China's NOCs to lower annual downstream gas prices to compete with spot LNG

China's national oil and gas companies -- PetroChina, Sinopec and CNOOC -- are expected to lower prices for their 2024-2025 pipeline gas sales contracts on the back of ample supply from both domestic production and imports, market participants said, in order to compete with falling spot LNG prices.

The prices are being cut amid an ongoing expansion in Chinese downstream gas markets which is allowing an increasing number of end-users to choose from multiple supply sources that were previously inaccessible, resulting in more gas-on-gas price competition and discovery.

Should the NOCs be able to negotiate for lower prices and lock-in as much demand as possible from China's second tier gas companies through pipeline gas deals, it could curb the surge in spot market activity observed in January-February, according to several China-based gas traders.

This means that the gas-on-gas competition in China is becoming increasingly two-directional. Not only are low spot LNG prices putting pressure on NOCs to reduce pipeline gas prices, but lower pipeline gas prices are also pushing second-tier gas importers to curb spot procurement.

The big three NOCs typically sign annual sales contracts with downstream customers that comprise largely second-tier gas distributors, industrial users and gas-fired power generators, for supplying pipeline gas in the April-March period. The pricing and volume of these contracts are significant because they impact gas procurement for the rest of the year.

These contracts are typically finalized at the end of March, but CNOOC and Sinopec have begun discussing price levels with customers, likely due to falling spot prices, trade sources said. Pricing formulas vary for different provinces as gas infrastructure and accessibility varies, impacting prices.

However, downstream pipeline contract prices for 2024-25 could range between Yuan 2.8-3.1/cu m, around 12.5% lower than Yuan 3.2-3.6/cu m in the 2023-24 period, market sources said.

Price cuts

CNOOC's pricing plan offered to non-residential users in Guangdong province for the non-heating season, mainly based on Platts JKM, is estimated at around Yuan 3/cu m, plus or minus 5%, lower than the average of Yuan 3.43/cu m last year, trade sources said. JKM is the benchmark for Asian spot LNG cargoes assessed by Platts, part of S&P Global Commodity Insights.

Specifically, the annual contract price is expected at Yuan 2.85/cu m should JKM average $8.05/MMBtu in 2024-25, Yuan 3/cu m if JKM averages $8.05-$10.05/MMBtu, and Yuan 3.15/cu m should JKM average more than $10.05/MMBtu, market sources said.

Sinopec offered three pricing options to non-residential buyers in Guangdong for pipeline gas in the non-heating season -- a floating price linked to Brent or JKM (exact formula not available), a fixed price of Yuan 3.03/cu m or a combination of the two in a ratio of 1:1, market sources said. These sources expected Sinopec's prices to be lower than last year's average of Yuan 3.41/cu m.

PetroChina, the country's biggest pipeline gas supplier, has yet to disclose its new pricing policy, but it is also expected to be lower than last year, multiple market sources said.

"The supply of natural gas, including both pipeline gas and LNG, is expected to be sufficient and prices are expected to be lower this year, which prompted the big three to lower their contract prices," a trade source in Guangzhou said.

Competing with spot LNG

In addition to price cuts, Chinese NOCs also maintained domestic market share by adjusting the volume of pipeline gas contracts offered to second-tier gas companies. A China-based market source said NOCs are expected to increase the volume of gas offered for the 2024-25 period, in excess of the basic and incremental volume that was offered last year.

The NOCs are reducing pipeline gas prices and boosting supplies to maintain downstream market share as JKM prices plunged to 34-month lows of less than $8/MMBtu in recent weeks and higher-than-expected LNG inventories in Northeast Asia, a market source said.

The spot price decline saw second-tier Chinese buyers pick up over 40 spot cargoes since January.

Platts assessed JKM at $8.792/MMBtu March 14, S&P Global Commodity Insights data showed, which is equivalent to around Yuan 2.86-2.90/cu m after taxes and fees.

Several Chinese buyers see annual pipeline gas prices fall below Yuan 2.70/cu m, which is an attractive level that aligns with imported LNG at $8-$9/MMBtu after subtracting operational and transportation costs.

Sinopec was reportedly offering longer term pipeline gas sales contracts of at least three years to downstream buyers this year, following CNOOC's recent move to introduce five-year contracts two years ago, in an attempt to lock-in high prices, according to trade sources.

The details of the three-year contracts were not immediately available but locking in such contracts would mean the NOCs expected gas prices to continue dropping in coming years.

"CNOOC's five-year contract is mainly linked to oil and gas prices, with Brent, JCC and HH pricing at a ratio of 1:1:1, which are pricing slopes generally higher than the market level," a second end-user in Guangdong said.

He said many gas-fired power generators in Guangdong likely signed CNOOC's five-year contracts as most end-users still need to rely on the big three NOCs to provide a steady supply of pipeline gas.