The Challenges of Navigating China's Gas Market

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• As the global LNG industry grows more competitive, China’s demand for LNG imports is set to be limited by growing domestic gas production and growing pipeline imports. • As foreign suppliers face being crowded out of China’s gas market, some are linking LNG sales to joint ventures with Chinese companies in the country’s downstream. • But the creditworthiness of second-tier Chinese companies is a risk, prompting some long-standing LNG players to strike long-term supply deals elsewhere in Asia. The Issue LNG suppliers face tough competition in China -- a key market for the fuel. Beijing's Five-Year Plan for 2021-25 suggests it will prioritize domestic production to ensure energy security and self-sufficiency, along with strategically important Russian piped gas imports (EIF Apr.7'21). Chinese NOCs will focus on boosting domestic gas output and optimizing existing -- and expensive -- term LNG supplies, which would leave limited appetite for new LNG commitments. The prize for sellers could lie among new second- or third-tier Chinese buyers that have gained access to regasification capacity or plan new terminals amid ongoing reforms. A Crowded LNG Market Selling LNG into China is getting tougher as the global LNG market grows increasingly competitive, with sellers looking to place their uncontracted LNG volumes into growth markets. But future growth in China’s demand for LNG imports looks set to be limited as domestic gas production takes off. China National Petroleum Corp. forecasts China's gas consumption at 430 billion cubic meters per year by 2025 and domestic output at 230 Bcm/yr, which would leave just 40 Bcm/yr of new supplies needed on top of existing import commitments. The bar has been raised further following a dramatic shift in Qatar’s marketing strategy, which saw the giant Mideast LNG exporter prioritizing volume over price by reducing its fees for new term supply deals (EIF Feb.17'21). Qatar Petroleum's (QP) volume-over-price strategy has allowed it to win a few long-term deals, including one with Sinopec. The Chinese state company decided to double the volumes it will take from QP to 2 million tons/yr from the initial 1 million tons/yr it had sought in its 2020 tender. As the world’s lowest-cost exporter pursuing a four-train expansion, QP is understood to have priced its new supply at a 10.19% coefficient of Brent on a delivered basis, a new low that will be tough for IOCs to match. Reforms Bring Opportunities, Uncertainty Beijing’s ongoing reforms to increase competition in the domestic gas market have provided opportunities for new players, but they come with uncertainty too for IOCs. BP and Royal Dutch Shell were among 54 companies that were initially selected by new pipeline operator PipeChina as LNG shippers that would be given access to regasification slots, but both were dropped from the final list in February without any explanation or guidelines. IOCs are nonetheless offering other value propositions beyond price to Chinese buyers. One approach is accessing the Chinese downstream markets directly by forming marketing joint ventures (JVs) with new buyers instead of simply selling them LNG. Last year, Shell signed a framework agreement with GCL Oil & Natural Gas to supply LNG to the Chinese company and form a JV to market and trade it. GCL plans to build a new terminal at Jiangsu, although it is waiting for Beijing’s approval. More recently, Total signed a deal with Shenergy to supply up to 1.4 million tons/yr of LNG, as well as form a 49-51 JV with the local gas distributor, to market and trade LNG in Shanghai and neighboring regions. For Chinese buyers, forming a JV with a supplier would ensure a stronger partnership and stable supply, regardless of whether it is a seller’s or buyer’s LNG market. LNG Deals Signed With Chinese Buyers Since 2020 Supplier Buyer Vol.

Gas Supply, Corporate Strategy
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