China`s lower gas demand growth leaves NOCs facing oversupply: WoodMac
Source: www.chinamining.org Citation: Platts Date: June 11, 2015
China`s 2020-2030 gas demand is expected to be 13% lower than previously forecast, which will lead to an oversupplied market and weaker prices, consultancy Wood Mackenzie said in a report Wednesday.
The country`s gas is now expected to be about 360 Bcm in 2020 and 560 Bcm in 2030, down from previous forecasts of 420 Bcm and 640 Bcm, respectively, due to short-term and structural drivers, WoodMac said.
"Short-term drivers include low oil prices and high domestic gas prices, reversal of environmental policies, competition from coal and hydro and warmer winter weather," said Gavin Thompson, WoodMac`s principal gas consultant.
"Structural factors include the switch from industrial production to the service sector as a driver of economic growth."
Despite weakening demand growth, Central Asian volumes into China are continuing to rise.
"As a result, there is an oversupply of contracted LNG into the market, particularly during periods of low seasonal demand," Thompson said.
"We expect China will be over-contracted by about 18 Bcm from 2015 till 2017."
Chinese national oil companies are now pursuing numerous channels to reduce volumes, including efforts to renegotiate ramp-up schedules and pricing terms, and reselling volumes into the Pacific market where agreement can be reached with suppliers, WoodMac said.
Sinopec in particular, as the last of the state-owned buyers to enter the LNG arena, is exploring its options to resell volumes, as it struggles to bring its downstream infrastructure online fast enough to absorb contracted volumes of LNG.
Sinopec is widely reported to be offering up to 4 million mt/year of its existing 7.6 million/mt long-term contract with ConocoPhillips to other Asia-Pacific buyers and portfolio sellers, including BP.
The volumes will originate from the ConocoPhillips-operated Australian Pacific LNG facility in Queensland, which is scheduled to come on stream in September.
According to market sources, Sinopec has also not ruled out the possibility of trading APLNG volumes from 2016 onward, an option that is also being explored by fellow state-owned LNG buyers CNOOC and PetroChina where term contracts allow.
WoodMac believes the NOCs will have three levers to optimize supply and minimize losses.
First, they may restrict domestic investment in more expensive developments and defer investment until demand recovers.
PetroChina will also manage overall volumes of pipeline imports using take-or-pay provisions, with the potential for spot volumes above take-or-pay during periods of peak demand.
Third, the NOCs will maximize contracted LNG volumes to sell into the domestic market as term and spot prices look competitive against regulated city gate tariffs due to low oil prices.
"With strong growth in contracted LNG and low LNG prices, we continue to expect that some volumes of LNG will be re-sold back into the broader market," Thompson said.
Some of these sales will be seasonal, particularly LNG that might otherwise have supplied northern China during the warmer months. But even at times of higher demand it is unlikely that all contracted LNG will find a market in China, according to WoodMac.
An oil price recovery ought to stimulate Chinese gas demand and create more market space for LNG, but the timing of this is uncertain, the consultancy said.
"Given the uncertainties around the market outlook however, we believe that all options must remain on the table," Thompson added.
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