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China hopes to stimulate demand by cutting gas prices

The country will cut regulated gas prices in order to encourage demand

Gas demand expanded by only 3.3% year-on-year for the first half 2015 - its weakest level in over a decade - and actually turned negative in May.

The regulated gas prices are among the highest in the world and significantly above the price of competing fuels, such as liquefied petroleum gas (LPG), coal and fuel oil. The government raised gas prices in August 2014, but oil prices have since fallen some 50%, prompting industry to switch back to cheaper oil and LPG.

"Low oil is a key driver here both in terms of weakening gas demand but also keeping import prices low and thus making a cut in city gate prices bearable. I'd be surprised if we don't see this in the second half. By how much, very difficult to say but precedent has been for something in the region of 15-20% and I don't think this would be unreasonable," Gavin Thompson, an Asian-based gas specialist at energy research company Wood Mackenzie told Petroleum Economist.

Import terminal delayed

As a result of the exceptionally weak demand in North China gas markets, Chinese NOC Sinopec will delay the start-up of its 2.2m ton/year import terminal in Tianjin to 2017, reported the National Audit Office.

The regasification plant was expected to receive LNG from the Origin Energy-led Australia Pacific LNG (APLNG) project, due to start up later this year, where Sinopec have contracted to buy 7.6m t/y.

China

Amid speculation that the NOC wanted to renegotiate the terms of its contracts because it was not ready to take the volumes it had agreed to buy, APLNG project partner ConocoPhillips said that it expected Sinopec to live up to the terms of the take-or-pay deal.

Speaking to investors in the US, the major's chief executive Ryan Lance, revealed that APLNG, of which ConocoPhillips and Origin hold 37.5% each and Sinopec 25%, had agreed to let the NOC send cargoes to destinations outside China for resale.

"They've got diversionary rights within China and, with our approval, which we have provided, they've got diversionary rights outside of China as well," Lance said.

Gas prices at city-gate

"We're working with them to understand the volume that they can take into the country in 2016 and as we go forward into 2017," he added.

Weakness in China, the fastest-expanding major LNG market, comes at a difficult time for the global LNG market. Delays in Australia and better than expected progress in the US, could see almost 50mn t/y of new capacity come online next year.

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