China's Domestic Natural Gas Production Throttles Back

Source:

"A combination of less domestic demand and rising imports means that China is cutting back on its own production of natural gas. But there's more to the relationships that lead to this reduction."

China has had to cut domestic gas production to make space for imports amid a seasonal dip in demand over the second and third quarters of the year.

The country produced 8.5 billion cu m (10 Bcf/d) of gas in April, up 8.6% year on year but down 25% from March, official government data showed. Production last year similarly tapered off after a strong first quarter—output in April 2011 fell 25% from March to 7.8 Bcm.

This seasonal drop in production began only after piped gas imports from Turkmenistan ramped up in the second half of 2010, according to analysts. The decline in 2010 was narrower with April output down just 4% from March at 8 Bcm.

"As the weather warms up, less gas is needed for heating. . .so domestic production has fallen. There are no gas storage facilities and we cannot stop importing gas because of already agreed offtake volumes in contracts," said Xu Bo, senior analyst at state company China National Petroleum Corporation's Research Institute of Economics and Technology.

Tony Regan, gas consultant at Tri-Zen International in Singapore, echoed a similar view.

"At the same time [as demand declines] imports of LNG and piped gas from Turkmenistan are increasing. They can't turn these off, as apart from spot LNG deals, there are take or pay clauses," he said. "So they seem to be balancing on domestic production."

In China, gas demand primarily comes from residential and industrial users in cities, with a small volume going to the transport sector as compressed natural gas, where it displaces relatively more expensive oil.

CNPC started receiving gas from Turkmenistan in late 2009. Under its contract, China is to lift 30 Bcm/year and volumes will go up to 40 Bcm/year from 2015. Meanwhile, contracted LNG to China for existing and future projects expected to start within the current decade is close to 35 million mt/year.

Xu said state-owned companies including PetroChina, Sinopec and CNOOC likely reduced output from China's largest gas producing areas to bring down overall production. These include Changqing in the Ordos Basin, which produced an average 2.5 bcf/d last year; the Tarim Basin in western Xinjiang province, which produced an average 1.6 Bcf/d; and Qinghai in the Qaidam Basin in northwestern China, which produced an average 628,600 Mcf/d.

"Demand should ramp up again in the fourth quarter towards winter," Xu said. Last year domestic production in the second and third quarters averaged 9.4 Bcf/d, while fourth quarter output was 10.5 Bcf/d.

Pricing is also a sticky issue with domestic gas producers. China's gas pricing regime gives domestic operators few additional incentives to produce more gas than is needed, Regan said.

China's natural gas prices are fixed at levels way below cost and as with other fuels, Beijing has been reluctant to push through reforms because of its potential inflationary impact on the economy.

The last gas price increase was in June 2010, when the government hiked wellhead gas prices by 25% to an average of Yuan 1.155/cu m ($4.69/MMBtu).

But as China's gas demand and import dependence grows, state companies are clamoring for pricing reforms.

CNPC's listed subsidiary PetroChina said it lost Yuan 21 billion ($3.3 billion) in 2011 on LNG imports and pipeline imports from Turkmenistan.

CNPC's contracted price for Turkmen gas delivered to the Chinese border is understood to be well above $5/MMBtu. The value of the LNG imports in the first quarter this year averaged $547.71/mt or $10.53/MMBtu, versus $375.93/mt or $7.23/MMBtu during the same period in 2011.

The government in December last year introduced a new pricing mechanism on a trial basis in the provinces of Guangdong and Gaungxi. The mechanism uses a basket of high sulfur fuel oil and LPG prices traded in Shanghai in a 60:40 ratio, calculating natural gas prices in both provinces based on 90% of the market price of the basket. In the past, the price was set using a cost-plus method taking into account pipeline and other tariffs.

PetroChina along with rivals Sinopec and China National Offshore Oil Corporation are now hoping for this new pricing mechanism to be extended to more regions.

China's total gas imports in the first quarter of this year stood at 9.7 Bcm, up 65.5% year on year, according to the National Development and Reform Commission.

Customs data show LNG imports were up 41% year on year to 3.26 million mt (1.74 Bcf/d) and pipeline imports from Turkmenistan nearly doubled to 5.2 Bcm during the period.

Apparent demand for gas grew 19.7% year on year in the first quarter to 39 Bcm, the NDRC said last month.

Imports will likely grow further this year which could mean a further tapering off of domestic production.

CNPC's General Manager Zhou Jiping said in March the company would import 4.2 Bcm or around 3.05 million mt of LNG in 2012, more than double the 1.83 Bcm it imported last year.

Yen Ling Song
Platts

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