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Covid-19 to slash China’s 2020 gas demand

LNG will bear the brunt of the impact of the coronavirus outbreak on China’s demand for natural gas in 2020. But the effects are likely to be short-lived unless there is a major escalation of mainland infections

China’s demand for natural gas is expected to be 10bn m3 less in 2020 than it would have been in the absence of the coronavirus Covid-19 outbreak, according to Sublime China Information (SCI99). Most of the reduction, around 9bn m3, is expected in the first quarter with another cut of 1bn m3 in quarter two. 

“We expect that the market will return to normal from March if things do not escalate,” says Michael Mao, senior energy analyst at SCI99, an influential provider of commodity data and analysis based in Zibo City, Shandong Province. 

Mao described the reductions as “minor” in the context of a 300bn m3 market. In 2019 Chinese gas consumption reached 304bn m3, up 10pc on 2018. However, he cautioned that LNG is suffering a disproportionate share of the reductions because it is a “supplementary” source of supply in China’s natural gas market,  “which amplifies the impacts, making them much worse”. 

“February LNG cargoes have halved,” he says, adding that operating rates at LNG regasification plants and LNG truck loading have dropped to historical lows. “So, we believe the [Covid-19 outbreak] will haunt the LNG market until maybe April or even May.” 

Despite the impacts of Covid-19, Mao says that LNG imports will still increase relative to 2019 but at a far slower rate. “We believe the increment of LNG imports in 2020 will be around 5mn t”. In absolute terms, that equates to total imports of 66mn t for the year. 

“A combination of positive and negative factors may give us unprecedented uncertainty in 2020” Mao, SCI99

Mao’s remarks came during a presentation that was originally scheduled for an SCI99 seminar in London. However, the seminar was changed to a webinar because of the “public health event”. Mao and his fellow presenters appeared on video wearing blue face masks. 

Policy response 

“A combination of positive and negative factors may give us unprecedented uncertainty in 2020,” says Mao.“But, based on our previous estimation and analysis, we have an optimistic anticipation of the market.” 

One positive is the very low price of spot LNG in Asia, a trend that emerged before Covid-19 but which has been exacerbated by it. Ongoing reforms that will open up LNG import slots at receiving terminals will make LNG more attractive to so-called “second-tier” importers, those that are not one of the big three national oil and gas companies: Sinopec, Cnooc, and PetroChina. 

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He stresses the importance of policy in driving the growth of Chinese natural gas consumption: the determination to improve air quality in cities by promoting a switch from coal to gas; the 2020 target to raise the share of gas in primary energy demand to 10pc, enshrined in the government’s 13th five-year plan and China’s climate pledges under the Paris Agreement; and the government’s response to the gas supply crisis during the winter of 2017-18. 

Those winter gas shortages meant that China’s big three have come under huge pressure to boost domestic gas production, which rose to 176 bn m3 in 2019, up 9.5pc on the previous year. But it is a growth rate which may not be sustainable, suggests Mao. 

The government has also promoted the construction of numerous import terminals, many of which are due to start up this year. Mao expects receiving capacity to reach 84mn t/yr in 2020, rising to an astonishing 136mn t/yr by 2025, by which time import volumes are expected to reach 109mn t/yr, as China overtakes Japan to become the world’s largest LNG importer in 2023.

His forecast for gas consumption in 2025 is 490bn m3, an annual growth rate of around 8.5pc. Underlying this bullish view are four recent events that will help to drive growth: 

  • The release of a new market pricing policy by the National Development and Reform Commission (NDRC) in November 
  • The start-up of the China-Russia East Pipeline (CREP) and the formation of the China Oil and Gas National Pipeline Corporation (COGNPC), both in December 
  • The announcement in January that upstream exploration and exploitation would be opened up to private and foreign companies 

“Any one of those major events could be taken as the ‘event of the year’,” says Mao. “Four of them together forge a new picture, not only for the arriving year of 2020, but also the blueprint of China’s natural gas market in the next decade.”

 

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