gas output from the region by 2025. PetroChina’s aggregate shale gas target is 7.6 bcm this year, up from 4.3 bcm in 2018.
Coalbed methane (CBM) has also been posting strong production y/y gains, although starting from a very low base. Output in January–September increased to 6.2 bcm, from 5.3 bcm in the same period a year earlier.
High state-owned company spends on upstream projects are being supported by government subsidies for unconventional output. China's finance ministry on 20 June extended subsidies for shale and CBM production into 2023. The government also cut its resources tax on shale gas by almost a third to 4.2% in April 2018 to help boost activity in the sector and increase domestic gas supplies.
The ministry also added tight gas—production from low-porosity sandstone and limestone formations—to its subsidy mechanism until 2023. Tight gas accounts for the vast majority of current unconventional output in China, so further support for this production could provide a substantial output boost over this period. Government financial support for China’s main suppliers will be important when a share of their transmission business is divested to form a state-owned system operator. The date for unbundling these activities appears to have been delayed from this year. The firms typically generate a large proportion of their revenues from transmission activities.
Power of Siberia
Gazprom’s 38 bcm/y Power of Siberia pipeline is scheduled to start on 1 December and deliver 5 bcm at the Chinese border in 2020, 10 bcm in 2021 and reach capacity by 2025. Questions remain over the onward transit of the gas, given that it may initially only feed into one northern Chinese province, Heilongjiang. But PetroChina was reported to have completed the construction of the 1,067 km northern section of the China-Russia pipeline on 16 October to link Power of Siberia flows to the Beijing-Tianjin-Hebei region. The full pipeline is expected to be completed by 2022–23 and terminate in Shanghai.
Work on drilling 176 wells at the Chayandinskoye field in Yakutia, which is the first to connect to Power of Siberia, was completed earlier this month. Development work is also starting at the Kovyktinskoye field, which will start feeding into the pipe in early 2023. Gazprom this month said substantial work had been completed at the 42 bcm/y Amur processing plant for gas entering the pipe.
China’s National Energy Administration (NEA) has forecast demand at 310 bcm this year, up from 280 bcm in 2018. This 11% y/y growth is down substantially from the 15% increase a year earlier.
The US-China tariff war has contributed to cutting industrial growth. China’s Q3 19 growth was its weakest in decades at just 6% y/y. The IMF sees a continuation of the US-China further cutting Chinese growth in 2020. That said, a ceasefire in the trade war was reached earlier this month (see Email alert US and China call ceasefire again in trade war to continue negotiations, 14 October 2019)
State suppliers still expect substantial increases in long-term growth, driven by increasing industry activity and population urbanisation. Sinopec has forecast demand of 510 bcm in 2030, up by 65% on 2019 demand. Sinopec expects China to reach urbanisation of 70% within the next decade, up from 60% at the end of 2018.