Gas shortages in China's Hebei province signal procurement, pricing challenges

Gas shortages in rural areas of China's northern Hebei province this winter pointed to the need for more progress in the country's gas market reforms, but also signaled how companies were coping with high international LNG prices which suggests more reliance on long-term contracts in the future.

These rural areas in Hebei experienced severe natural gas shortages this winter, prompting angry responses from residents and forcing the local government to intervene to manage the supply, according to state media, provincial news agencies and other local publications.

Hebei's gas shortages were reported shortly after the start of the 2022 heating season, typically from mid-November to mid-March, and continued until at least early January, according to multiple reports published in recent weeks.

Households in several villages and counties complained of restrictions on purchasing natural gas or interruptions to gas supply, which is the key fuel source for winter heating and cooking; with complaints spilling onto Chinese social media platforms.

Residents complained about gas supply interruptions that affected the elderly and toddlers mostly on cold nights, while others said they had to burn their furniture to keep warm or go to the forest to collect firewood.

These online complaints forced the local government to intervene, according to reports by state media like China Daily, Shanghai government-backed Jiemian.com, privately owned Financial Eleven and Hong Kong's South China Morning Post.

The shortages were experienced across many parts of the province and local authorities blamed companies like China Gas Holding Co Ltd, one of the country's largest energy suppliers, for not signing sufficient contracts with upstream suppliers. China Gas Holding was asked to take immediate measures to coordinate adequate gas supply to meet household needs, the reports stated.

Local authorities like Wangdu county in Baoding city also blamed infrastructural issues, saying that the sudden drop in temperature impacted some sections of the gas pipeline and workers had been deployed to conduct repairs, state media reported.

China Gas Holding did not respond to queries but state media reports, citing company officials, said there was insufficient supply from upstream companies and a mismatch between contracted volumes and actual downstream residential demand. Other city gas companies including state-owned and private companies were also facing losses on the sale of residential gas, and most have been diverting supply from non-residential users to residential users, traders said.

Past shortages

This is not the first time gas shortages have been reported in Hebei province, an industrialized region adjacent to the capital Beijing and one of the world's largest steel producing regions. In the winter of 2017, severe gas shortages were caused by a surge in coal-to-gas switching and insufficient build out of natural gas supply and infrastructure to meet incremental demand.

This time city gas suppliers like China Gas did not import sufficient gas as downstream prices were capped in what was still a largely regulated energy market. Importers were unable to pass high fuel costs to customers, forcing them to incur heavy losses especially if they had been relying on spot LNG, and this was likely to drive companies to sign more term contracts.

It also meant that the coal-to-gas switch had not been smoothly implemented and continues to face issues, especially in the rural areas.

China Gas is a privately held Hong Kong-listed company, which operates pipeline gas projects in around 30 provinces and supplies gas to more than 43 million residents and 350,000 industrial and commercial users, according to the company's website.

The company sold 36.7 billion cubic meters of natural gas in 2021, making it the third biggest city gas supplier in China after Kunlun Energy and ENN Energy, according to company data.

In 2022, China Gas signed at least two long-term LNG sales and purchase agreements with US producers. It signed a 25-year contract with Energy Transfer for supply from Lake Charles LNG for 0.7 million mt/year starting 2026, and a 20-year contract with NextDecade for the Rio Grande LNG project for 1 million mt/year starting 2027.

Many of China's newly signed 2022 LNG contracts will start delivery after 2025, which leaves these companies exposed to near-term disruptions, and raises the likelihood of significant spot demand under $15/MMBtu.

China has a complicated downstream gas pricing mechanism under which the price of natural gas sold to residential users is not allowed to exceed the provincial city-gate gas prices.

The retail gas price for residents in Hebei was around Yuan 2.683/cu m, according to local media. This is equivalent to around Yuan 3,696-4,137/mt, while trucked LNG prices on the spot market averaged Yuan 7,179/mt in December, Shanghai Petroleum and Natural Gas Exchange data showed.

Platts JKM, the benchmark for spot LNG in Northeast Asia, averaged $33.80/MMBtu in December, or the equivalent of over Yuan 10,000/mt, S&P Global Commodity Insights data showed. Platts JKM for March delivery was assessed at $15.663/MMBtu Feb. 9.