Chinese energy companies to consolidate gas/LNG trading, supply chains in 2024

China's energy companies are expected to consolidate their domestic and global natural gas and LNG supply chains further in 2024, including activities around spot trading, long-term procurement, shipping and downstream market expansion, market participants said.

These companies include the three state-owned oil and gas majors, also known as the three barrels, China National Petroleum Corp (CNPC), China Petroleum & Chemical Corp. or Sinopec, and CNOOC, several second-tier gas companies, and state infrastructure company PipeChina.

Besides the usual suspects, a wave of new market entrants will be expanding their footprint in the gas business including shipyards, privately held conglomerates diversifying investments into the gas space, financial institutions lending to the gas sector, state companies investing in overseas projects, and commodity exchanges.

These activities underscore the growth of China's gas market as one of the world's largest by volume and will be underpinned by three major factors in 2024 – a cyclically lower global LNG price environment as markets recover from the Russia-Ukraine crisis, domestic market expansion on the back of new terminals, pipeline and storage infrastructure, and the role of gas in energy transition.

The expansion of China's gas market will have global repercussions – the national oil companies will be looking to leverage low-cost pipeline gas options from Russia and Central Asia, state firms will seek projects under the Belt and Road Initiative, yards will scale up ship orders to record levels and importers will build out gas trading capabilities in hubs like Singapore and London.

"In the current landscape, there's a notable inclination toward exploring spot trading, where spot traders are urged to provide greater optionality and flexibility during negotiations. We will also start to develop spot trading," an executive with a provincial gas company said.

"The situation is common in China -- the slightly larger local gas companies, large- and medium-sized power plants, will be considering how to adapt to the future trend of higher marketization and trading in the spot market," the executive added.

Domestic market

China's domestic market in particular is set to become highly competitive. The NOCs, such as CNPC's subsidiary PetroChina, are expected to further expand downstream businesses to take advantage of rising gas production and pipeline gas imports in 2024.

PetroChina is the largest natural gas producer and importer in China and supplies over 60% of the country's gas, making it the country's biggest gas supplier as well.

Apart from the West-East Gas Pipeline, it has also been able to leverage third-party access of PipeChina's gas infrastructure to enter the southern China market and is now the biggest shipper at terminals like the Shenzhen Diefu LNG terminal.

As more second-tier companies, mainly large city gas distributors and utilities, start new LNG terminals, they are expected to drive LNG imports. Four second-tiers -- Suntien Green Energy, Guangzhou Gas, Zhejiang Energy and Beijing Gas -- started operations of their own LNG receiving terminals in 2023, adding 14 million mt/year of LNG receiving capacity.

In 2024, Guangdong Energy and Huaying are expected to put around 7 million mt/year of LNG receiving capacity into operation.

Price sensitivity

In 2024, overall demand in China is expected to remain price-sensitive, particularly among end-users like power generators and industrial users.

Gas importers will be highly attentive to profit margins and gas prices below $10/MMBtu during both summer and winter, ideally between $8-$9/MMBtu, are profitable for both importers and downstream entities, incentivizing year-on-year growth in LNG imports of 10% or more, Singapore-based traders said.

However, if the price hovers around $10-$12/MMBtu, end-users may barely break even, leading to slower growth in LNG imports of 5%-7% year on year, traders said, adding that a more conservative growth estimate was around 3%-5%, driven by increased demand from industrial users and expanding terminal storage capacity.

Market participants also said that the effectiveness of economic stimulants in China could be blunted by higher interest rates in the US in 2024 due to China's heavy reliance on external demand growth, but quantitative easing policies in China could worsen the exchange rate and be detrimental to energy imports.

Prices are also the deciding factors in whether China signs new pipeline gas deals with Russia, including Russia's proposal to supply gas via the Central Asia-China Gas Pipeline.

Russian gas exports to China via the Power of Siberia pipeline totaled 22.7 Bcm in 2023 and daily deliveries have been raised to a new level for 2024, operator Gazprom said Jan. 3. The Power of Siberia pipeline is expected to reach its design capacity of 38 Bcm/year in 2025.

2024 outlook

Chinese natural gas demand is forecast to increase by 6.6% on the year to 415 Bcm in 2024, up from the anticipated 389 Bcm in 2023, on the back of GDP growth estimates of around 4.7% in 2024, slowing down from around 5.2% in 2023, according to S&P Global Commodity Insights.

S&P Global expects China's LNG imports to rise by 7% on the year to 105 Bcm in 2024, and LNG receiving capacity to rise 19.4% to around 157.15 million mt/year in 2024.

Excluding Russia's sanctioned Arctic-2 project, China's LNG imports under term contracts are expected to reach about 74.6 million mt in 2024, up by 4.7 million mt from 2023, S&P Global data showed.

China's pipeline gas imports are forecast to rise 12.7% to 74.78 Bcm in 2024, mainly from Russia, which is expected to send more than 30 Bcm of natural gas to China via pipeline in 2024, up by around 32% year on year, according to S&P Global data.