China’s blue skies target may make for winter gas crunch


Chinese President Xi Jinping’s government has beaten expectations in its drive to help clear the nation’s notoriously smoggy skies by burning less coal and oil in favour of cleaner natural gas.

Now that success may be too much, too soon.

Gas consumption has risen 15 per cent in the first half of the year, including a 27 per cent jump in June, as industrial customers shift towards the fuel and as distributors add more residential users. That surge during the traditionally low-demand part of the year raises the possibility the country may find itself short of gas when the northern winter hits, according analysts at Jefferies Group and SCI International.

“China could be setting itself up for a nasty winter gas shortage,” Laban Yu, a Hong Kong-based analyst at Jefferies, said in a research note last week. “We believe gas prices will have to increase, especially in winter months, to balance supply and China’s regulation-induced demand surge.”

China’s drive to use more natural gas and renewables has resulted in coal’s share of the energy mix drop to just below 60 per cent during the first half of the year, according to the National Energy Administration. It accounted for 64 per cent in 2015, and the government is aiming for 58 per cent by 2020.

China’s natural gas demand would rise to 620 billion cubic meters a year by 2030, China National Petroleum Corp said in a report on Wednesday. The country used 206 billion cubic meters last year, according to the National Development and Reform Commission.

Consumption peaks in the winter

Natural gas use tends to fall into two categories: recurring demand from activities such as power generation and industrial plants, and seasonal demand for powering air conditioners in summer and heating in winter. For China, which has hundreds of millions of people living in colder northern cities such as Beijing, Tianjin and Harbin, consumption peaks in the winter.

But demand this year is booming in the middle of the northern summer. Imports in July jumped by 55 per cent over the previous year and are up by almost 21 per cent for the entire year, according to the General Administration of Customs. That’s on top of a 8.8 per cent increase in domestic output during the first seven months of the year, according to the National Bureau of Statistics.

In 2015 and 2016, seasonal demand meant December consumption was double that during July. China Petrochemical Corp, one of the country’s leading liquefied natural gas importers and known as Sinopec Group, was expecting “big” year-on-year increases in the northern winter and spring, Shanghai Securities News reported last week, citing comments from the company after its mid-year work conference.

The government would probably push energy companies to ramp up imports and production and ensure new terminals were online to meet winter demand, said Liu Guangbin, a gas analyst at Shandong-based SCI International. Energy companies might use the surge in buying to bolster requests to the government to raise regulated domestic prices, he said.

“I expect the gas supply shortage this winter to be more severe than the situation in the previous two years, due to sharp increase in demand from industrial users amid the government’s coal-to-gas switching policy,” he said.

Surge in demand

The growing global LNG market would help the country meet any surge in demand this winter, said Liu Ming Hui, executive chairman of China Gas Holdings, which distributed natural gas to homes and businesses. Other distributors, such as ENN Energy Holdings and Guanghui Energy, had started importing LNG to supplement supplies they typically bought from China’s state-owned energy companies.

LNG has made up almost 51 per cent of China’s natural gas import supply during the first half of the year, up from 48 per cent last year and 44 per cent in 2015, according to Bloomberg calculations using data from the General Administration of Customs.

A surge in LNG production, led by new facilities in Australia, boosted global output to a record in July, according to JP Morgan. New plants will ensure there’s ample supply for Chinese buyers, even as they are expected to increase imports this winter by 30 per cent from last year, says Zhi Xin Chong, a Singapore-based analyst with Wood Mackenzie.



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