By Michael Lelyveld
![](https://i0.wp.com/www.eurasiareview.com/wp-content/uploads/2018/08/a-3.jpg?resize=830%2C510)
On Oct. 24, China’s top planning agency said it has a “contingency plan in case of emergencies such as extreme weather, in order to guarantee sufficient supplies of gas for residential use during the winter,” the official English- language China Daily reported.
The guarantee by the National Development and Reform Commission (NDRC) is the government’s strongest assurance to date that homes will not be left in the cold as a result of anti-smog bans on coal-fired heating, as was the case last December.
Details of the contingency plan announced by NDRC spokeswoman Meng Wei were not reported, but it is believed to include a combination of industrial cutbacks during the winter season and increased supplies from the international spot market for LNG.
More than 120 billion cubic meters (4.2 trillion cubic feet; one bcm = 35.3 billion cubic feet) of gas will be made available for the winter heating season, or more than half of all the gas that China consumed last year. Forty percent of the winter supplies will be reserved for residential service, Meng said.
With limited supplies from domestic production and cross-border pipelines, the government’s guarantee will have to rely on major increases of imported LNG from both long-term contracts linked to oil prices and the spot market.
In the first nine months of the year, tanker shipments of super-cooled LNG from abroad accounted for 57 percent of China’s total gas imports, outpacing pipeline deliveries, according to customs figures.
LNG’s share of total gas imports stood at 55.5 percent last year, exceeding pipeline deliveries for the first time.
In 2017, China relied on pipeline and LNG imports for 38.7 percent of gas consumption. Through September, LNG imports have climbed 44.7 percent so far this year.
The NDRC believes it is better prepared to avert shortages this winter as a result of a crash program to open new LNG import terminals and gas storage facilities.
China’s storage capacity as a share of consumption has been only a fraction of the international average for major importers, leaving the country unprepared for rising demand.
The NDRC said that China has now addressed the problem with about 100 newly-opened storage facilities, including tanks and depleted oil wells, accounting for 16 billion cubic meters (bcm) of capacity.
Still not enough
But with consumption of 237.3 bcm in 2017, China’s 3.5-bcm increase in storage this year will still be inadequate to meet consumption growth, if it sticks to its anti-smog campaign.
Domestic gas production is running only 6.2 percent ahead year-earlier output, while China’s Central Asia Gas Pipeline (CAGP) system is nearing capacity.
The limitations appear to make LNG imports the only avenue for the double-digit growth in demand.
Total gas imports have jumped 33.1 percent in the first 10 months of this year, Platts Commodity News reported citing customs data.
But the government’s calculations may be complicated by the unexpected and unpredictable vacillations of the Asian LNG market.
On Oct. 25, Reuters reported that half a dozen tankers with LNG cargoes were “stranded” for up to two weeks in waters off Singapore and Malaysia due to adverse trading conditions and weaker-than-expected demand in the larger Asian market.
The sudden turnaround in the Asian market is said to be the result of multiple factors, including official weather forecasts in Japan and Australia of a milder-than-usual winter in the region this year.
The predictions have led to a market condition known as “contango,” when future gas prices rise above those for the nearer term, causing traders to delay deliveries.
In this case, the situation has been muddied by several factors, including the high cost of delay.
Due to the flood of LNG shipments in preparation for winter, tanker rates have soared to nearly U.S. $150,000 (1 million yuan) per day, according to petroleum industry consultants Gaffney, Cline & Associates.
But in addition to the weather forecast, changes in demand are taking place in Japan, which has been the world’s largest LNG importer.
The country’s nuclear reactors have started to come back on line sooner than expected following the Fukushima disaster of 2011, further reducing Asian LNG demand, Reuters said.
In an added complication, Japan’s Inpex Corp. has started shipping LNG from its U.S. $40-billion (278-billion yuan) Ichthys project in the offshore of Western Australia, easing the Asian supply picture even further, The Wall Street Journal reported.
“It is heartening news for China, which sees sudden rises in demand for LNG during the winter months,” the paper said.
Will gas prices rise?
For the time being at least, the eased pressure on prices seems to have outweighed concerns over China’s 10-percent tariff on LNG imports from the United States, imposed as part of the ongoing trade war.
But China’s lack of available storage is likely to determine its ability to take advantage of more favorable conditions, leaving it susceptible to paying spot market prices whenever winter demand spikes.
In a separate report, Platts quoted Citigroup analysts as saying that “as of September, LNG storage fields, with already limited capacity, might be nearly full due to more aggressive injections to avoid a repeat of last winter’s gas supply shortage.”
Despite the NDRC’s guarantee and easing market conditions, the government has signaled its concern that gas costs will rise.
On Oct. 26, Reuters reported that the government has warned China’s three big state-owned oil companies “not to manipulate gas prices or exceed the ceiling of government guided prices as the winter heating season approaches.”
Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, said that China’s infrastructure problems have not been solved, despite the crash capacity-boosting program since the crisis last winter.
“Their storage and pipeline capacity is very limited. It’s not something they’re going to fix in 12 months. It’s going to take a number of years,” Herberg said.
China will get some relief from the infrastructure pinch with the opening of Russia’s 4,000-kilometer (2,485-mile) Power of Siberia pipeline. But deliveries are not expected until December 2019, gradually rising to peak volumes of 38 bcm annually after several years.
In the meantime, China may have no way of avoiding reliance on high-priced LNG imports this winter, even if prices are slightly lower than last year’s record levels.
“They really have no choice but to be dependent on the short-term spot market for the incremental demand beyond what’s been contracted,” Herberg said.
Herberg compared China’s gas supply problems with the just-in-time production process in manufacturing that depends on incoming supplies of parts instead of warehouses full of inventory.
“That will make them, chronically for the next number of years, just-in-time buyers. I don’t see a way out of that,” he said.
“The imports are likely to weigh on the profits of China’s state-owned petroleum giants. The recent windfall in earnings from higher oil prices in the third quarter has been “covering up” the gas costs, Reuters said in another report.
The impact on the PetroChina subsidiary of China National Petroleum Corp. (CNPC) has been particularly heavy, according to Reuters.
“It is on the hook to fix China’s perennial gas shortages and must import from abroad to do so,” it said. The company reportedly spent about 20 billion yuan (U.S. $2.9 billion) on gas imports in the first nine months of the year, suffering losses on most sales due to domestic price controls.
The warmer-than-usual weather may also make smog more persistent this winter, since weaker cold fronts will allow air to stagnate, China’s National Climate Center said at a press conference last week.
No comments:
Post a Comment