Jonathan Fenby

Chairman, China team and Managing Director, European Political Research
+44 20 7246 7880

Featured China research

China Global: Trump and Xi see off the storm – for the moment China Global: Trump and Xi see off the storm – for the moment, Jonathan Fenby, 10 Feb 2017

Recent China research

* China Watch: Strong global growth a tailwind for China's deleveraging, Michelle Lam, Trey McArver, Larry Brainard, 14 Dec 2017
* China Watch: Outlook for 2018, Larry Brainard, Trey McArver, Michelle Lam, 7 Dec 2017
* China Perspective: North Korea scores, US stuck, Jonathan Fenby, 1 Dec 2017

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Recent blog posts

Gas-to-gas competition emerging in China Gas-to-gas competition emerging in China, Stephen O'Sullivan, 17 Aug 2017
Chinese gas import dependency continues to increase Chinese gas import dependency continues to increase, Stephen O'Sullivan, 25 Jul 2017
China gas reform has not gone far enough China gas reform has not gone far enough, Stephen O'Sullivan, 18 Jul 2017
China’s gas reform – not as far or as fast as we had hoped China’s gas reform – not as far or as fast as we had hoped, Stephen O'Sullivan, 5 Jul 2017

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Gas-to-gas competition emerging in China

One of the Chinese government’s key energy objectives is to increase the use of gas at the expense of coal to improve the environment. Industry reform should play a large role in this process. However that process is moving more slowly than we had anticipated and therefore having less of an impact.

Still, independently of the government’s top-down reform, market forces are having an effect. Gas pricing is having an impact on gas demand. Gas-to-gas competition is emerging in several provinces with LNG delivered by truck competing head-to-head with pipeline gas delivered by China’s energy majors.

Gas demand in the country has risen by 12 per cent in the first four months of the year against 1.8 per cent in 2016. LNG in particular has shown strong growth and one reason behind this is the way that industrial customers have been switching from piped gas to cheaper LNG.

The case of Shandong

In Shandong, LNG demand in the first four months of 2017 increased by 18 per cent. Households represent just 5 per cent of the province’s demand while industry accounts for 58 per cent and transport for 37 per cent. Large users have started to use trucks to deliver LNG to factories which want the reliability of pipeline supply but cannot afford the higher prices this entails.

Local authorities are following central government orders to reduce pollution and are pressing industrial users to switch from coal to gas. However the industrial users prefer coal because it is cheaper and, if forced to switch to gas, they clearly prefer supplies of LNG delivered by truck to their factories.

Industrial citygate prices are higher than usual following the NOCs’ decision to impose a 10-15 per cent price increase before the winter in 2016. Despite the summer, “winter” tariffs are still in force, it seems. Some city gas distributors in the province have taken it on themselves to lower tariffs to encourage increased gas demand. However, most have not and the result is that trucked LNG is now taking market share from those gas distributors’ piped gas business.

Even in the four cities which have seen price cuts by distributors, pipeline gas at RMB 3.22/cm is around one third more expensive than LNG delivered by truck which costs on average RMB 2.45/cm. A large number of factories in the province are sensitive to energy costs and have taken the opportunity to switch to trucked LNG as a result. Sinopec even seems to be competing with itself since its terminal in Qingdao supplies 60 per cent of Shandong’s industrial LNG at around RMB 2.48/cm against its own pipeline gas delivered by the gas distributors which costs RMB 3.35/cm. Truck volumes from the terminal are up by almost half in the January-April period compared to the same period in 2016.

The gas distributors themselves are under pressure with the government aiming to reduce the cost of gas by capping midstream margins and encouraging more competition. The first concrete result of this process emerged last month with a somewhat disappointing (for advocates of reform) rate of return on distribution pipelines of 7 per cent being announced, higher than the 6 per cent that had been trailed until recently.

In our view, market forces are starting to do the job that the government set out to do – reduce costs to the consumer and spur an increase in demand for gas to help improve the environment. By forcing companies to burn less coal and more gas, government policy is clearly positive, but the market is sending a clearer message when it comes to pure economics of energy supply to end-users in China.

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