WoodMac: China better positioned to take on this winter's gas demand

Last winter, strong demand growth in China caused regional gas shortages. But it will be a different story this winter. Policy and market signals imply that industrial and heating gas demand growth this winter could be moderate compared to last winter, a sign that China comes better prepared after last winter's gas shortage. China has ramped up domestic gas production, increased pipeline imports, and brought forward underground gas storage injection scheduling. As a result, LNG demand growth in September slowed down significantly. Some Chinese NOCs are reselling winter cargoes in the spot market to correct their previously ambitious purchasing plans. Also, we saw spot prices fall.

In September, LNG imports grew by 27% to 4.4 Mt – nearly half of the average growth rate of 48% in the first eight months. Such a notable slowdown came without surprise. We have been expecting that earlier scheduling of storage injection would harm LNG imports in September and October. In response, China ramped up other gas sources to prepare for the coming winter demand spike. Pipeline gas imports grew by 30% to 3.3 Mt and domestic production grew by 8% to 11.9 billion m³ – both higher than the average growth rates we saw in the first eight months this year.

In the meantime, LNG spot prices started to fall. Some Chinese NOCs are reselling winter cargoes in the spot market to optimise their previous spot purchasing plans that now look too ambitious. Industrial coal-to-gas switching in the second half of 2018 could fall short of expectations, reflected by weak domestic LNG prices. Policy signals also suggest that winter coal-to-gas switching in the heating sector could be moderate compared to last year.

However, the temporary slowdown in LNG demand will not rock China’s position as the fastest growth market. In fact, companies are moving faster to capture the benefits. CNOOC and Total have renegotiated their LNG sales and purchase agreement for extended terms, more volumes and a lower price. ExxonMobil also signed a heads of agreement with Zhejiang Energy – the IOC’s first contract ever signed with a Chinese emerging buyer. PetroChina also aims to double its gas imports from Kazakhstan starting from 2019. We believe stringent environmental policies will keep unlocking China’s massive latent demand for gas and LNG longer term.

This winter season (November 2018 – March 2019), we forecast China's LNG demand to be 28 Mt, 30% increase from 21.5 Mt last winter.

On the power side, energy-intensive industries continue to drive growth in electricity consumption, though services have also been a bright spot. China has just commissioned two third-generation nuclear reactors, after years of delays and cost overruns.

China National Nuclear Corporation announced its Sanmen 1 reactor in Zhejiang, which uses third-generation (G3) AP1000 technology, had fulfilled the requirements to enter commercial operation. State Power Investment Corporation made a similar announcement regarding its Haiyang 1 reactor in Shandong, which uses the same technology. But the journey has not been smooth for these projects. Both have faced various challenges, ranging from major design changes, equipment quality issues, around four years of schedule delays and cost overruns. Their entrance into commercial operation is encouraging and could lend more confidence to future investment, but the G3 reactors in general will still need more time to prove themselves as a mature technology. The supply chains also need to adapt to a gradually saturating domestic power market, and to growing competition from more cost-effective renewables. But advanced nuclear power technology could help China win more contracts from overseas markets.

It won't be easy for nuclear power to regain its momentum as power demand slows in the longer term and cheaper renewables have started to bite.

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