China, still the most interesting gas market worldwide?

Policy and market trends in non-EU gas markets and China

Even if with a decade of delay, a country is finally experiencing its golden age of gas (as per the famous IEA report): China, indeed, has recently become the most interesting market for gas globally.

Actual facts, figures and forecasts can well portray this scenario: an incomparable growth in consumption (from 190 BCM in 2015 to 310 in 2019 with a 600BCM target in 2035), a rapid rise in the ranking of LNG global importers (second behind Japan with top spot on sight), the beginning of pipeline import as a sign of new ties with Russia, the constant addition of new infrastructures (for example re-gasification plants that represent the way for regional players to become independent for commodity supply)[1].

This scenario is the direct result of policies which have been adopted to improve citizens’ quality of life and reduce air pollution and which resulted in a shift from coal to gas, a move that had little impact on the stake of coal in the energy mix but allowed to double the relative importance of gas.

To keep the pace of demand, market structure must further evolve and  its comprehensive reshaping will be driven by new principles: energy policies will enforce new regulation, particularly on midstream business, with  the creation of an independent company to manage all infrastructures. This move has at the same time the aim to foster, on one side, competition on E&P business (by avoiding captive use of pipelines and allowing a more resolute development of new capacity) in order to increase domestic production and reduce reliance on imports – and, on the other side, to reduce energy prices for final customers by trying to giving to more players access to downstream markets. Something is already happening: a comprehensive “energy law” has already been presented for comments to all stakeholders and in March this year NDRC (the Authority in charge of economic reforms) has introduced the possibility to move from regulated citygate gas pricing to market pricing for Provinces where there’s enough competition on the supply side (typically coastal region with multiple LNG plants).

So, what could we realistically expect? Upstream is the current Achilles’ heel of the overall framework.

In 2018 domestic production (equal to slightly more than 150 BCM, anyway 3 times the same value in 2005) accounted only for 55% of consumption (down from 70% in 2012-2013) and a stronger dependency from imports is expected in the coming years. After years of limited openness towards the involvement of foreign companies (that today have limited business in the country) the struggle to boost internal production is so strong that a new law has been implemented in 2019 giving foreign IOCs the possibility to work in E&P in China without local partners[2]. It’s not clear if this will be enough to restart foreign investments (with potentially the sole exception of shale gas); so far, markets registered the strong increase of efforts by the 3 giants (CNOOC, CNPC, Sinopec) with good results[3].

On top of this, something else happened in 2019 after many years of waiting.

Indeed, last December saw the incorporation of China Oil&Gas Piping Corporation, a company that will be responsible for the development and management of transportation of gas, crude oil, refined products plus re-gasification and underground gas storage[4]. This company will consolidate large part of the assets, held by the three giants, and will then be responsible to fill the gap in terms of gas infrastructures, the real bottleneck for the full development of the market. This step should allow to eventually enforce third party access and, as a consequence, bring more competition in the market. The importance for the Chinese government of the evolution of midstream business has been recently highlighted also by a new opinion for a more favourable legislative framework to add storage capacity.

The downstream business has seen the rise of new powerful players:

Companies like Beijing Gas, ENN, China Resources Gas, who are managing retail business in big cities (like Beijing, Shanghai, Shenzhen) are posing new challenges to the 3 giants. They want to have independent supplies (so they build their own LNG terminals) escaping the current constraints on regulated wholesale gas pipeline price and they also want to enjoy TPA on transportation and re-gasification capacity. Retail market is then both consolidating (with big utilities and the three giants acquiring smaller players) and experiencing more competition (even if in most of the cities there’s only one provider)[5].

How will this picture be affected by the recent COVID epidemic?

Forecasts are still difficult but some trends can be identified. The sharp decrease of LNG prices on one side will reduce the pressure on the efforts to increase domestic production; on the other side, it could support gas utilization in the segments where price competitiveness is a key driver even if other commodities (oil for example) have experienced even sharper decreases in prices. More innovative examples of energy transition (e.g. biomethane, hydrogen) risk to be abandoned if not properly subsidized as this new scenario makes their economic feasibility less appealing. Overall the picture shouldn’t change dramatically as long term perspectives remains strong for gas and the key driver for Chinese policy makers.

[1] https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/11/Chinas-Natural-Gas-Development-Report.pdf

[2] https://ihsmarkit.com/research-analysis/china-upstream-revitalized–the-implications-of-chinas-new-ene.html

[3] https://www.reuters.com/article/us-china-usa-oil-breakingviews/breakingviews-chinas-oil-and-gas-titans-heed-the-call-to-spend-idUSKCN1VK083

[4] https://www.ft.com/content/48b0961b-8704-4ba0-9c82-8d5723629e55

[5] https://www.bcg.com/publications/2020/china-move-toward-gas-market-reform.aspx

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This is the first installment of our Topic of the Month: Covid-19 and decarbonisation. Find the other installments here:

Intro to the Topic of the Month: Covid-19: an accelerator or a stopper of decarbonisation?