Wood Mackenzie: Significant Volumes of Spot LNG to Be Required this Winter in China

Wood Mackenzie says northern China will see residential winter gas demand this year increase up to tenfold from non-peak requirements in some cities. In this peak season, China will be forced to rely more on the spot market due to limitations in domestic production and contracted supply.

More significantly, this winter’s trend is indicative of likely winter gas shortages through the rest of the decade. This is because production will not grow in line with demand and domestic shale gas is unlikely to provide relief earlier, in spite of recent gas price reform announcements. The implications are a tighter seasonal spot liquefied natural gas (LNG) market in North East Asia; increased opportunities for suppliers; and further reforms needed to accelerate shale development.

To meet residential natural gas heating demand this winter, some industrials will be switched off gas, Central Asian pipeline imports will be ramped up to capacity levels and significant volumes of spot LNG will be required.

Head of Asia Pacific Gas & Power Analysis, Gavin Thompson says, “Winter gas shortages will be exacerbated through to 2020 as seasonal demand growth in northern China increases at an annualised rate of approximately 16% per annum. Domestic supply cannot respond significantly due to production and storage constraints, and for this reason the struggle to keep northern China warm through winter calls for urgent action. The pace of unconventional gas development, particularly shale and coal bed methane (cbm) will play a critical role but we still do not foresee significant production of domestic shale before 2020.”

China’s domestic gas production was reported at 58 billion cubic meters (bcm) for the first nine-months of 2013, an increase of nine-percent in the same period of 2012. However, the rate of China’s gas demand growth will supersede production, driven mostly by northern China’s winter needs. China’s overall gas demand will grow by around 14% to almost 100bcm in 2013. In the coming winter alone, China’s gas demand will reach 88bcm, with 60% of that demand accounted for by Northern China.

Analysing China’s shale gas developments, Mr Thompson says, “There has been some progress in the shale gas industry, including some positive well results reported by both Sinopec and PetroChina. In addition, gas price reforms announced this year, if fully enacted, should sufficiently incentivize investment in unconventional gas. As such, we no longer believe that price is the key bottleneck. Next, China must move on to other critical issues to encourage the pace of development at least matching the growth in demand.”

Wood Mackenzie presents three pertinent shale development challenges China will need to address next. Firstly, there needs to be greater access to acreage for companies willing to commit risk capital in exploration and development – China’s shale is different to that of the US, but foreign companies with the know-how can overcome the issues. Secondly, China’s pace of technical innovation can be hastened through cooperation with service companies able to provide skills such as seismic testing as well as drilling and fracturing technologies. Finally, more widespread access to technical data of previous and ongoing drilling is required to encourage higher levels of activity, by allowing operators to apply lessons learnt to new plays. Without these developments, China will need to contract rising volumes of imported gas.

China will import some 53bcm of gas supply in 2013, rising to 65bcm in 2014. 54% will be delivered via pipelines from Central Asia and Myanmar, with the remainder coming from LNG delivered into terminals along China’s coastline. However, given the significant regional and seasonal variations, the call on winter imports into markets north of the Yangzi is increasingly significant. While volumes of gas from Turkmenistan is expected into northern China at peak capacity, additional LNG above currently contracted volumes will be required this winter.

To make up for the shortfall, orders for additional spot LNG cargoes are rising in an attempt to balance the gas market in northern China. Wood Mackenzie believes that northern China will account for around 70% of China’s annual spot LNG demand through 2013, of which some 90% is driven by winter needs. This strong seasonal demand growth will persist, due both to the widening gap between supply and demand in northern China, and the commissioning of two additional LNG terminals in the region in late 2013 and early 2014 respectively.

Thompson concludes, “With rising seasonality, the need for additional spot LNG during winter, or at least more seasonal shape to China’s future long-term contracts will become a defining feature of their LNG market. This will increase competition among Asian spot LNG buyers during peak demand periods and allow suppliers to drive spot prices upwards during winter months. China will not want to perpetuate greater reliance on spot suppliers hence, developing domestic shale gas remains vital in the longer-term. As in the US experience, China will simply need more time for successful shale development and progress the more immediate challenges. These challenges will afford renewed opportunities for foreign companies to position themselves as part of China’s shale gas history.”

LNG World News Staff, November 22, 2013

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