China’s winter gas shortage

The latest report from Wood Mackenzie states that China’s winter gas shortage will be an annual trend through to 2020.

The research company believes that northern China (which it defines as the provinces north of the Yangzi river) will see residential winter gas demand increase up to tenfold this year in some Chinese cities. In the winter peak season, the country will have to rely more heavily on the spot market, thanks to limits in domestic production and contracted supply.

More significantly, the trend this winter looks likely to continue through the rest of the decade until 2020. This is primarily because production will not increase in line with demand, and domestic shale gas is unlikely to provide relief, despite a number of recent gas price reform announcements. This will result in:

  • A tighter winter spot liquefied natural gas (LNG) market in North East Asia
  • Increased opportunities for suppliers
  • Further reforms needed to speed up shale gas development.

In order to meet residential natural gas heating demand this winter, some industrial producers will stop using gas, Central Asian pipeline imports will be increased to capacity levels, and significant volumes of spot LNG will have to be imported.

Winter shortages

"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", explained head of Asia Pacific Gas & Power Analysis, Gavin Thompson.

Domestic gas production in China for the first nine months of 2013 were reported at 58 billion m3, an increase of 9% over the same period last year. However, the rate of the country’s gas demand growth will overtake production, driven largely by northern China’s winter needs. The country’s overall gas demand looks set to increase by approximately 14% to almost 100 billion m3 in 2013. This winter, gas demand will reach 88 billion m3, of which 60% comes from demand in northern China.

Shale gas

In his analysis of the country’s shale gas developments, Thompson added: "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 incentivise 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."

Three major shale development challenges facing China need to be addressed:

  1. Greater access to acreage for companies willing to commit risk capital in shale gas exploration and development.
  2. The speed of China’s technical innovation can be increased through cooperation with service companies able to provide necessary skills, such as drilling and seismic technologies.
  3. Wider access to technical data of previous and current drilling is needed to encourage higher levels of activity.

Wood Mackenzie reports that without these three major developments, China will need to increase its imports of natural gas.

Gas imports

In 2013, China will import approximately 53 billion m3 of gas supply, which will increase to 65 billion m3 next year. Approximately 54% of this gas supply will be delivered via pipelines from central Asia and Myanmar. The remainder will come from LNG imports through the country’s coastal terminals. However, it is probable that with increased demand from northern China, additional LNG above currently contracted volumes will be needed this winter, even if gas imports from Turkmenistan are at peak capacity.

In order to make up for the shortfall this winter, orders for additional spot LNG cargoes are increasing to try and balance the gas market in northern China. Predictions are that northern China will account for approximately 70% of the country’s total spot LNG demand through to the end of 2013. 90% of this demand will be driven by winter needs, and the strong seasonal demand growth looks certain to persist.

Conclusion

"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," Thompson concluded.

Adapted from press release by Katie Woodward

Published on 22/11/2013


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