China issued the implementation plan of natural gas storage capacity mandate on April 14, 2020, and facing a 5% mandate, China’s city gas companies are at the finest time to establish the emergency and peak-shaving LNG storage system with abundant support from all levels.
First, the support from the marketization reform of China’s natural gas sector. In previous years, city gas companies signed rigid and strict SPAs with piped gas suppliers, and the contract terms were usually harsh on the intake volume. If a city gas company failed to match the contracted intake volume, the supply volume of the upcoming years was about to be reduced. In the wake of those rigid terms, city gas companies took piped gas as the vast majority of the source, and the autonomy and flexibility were minimum. Against this monopolistic conduct, China established the national pipeline company COGPNC to separate the piped gas transmission from the upstream suppliers as an independent and public service, and the coerciveness and exclusiveness of the piped gas contracts were expected to ease out. City gas companies with more initiative now are capable to choose their own peak-shaving measures instead of depending on piped gas suppliers, and the monopoly of this level will be totally broken through by introducing more suppliers. Thus, the storage capacity has become the essential need and motivating goal for city gas companies.
Second, the support from the market fundamentals. In 2020, the global LNG supply increased fast, but the global demand was greatly suppressed by the pandemic and oil meltdown. The overwhelming fundamentals not only brought extremely sufficient LNG supply from overseas, but also suppressed the spot price and oil-linked price to historical lows simultaneously. On the one hand, it is expected China’s LNG import has reached 5.8-6 million tons in May and will keep increasing in the summer season, on the other hand, the spot price of NEA frequently broke through $2/mn Btu, and China’s LNG import cost, combined by spot price and oil-linked price, has broken through $6/mn Btu in May and is expected to touch the bottom at $4-4.5/mn Btu in July and August. With the strong support from the import cost, China’s LNG terminals started a price war in the domestic LNG market and pushed the domestic LNG price to the lowest level in history. In East China and North China, the LNG price has dropped below the pipeline hub price by the end of May, and it is estimated the domestic LNG price will continue weakening and remain at lows for a long term. By using more LNG as supplementary, city gas companies, especially those in eastern China, will magnificently improve the profitability, and in return, city gas companies will contribute more efforts to the LNG market expansion against the piping network.
Third, the support from the policies against the pandemic. China is recovering fast from the coronavirus epidemic, and Beijing issued out a series of stimulation and promotion policies to help the national economy. During the Two Sessions, China government determined to implement 8 trillion RMB level investment into infrastructure construction. Accordingly, as one of the hottest investment zone, China’s LNG sector witnesses more-than-ever FID and ground-breaking news of LNG receiving terminals in the first half of 2020. As for the 5% mandate for city gas companies, the implementation plan also requested local administrations to provide supports and schedule the timeline and route map together with city gas companies. Also, local financial departments are requested to provide necessary supports to the LNG emergency station construction. With all those policies, big city gas companies decide to upgrade storage plans to terminals one after another, and small city gas companies are also motivated to jointly build local LNG hubs.
Fourth, the comprehensive LNG utilization prospect. China’s city gas companies had a narrow business coverage in the past. Limited by the piped gas supply source, city gas companies were only capable to distribute the piped gas, while the piped gas suppliers also competed with them to sign direct-supply contracts with big industrial users and gas power users. Thus, the business of city gas companies only covered residential gas, small industrial users, commercial gas and CNG. With the extra LNG source and LNG storage capacity, city gas companies are capable to expand the business to distributed energy utilization, cold energy utilization, and even the LNG filling station business of the surrounding areas. On the one hand, the diversified business will give more income and revenue to city gas companies under fierce market competition, and on the other hand, the LNG business will help city gas companies to bypass the franchised concession to expand market coverage by P2P LNG distribution.
In general, under the cross-reaction of the 5% mandate, pandemic and oil meltdown, national infra boost and market reform, China’s city gas companies will embrace great opportunities for a more independent market position and stronger competitive power by establishing LNG storage system, and the new capacity will exert strong LNG buying appetite in upcoming several years.
