Skip to main content

Low domestic prices to undermine China’s LNG imports

Hydrocarbon Engineering,

According to Business Monitor International  (BMI), Chinese state owned Sinopec is looking to offload shared in its long term LNG sales and purchase agreements (SPAs). The SPAs under negotiation are said to include a 5.85 billion m3 contract with Origin Energy’s Australia Pacific terminal and a 2.72 billion m3 contract with ExxonMobil’s Papua New Guinea LNG. Both contracts come into effect in 2015, for a period of 20 years.

The decision reflects both a weaker demand outlook and the poor price dynamics of imported LNG in China. BMI forecast gas consumption growth remains strong, averaging 8.4%/y for the next 10 years; nevertheless, growth has begun to slow. As a point of comparison, annual gas consumption growth for the previous years averaged 18%.

The need for imported LNG has been further eroded by the major supply deals signed with Turkmenistan and Russia in recent years, adding more than 100 billion m3 in pipeline import capacity. The preference for pipeline gas is in large part due to its lower price. The price of piped gas is estimated in a range of US$3 – 12/million Btu; LNG imports are significantly more expensive, in a range of US$4 – 20/million Btu. Legacy contracts with countries such as Indonesia and Australia account for the lower end of this spectrum. Contracts yet to come into force, and signed in recent years in a context of tight supply, rising demand and elevated Asian LNG prices, will be significantly less generous. The SPAs with both Origin and Exxon fall within this bracket.

According to BMI, the recent sharp drop in oil prices, to which LNG contracts are linked, should provide some relief. LNG contract pricing lags spot pricing by approximately six months, so lower prices will feed through by Q2 2015. However, in terms of the Chinese gas market, the lower prices will offer little competitive advantage to LNG importers. The bulk of China’s pipeline imports are also indexed to oil, and so the differentials will remain broadly unchanged.

The relative pricing dynamics of piped gas and LNG may gain an importance in 2015, with import profit margins set to fall. China’s new gas pricing mechanism takes effect from January, linking the domestic gas price cap to a basket of imported fuel oil and LPG. In indexing it to oil, the mechanism was intended to raise the price of gas, to better support the economics of increased domestic production and rising import volumes. However, given the sharp fall in oil prices, it is widely believed that the new mechanism will trigger a fall in the domestic price of gas in 2015. The country’s National Development and Reform Commission (NDRC) could decide to delay its implementation, although there is nothing to indicate this as of yet.

The impact on the profitability of imported LNG will depend on the fall in fuel oil and LPG prices, relative to the fall in crude. Historically, the prices of fuel oil and LPG have broadly tracked the price of crude; however, fuel oil, which accounts for 60% of the reference basket stood US$69.8/bbl, marginally below the price of Brent crude, which averaged US$70.1/bbl. Unless the basket price strengthens significantly, LNG imports will likely offer limited profitability in coming quarters.

Given the rise in LNG supplies globally, and weakening demand from the other major LNG consumers – Japan, South Korea and Taiwan – Sinopec may struggle to offload shares in its long term SPAs. A sustained lower oil price environment and loosening supply and demand dynamics point to a longer term decline in global LNG prices. In this context, buyers may be reluctant to tie in to 20 year supply contracts and Sinopec may be forced to discount its prices.

As excess, and potentially discounted, volumes from China hit the markets, BMI expects further downward price pressure on global LNG prices in 2015, compounding the impact of a near 40% drop in oil prices.

Adapted from a report by Emma McAleavey.

Read the article online at:


Embed article link: (copy the HTML code below):