Market data show that since November last year, Asian LNG spot prices have fallen from more than $10 / mmBTU to the current $4.5 / mmBTU, only half of the same period last year.

For China, where the scale of natural gas consumption continues to grow rapidly, it should be a good time for LNG prices to continue to decline. However, reporters have noticed that the growth rate of LNG imports in China has shown an “abnormal” slowdown since this year.

Statistics show that China’s LNG imports increased by 19.5% in the first half of the year, compared with 49% in the same period last year. The industry expects LNG import growth to fall further below 10% in the third quarter. What are the reasons?

Loose Supply and Demand Causes Global Gas Price to Decline

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“This year’s international LNG spot price is relatively low, mainly because the supply is very sufficient.” Xiong Xin, deputy general manager of Trade Department of Zhonghai Petroleum Gas and Electricity Group, told reporters.

With the rapid increase of natural gas in energy supply, LNG is growing at a rate of more than 10% per year, becoming one of the fastest growing energy products in the world, which has led to the rapid growth of global LNG production capacity.

Statistics show that the new supply of LNG producers worldwide will exceed 30 million tons this year. If the planned capacity projects can be put into operation before the end of the year, the number is expected to reach 40 million tons.

But on the demand side, since this year, due to the weakening momentum of world economic growth and the continuing warming of trade protectionism, as the main incremental market of global LNG trade, the growth of LNG demand has slowed down synchronously in Asia. As the top three LNG importers in the world, Japan, China and South Korea have all experienced different degrees of demand decline.

Global loosening of supply and demand has led to a sustained decline in LNG spot prices. It is reported that, as the largest market to absorb new LNG production in the world this year, the spot price of LNG in Europe has recently dropped to a new low in more than 10 years. LNG spot prices in Asian markets are also at their lowest levels in recent years.

“Considering the concentration of new production capacity in the upstream in the past one or two years, we believe that the supply of international natural gas resources will remain relatively loose until 2020. With a new wave of new production capacity coming into operation after 2023, the situation of oversupply is likely to re-emerge.” Xiong Xin thinks.

Domestic Import Growth Rate Doesn’t Rise but Decline

Loose supply and demand and falling prices are undoubtedly very good for China. “Now is a good time to buy a lot of international LNG resources. Whether it is a long-term contract or spot, including upstream equity participation, the buyer will benefit. Xu Jiangfeng, senior engineer of comprehensive planning at CNOOC Economic and Technological Research Institute, said.

“At present, LNG spot price has certain advantages even compared with pipeline gas. Therefore, for some domestic receiving stations, they are free to purchase spot goods.” Zhuo Chuang Information Natural Gas Analyst Guojian told reporters.

Take Sinopec as an example. Since this year, the group has increased LNG imports. In the first half of the year, LNG imports increased by 73% year-on-year. Among them, the monthly receiving capacity of Tianjin LNG receiving station maintained a high level and reached a record of 10 LNG vessels in the off-season of traditional consumption in May.

“There are two main reasons for the large increase in imports: first, to meet and consolidate the market needs to increase the total volume and ensure supply; second, the increase is mainly in spot, through more imports of spot can spread the cost of long-term cooperation, reduce losses, and increase the revenue of the receiving station.” Liu Jianwen, deputy general manager of Sinopec Great Wall Gas Company, told reporters. He further pointed out that Sinopec’s imported LNG spot resources contributed about 35% of the Group’s LNG import increment in the first half of the year.

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However, according to the overall import data in the first half of last year, the import volume of LNG in China was 28.43 million tons, an increase of 4.69 million tons over the same period last year, an increase of 19.5% over the same period last year, while in the first half of last year, the import volume of LNG in China increased by 7.83 million tons, an increase of 49% over the same period last year. By comparison, the growth rate of LNG imports declined significantly.

“Compared with the same period last year, the main reason for the relatively low growth of domestic LNG imports this year is the decline in demand.” Xiong Xin explained. “We expect the domestic gas consumption growth rate to be around 12% this year. At present, there is no new increment of imported pipeline gas, and it can only be produced by imported LNG and self-produced gas. National Construction further pointed out.

It is worth noting that for major domestic LNG importers such as CNOOC and PetroChina, the first priority is to absorb the high-priced and non-negotiable resources of the CPPCC LNG.

According to the usual practice, domestic enterprises usually arrange long-term import plans for the second year before the fourth quarter, that is, September and October. “In fact, last year’s”three barrels of oil”in the arrangement of this year’s long contract volume, the situation this year is relatively optimistic, coupled with some previous undermentioned volume, long LNG volume overall arrangement is more, so this year there is little room to import more low-cost spot gas.” Industry insiders familiar with the situation told reporters.

Take multiple measures to “digest” import losses

With the diversification of global LNG suppliers, LNG spot “limelight” is becoming more and more prosperous. According to DNV GL’s latest LNG market outlook report, by the middle of the next decade, most of the increase in natural gas supply will flow to the market in the form of LNG.

It is reported that in order to enhance the competitiveness of the natural gas industry, most LNG buyers began to tend to sign short-term, small quantities of high flexibility contracts. According to the latest report of the International Organization of LNG Importers (GIIGNL), China, Korea and Japan absorbed 52% of the world’s natural gas spot in 2018, totaling 41 million tons.

At present, in the portfolio of imported LNG resources in China, long-term contracts account for more than 70%, while short-term and spot imports are less than 30%.

In the context of the imminent establishment of the National Pipeline Network Company, how can the “three barrels of oil” which bear huge inverted losses due to carrying the resources of the CPPCC with low price and sufficient spot supply?

“It is impossible to smooth down long-term losses by relying on low-cost spot resources.” Xu Bo, a natural gas expert at the China Petroleum Economic and Technological Research Institute, bluntly said that the reason was that the stock was too small. “At present, long-term import is still the main force of guarantee supply, but if too much spot resources are imported, it will not only promote the rise of international gas prices, but also reduce the security factor of domestic supply.

In Xiong Xin’s view, the reliability of resources also depends on supply and demand, referring to the situation of crude oil market. “In fact, the safety of China’s crude oil supply has not been affected by the long contract or the short contract. If the maturity of the market is high enough and the liquidity is strong enough, long contract and spot should not be the key factors affecting the guarantee.

Xiong Xin pointed out that in any case, low prices will be a better opportunity for future new contracts and private enterprises. With the continuous expansion of domestic natural gas consumption scale, the balance role of low-cost resources will be revealed. At the same time, with the continuous expansion of international LNG spot trade scale, the future boundaries between long contract and spot will gradually become blurred. Traditional buyers can also optimize the structure of import resources through “resale” to alleviate their long contract losses to a certain extent.

“To solve the upstream import losses, we must take comprehensive consideration and take various measures simultaneously.” Liu Manping, an expert of the China Oil and Gas Think Tank Alliance, further pointed out that, for example, in the reform opinion, it was mentioned that the equity gains of the “three barrels of oil” in the pipeline network company could be compensated, while the terminal price of natural gas still needs to be adjusted appropriately.

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