China Gas Strategy Lead
Royal Dutch Shell
16:25 - 16:50
Tuesday, 17 September 2019
S1.2 Key Changes with China Gas Market and the Global Implications
Objective/scope: The China demand factor has been the single largest driver for the upturn of the global LNG market for the past two years. This paper is to review key gas market developments since 2017 in the country and identify the various spill over effects on the global market. In view of emerging concerns about the sustainability of China growth, the paper is also to present evidences for the resilience of this market.
Methodology: Review of historical data (for volume and prices) for China and global markets; review of drivers of China demand growth-- policies and economic factors; case studies for provinces/segments;
The China gas market has undergone some significant shifts over the past two years.
- Demand growth has reaccelerated since 2017, leading to a quicker-than-expected rebalancing of the market and creating a strong call for new supply.
- The need for flexible supply (underground storage and LNG) that follows seasonal demand has increased sharply, with a step increase in gas demand from the space heating sector.
The China demand cycle has heavily influenced the global gas/LNG market cycle, on almost all aspects, from demand/supply balance to price and trade flows.
- The global LNG market has become more balanced, with a significant portion of incremental supply absorbed by China.
- There has also been increasing linkage between China spot procurement behaviour and N. Asia LNG prices, hence trade flows across Basins. (For example, forward procurement of Chinese buyers in 2018 has resulted in much less LNG price volatility in winter 2018/19).
- The longer-term call for new LNG supply has also increased, as China steps up term LNG contracting, opening a new window for LNG project FIDs.
Looking forward, there have been growing concerns about the sustainability of China market growth given that the economy has started slowing again and the coal substitution program has been recalibrated. Despite these, we would argue that China gas demand will stay resilient, although growth may moderate.
- China demand fundamentals are still solid. The gas policy anchor (a major contributor for the 2017-18 upturn) has been recalibrated, rather than diminished. For many provinces, gas will be the more affordable and available clean fuel (i.e., energy-deficit provinces with little indigenous energy resources).
- China will also likely stay one of the fastest-growing ‘winter demand’ markets, with the push for coal substitution in the heating sector of northern China and strong potential for new heating market development in central/eastern China.
LNG demand will be underpinned by some structural supports:
- The structural disconnect between infrastructure development and gas demand (particularly seasonal demand) will stay;
- Uncertainties with domestic gas production and pipeline imports.
- Interconnection between China and global LNG market is improving, helped by gas market structure reforms (which improve access to terminal capacities) and infrastructure push to improve broad market connectivity (particularly connectivity of terminals with pipelines).