Forging links: The difficulties facing trucked LNG pricing in China

Banner Image

China's LNG and natural gas markets are unique. Unlike in other North Asian countries, only one-fifth of China's natural gas consumption is for power generation. Its collective industrial consumption (including fertilizers) accounts for 50% of total gas consumption*.

China's natural gas demand by sector
Sector2022* (Bcm)2021 (Bcm)% Growth
Power generation73.36611.1%
Industrial sector159.9145.210.1%
City gas124.4116.46.9%
Fertilizer and chemicals37.937.90.0%
Total395.4365.48.2%
Note: * Calculation volume based on the growth rates provided by CNPC ETRI
Source: CNPC Economics & Technology Research Institute

China's trucked LNG is a much-followed part of this unique market. There are a few reasons for this: LNG that leaves import terminals by truck – totalling around 22 million mt in 2021 – accounts for around 30% of China's LNG import volume, which was the largest in the world in 2021. It is also a very prompt market and not price-regulated. Therefore, it can give an indication of the immediate prevailing fundamentals in the region of China the trade takes place.

In this sense, China's trucked LNG market is similar to the port stocks trade that takes place for other major bulk commodities, such as iron ore or coal. Like these commodities, the trade takes place off the back of imported cargoes, and it happens in many locations around China – each with different local market dynamics – making it hard to have a unifying "trucked LNG price". For instance, in south China, there's less connectivity to pipeline gas from than the north and east China, so it is relatively more reliant on LNG and therefore the demand for trucked LNG comes from power generation, industrial and city gas. In northern China, trucked LNG demand comes mainly from the industrial sector. The regional imbalances can be so big that they can attract, occasionally, trucked LNG from one part of the country to another, as what happened in April 2022, when there were sales of trucked LNG from north to south China.

Cargo benchmarks solve this issue by reflecting a whole seaboard or multiple locations, meaning that the fundamentals of the whole are reflected, rather than the minutiae of the local.

Unlike these other commodities, in some ways trucked LNG trade is taking place due to a lack of infrastructure: pipelines. Nearly always it would be more cost-effective in the long run to regasify and transport the gas by pipeline to demand sources, rather than ship in individual trucks. Indeed, market participants noted that trucked LNG trade has declined in the last couple of years, especially in areas where alternative infrastructure has been installed. As a difficult-to-store fuel, LNG – unlike many other commodities – is also rarely stockpiled in the expectation (or hope) of upward market movements.

Chinese importers slow spot LNG procurement activity in winter

Trucked LNG prices have recently diverged from LNG import prices, causing difficulties for importing companies, which are faced with a higher LNG spot import price than their sales price in trucks. This situation is historically unusual: in 16 of the last 24 months, LNG spot prices (represented by the JKM) were below trucked LNG prices, allowing for profitable import and on-selling.

There are several reasons for the decoupling that took place in winter 2021. Industrial users of gas in China started to consume less because of high prices caused by fierce competition for the marginal spot LNG cargo between the Pacific and Atlantic basins. This reduction in demand caused an imbalance at terminals in China because cargo imports are agreed several months before trucked LNG sales take place, due to the mismatch in lead times.

It therefore took some time for LNG import volumes to react to the sudden sharp reduction in demand from more elastic end-users, leaving an ongoing imbalance in fundamentals.

Moreover, China's LNG importers pulled back from spot purchases as these were more expensive than long-term contract formulas linked to Brent crude oil. This temporarily weakened the pricing link between spot LNG prices and China trucked LNG. Given spot purchases typically accounted for 30%-40% of the country's LNG imports in the past few years, this also meant that China's overall LNG imports started to significantly drop year-on-year in Q1, falling over 15% to around 16.5 million mt.

China's LNG imports

Indeed, such was the lack of demand that importers began to sell cargoes in the spot market from both long-term supply and strip tenders. Unipec, CNOOC, ENN and Guanghui all sold cargoes during the winter period.

China's LNG importers were the biggest participants in signing long-term contracts in 2021, in light of the higher spot prices at the time, but only around 6 million-7 million mt of the 35+ million mt of term contracts signed are commencing in 2022.

Chinese firms rush to sign new long-term LNG contracts
BuyerSellerVolume (mil mt/year)Start dateDuration (years)
Guangdong EnergyQatar1.0202410
Suntien EnergyQatar1.0end-202215
Zhejiang HangjiaxinPavilion Energy0.520235-7
ENNNovatek0.6-11
Beijing GasShell1.5202310
Henan Investment GroupNovatek-2025-
Guangdong EnergyNextDecade1.5202620
ENNEnergy Transfer2.7202620
ENNNextDecade1.5202620
SinopecVenture Global4.0202620
UnipecVenture Global2.520231
UnipecVenture Global1.220223
SinochemCheniere0.9-1.8July 202217.5
Foran EnergyCheniere0.3202320
China GasVitol0.8-5.020235
ENNCheniere0.9July 202213
Guangzhou DevelopmentSinochem0.4202310
Foran EnergySinochem0.2202317
CNOOCVenture Global3.52023-202620
CNOOCQatar Petroleum3.5202215
CNOOCPetronas2.2mid-2020s20
Guangzhou DevelopmentBP0.7202215
ShenergyTotal1.4-20
ShenergyNovatek3.0-15
Guangzhou DevelopmentMexico Pacific2.0202620
Source: S&P Global Commodity Insights

If China's importers maintain the current strategy, at least one of the following will likely happen: LNG imports will be curbed in 2022 – because term demand only covers circa 15 million mt less than the total import demand from 2021, LNG spot prices will come down and allow for elastic Chinese industrial demand to return, or local prices will rise to meet the international market.

Judging from the recent price progression, it looks like south China trucked LNG prices are coming up to meet (and exceed) LNG import prices. This could lead to the situation seen in previous years where spot LNG prices allowed for profitable trucked LNG sales. In fact, the average ex-terminal trucked LNG price in south China has risen to $25/MMBtu, according to domestic market participants.

Ex-terminal trucked LNG vs Platts JKM

However, the price and timing risks are still there for importers, who are generally buying on an index-linked basis for the future delivery of cargoes and selling in the trucked LNG market on a fixed price basis for very short-term delivery.

Chinese spot LNG importers enjoyed an average positive margin of Yuan 1,500-2,000/mt over 2020 from ex-terminal trucked LNG sales, as the JKM fell to a record low of $2/MMBtu in the year as gas demand dwindled significantly due to lockdowns across major cities in North Asia. However, fast forward to winter 2021, and China's importers faced an almost continuously negative margin for on-selling spot-procured LNG, and hence pulled back from the market.

How can importers manage this time and price risk?

Greater linkage between upstream and downstream markets required

They could be resolved by linking downstream markets like trucked LNG to the international spot cargo price, the main feed-in cost, and the market price China contends with to import LNG. Even though a lot of LNG is invoiced to other benchmarks, LNG spot prices remain the opportunity cost for China's importers, and are being used in downstream price negotiations or contracts in countries as diverse as Brazil and Japan.

In fact, the model of using international LNG prices in Chinese gas contracts already exists. China's Sinopec introduced spot LNG pricing in its downstream trucked LNG sales by referencing the JKM in its ex-terminal trucked LNG offers from April to October 2021, after procuring spot LNG cargoes through a strip tender on a JKM-linked basis earlier in 2021. BP China signed multiple regasified LNG supply contracts with buyers like ENN for pipeline gas from the Guangdong Dapeng terminal linked to the JKM. This pricing model allows sellers like BP China to import LNG at international spot prices and on-sell gas to the downstream markets via a back-to-back method, ensuring that a positive margin is locked in.

Furthermore, state-owned PetroChina also announced its plans to pass through its cost of spot LNG to downstream buyers of its spot natural gas volumes. China's Shandong province had also allowed city gas distributors to sell their spot LNG cargoes at market prices to non-residential users in October 2021.

Because LNG is the glue that links together regional gas markets, LNG price benchmarks are also being used in contracts between upstream suppliers and LNG liquefiers. Multiple 15-year term US feedgas agreements have been signed by Cheniere with American gas producers Tourmaline, EOG and Apache, all referencing the JKM.

As China's gas consumption is forecast to reach 430 Bcm-450 Bcm by 2025 from 395 Bcm in 2022, spot LNG imports will continue to play an important role in the country's efforts to decarbonize and transition to cleaner fuels. The ability to pass down import costs to downstream markets like trucked LNG would hold the key to ensure sufficient, stable gas supplies to non-residential users at times of peak residential demand, as LNG importers in China would be incentivized to make additional spot LNG cargo purchases, hence reducing margin pressure for them. This would also allow China's power sector to move toward more market-oriented balancing mechanisms.

*According to CNPC's Economics and Technology Research Institute

Tags

  • LNG

  • Gas & Power

Related content

News

India Elections: Infographic - Eyes on policy push to accelerate gas demand

Results of India’s 18th general elections are scheduled for June 4, with the new government facing a formidable task of providing affordable, stable and clean energy supplies that could be achieved by increasing the role of natural gas in the country's primary energy mix, among other steps. The country has already set a target for natural gas to achieve a 15% share of the energy mix by 2030, a challenging task given that the current share hovers around 6%-7%, according to industry estimates. Accelerated gas market reforms, increased gas-fired generation reflecting power market improvements and speeding up infrastructure are some steps that would aid the country's ambitions of becoming a gas-based economy. Click here for the full-size infographic

News

India's AMNS signs 500,000 mt/year LNG deal with Shell at 11.5% slope to crude oil

Arcelor Mittal Nippon Steel India has signed a deal with Shell for the supply of 500,000 mt/year of LNG starting from 2027 for 10 years, at an 11.5% slope to crude oil, sources told S&P Global Commodity Insights May 23. This marks the first deal priced below 12% slope to crude oil since Europe switched to consuming LNG after reducing pipeline gas consumption from Russia following its invasion of Ukraine. The deal involves certain flexibilities that the seller can exercise, such as one additional cargo per year, sources said. "The contract is signed for 10 years for 500,000 mt/year starting in 2027 and there is no DQT (downward quantity tolerance)," one of the sources said. Sources added that the deal was likely to include some flexibility around deliveries at the Hazira LNG terminal. Official spokespersons for Arcelor Mittal Nippon Steel India and Shell did not respond to queries at the time of writing. Below 12% slope After Russia's invasion of Ukraine, the LNG market was focused on energy security. As global LNG markets adjusted to the change and spot prices eased from the record high seen in 2022, affordability has become an important component of energy security for South Asian and Southeast Asian buyers. A Singapore-based source said the news was big because, with this deal, it seemed that the market has corrected below 12% slope to crude oil. A Europe-based source said the price was understandable if there was some flexibility afforded in the deal for the supplier. LNG buyers have been negotiating hard to lower oil-linked price slopes for long-term contracts as market participants expect additional volumes from the US and Qatar to be made available later this decade. The expectation of additional supply being available from 2025 onward has put pressure on long-term pricing slopes, especially as LNG spot prices have eased from the elevated levels seen in 2022 and early 2023. Platts assessed the West India Marker, the benchmark price for LNG cargoes delivered to west India ports and the Middle East, for July at $11.163/MMBtu on May 21, according to S&P Global Commodity Insights data. According to the forward curve on May 21, the WIM derivative for calendar year 2027 was assessed at $9.675/MMBtu.

News

Potential record-setting hurricane season is forecast and may weaken energy demand, prices

The National Oceanic and Atmospheric Administration on May 23 projected the most tropical cyclones ever in its early hurricane season forecast, and such storms could weaken energy demand and prices in landfall areas during what may be an otherwise warmer-than-normal summer. In particular, NOAA made the following forecast: 17-25 named storms, up from 14.7 for 1991-2023 Eight to 13 hurricanes, up from 7.2 for 1991-2023 Four to seven major hurricanes, up from 3.2 for 1991-2023 At the high end of the forecast, the season could equal 2020's record seven major hurricanes and approach 2020's record 30 named storms and 2005's record 15 hurricanes. "As one of the strongest El Nino ever observed nears its end, NOAA scientists predict a quick transition to La Nina conditions, which are conducive to Atlantic hurricane activity because La Nina tends to lessen wind shear in the tropics," NOAA said. "At the same time, abundant oceanic heat content in the tropical Atlantic Ocean and Caribbean Sea creates more energy to fuel storm development." Energy market impacts Tropical cyclones making landfall 2021 through 2023 cut peakloads at affected grids an average of 18%, power burns an average of 17%, and power prices -- excluding the Electric Reliability Council of Texas South Hub's extreme case in 2023 -- an average of 38%. ERCOT had one of its hottest summers on record in 2023, so day-ahead on-peak locational marginal prices at the South Hub averaged almost $795/MWh on Aug. 15, the Tuesday before Tropical Storm Harold hit South Texas on Tuesday, Aug. 22, when prices averaged less than $60/MWh. The change was drastic, inasmuch as ERCOT load fell just 1.5% on the week, and natural gas power burn actually increased 10.7%. South Texas has a large wind generation fleet, which may have been taken offline during the storm due to transmission constraints or grid reliability concerns. Grant Gunter, energy markets expert at PA Consulting, said hurricanes "can be a mixed bag for supply and demand" for natural gas. The production impact "used to be the typical thinking for hurricanes," as they would diminish offshore production as platforms shut down and evacuate, Gunter said in a May 23 email. "However, as offshore gas production has fallen and moved more onshore, these impacts have become more muted," Gunter said. "A mild hurricane likely won't impact onshore Gulf Coast production all that much." In contrast, hurricanes can have a big impact on power burn and shut-in LNG exports, Gunter said. The National Weather Service on May 16 forecast enhanced chances – 40% to 60% -- for above-normal temperatures for June, July and August across the US South Atlantic and Gulf Coast. CustomWeather on May 22 forecast temperatures to be zero to two degrees above normal across the region in June. "Power outages naturally reduce power burn demand, which is a significant source of demand in Texas and the Southeast," Gunter said. "LNG facilities, which are situated primarily along the Texas and Louisiana Gulf Coast, will usually halt exports during hurricanes due to rough seas and an inability to bring in tankers to load. These shut-ins can last 3-5 days or more depending on the severity of the storm, and a single LNG facility shutting in can result in 2+ Bcf/d of demand going offline. Ian Palao, vice president for strategic energy services at POWWR, an energy management service, advised considering ERCOT's likely heavy heat-driven power demand, despite the hurricane forecast. "Because of the random nature of hurricane landfall, I wouldn't expect an increased level of forecasted tropical activity to nullify the potential heat risk this far out in time," Palao said in a May 23 email. Hurricanes in the past have affected not only the demand side from reduced load due to system outages but also the supply side, due to reduced offshore production. "I would say hurricanes have more of a demand (gas burn for electricity generation) impact than a supply impact as significant swaths of cities can be off the grid for upwards of a week or more (thinking of Hurricanes Harvey and Ida)," Palao said. "Additionally, given that on-shore gas production far outpaces off-shore production, a temporary shutdown of offshore rigs will be but a blip in total supply." Risk management As of May 22, day-weighted average on-peak power forwards for the 2024 hurricane season, June 1 through Nov. 30, were less than day-ahead on-peak prices at relevant hub in ERCOT, but had premiums in comparison with day-ahead on-peak power in the Southeast and at the Midcontinent Independent System Operator's Louisiana Hub. Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, a Houston-based interdealer commodity broker, said "over all forward market seems to mostly be pricing in generalized 'heavy load' season prices that have been driven up" by weather-normalized load growth. "From the risk side, there are some very difficult to predict effects of what a major hurricane would do to any of the Southern control districts," Faulkner said in a May 23 email. "Florida is the best equipped to deal with a major strike. Texas? Well the derecho storms that recently rolled through highlight the extreme risk that a Houston-centered major wind event hurricane could cause." Gary Germeroth, a PA Consulting energy market risk management expert, said the location and strength of such storms affect the risk of lost load the most. "The forward markets, even at a near coastal hub months before the hurricane season begins, do not have any information or data that indicates the timing or severity of hurricane landfall, so the incorporation of a long-term forecast like this is interesting data to the market, but not likely a key component of forward price," Germeroth said in a May 23 email. Another risk to consider is the effect on solar installations, which have grown substantially over the past few years along the Gulf Coast, particularly in Florida and Texas. Tulane Energy Institute Associate Director Eric Smith said Florida's "new solar capabilities will be vulnerable to damage from wind-borne debris." "Texas is also vulnerable to wind damage to both solar and wind assets," Smith said May 23. But Derek HasBrouck, PA Consulting's ReliabilityOne program director in a May 23 email that storm tracks from the more active seasons of 2004 and 2005 show the grid and solar installations are distributed widely over the peninsula, such that "any one hurricane, or even several, are not going to make the sort of direct hits required to cause extensive damage." "And, to the extent those installations have associated storage and/or inverters capable of operating islanded from the grid, any installations that are not damaged are useful resources for consumers and/or the utility," HasBrouck said. Effects on oil, gas, LNG The US Energy Information Administration noted that production of crude oil dipped during Hurricanes Katrina and Rita in 2005, Hurricanes Gustav and Ike in 2008 and Hurricane Ida in 2021. Export terminals for liquefied natural gas (LNG) on the Gulf Coast could be in harm's way as well, the EIA said in a May 22 analysis. The US exports about 13 billion cubic feet of LNG daily, mainly through Gulf Coast facilities. "Although LNG facilities generally have many layers of protection from direct impact, hurricanes can damage electrical and marine infrastructure and hamper ship movement," the EIA analysis said. Hurricane Laura in 2020 temporarily halted LNG exports from Louisiana's Sabine Pass and Cameron LNG facilities. All that said, OTC Global Holdings' Faulkner described forecasts for an abnormally active hurricane season are "borderline useless." "Last year was supposed to be horrible and ended up being rather benign," Faulkner said May 23. "Thus the prognosticating and fear mongering is an exercise designed to drive clicks and induce fear in the wider populace." But Faulkner acknowledged that if a hurricane does approach the Gulf Coast, its effect "could be serious, especially given the importance of LNG exports," causing gas prices to "plummet."

News

Global LNG markets finely balanced amid strong Asian demand: Shell Australia

Global LNG markets will likely be finely balanced as a potential slowdown in the rate of delivery of some projects out of the US and growing demand in Asia tempers the impact of new international supply coming online towards the end of the decade, Shell Australia Country Chair Cecile Wake said May 22. The combination of meeting energy needs while grappling with declining domestic production as well as advancing decarbonization goals is propelling countries such as the Philippines, Thailand, Vietnam, and Bangladesh towards LNG, Wake told S&P Global Commodity Insights on the sidelines of the Australian Energy Producers conference in Perth. "I think we describe it as latent demand in South and Southeast Asia," she said, noting that within the region some markets were less price elastic than the others. LNG buyers, particularly from price-sensitive markets such as India and Bangladesh, stayed away through most of 2022 amid high prices and volatile markets following the Russia-Ukraine war. The Platts JKM -- the benchmark price for LNG cargoes delivered to Northeast Asia-- averaged about $33.9789/MMBtu for calendar-year 2022, compared with $18.59543/MMBtu in 2021, according to data from Commodity Insights. The Platts assessed JKM for July was assessed at $11.485/MMBtu on May 21, down 0.1% on the day, the data showed. Despite this price elasticity of demand, most buyers were likely to have a mix of spot and long term to create physical hedges and manage potential supply risks, she said. Shell, for its part, was competitively positioned to serve Asian markets and its trading model allows the company to supply a combination of term cargoes to buyers while also maintaining a flexible portfolio to cater to the needs of evolving markets, Wake said. In 2023, Shell delivered the first commissioning cargo to Vietnam's first LNG import terminal while also supplying the first LNG cargo delivery at Philippines' Batangas LNG terminal. Confidence in Prelude FLNG In Australia, Shell operated projects include Prelude, Crux, and QGC and non-operated ones comprise Browse, Gorgon, North West Shelf, and Arrow. The operations in Australia are poised to maintain their supply position, ensuring high utilization and high reliability of the company's assets, Wake said. "At Prelude, the story of the last 18 months has been one of increasing reliability, increasing utilization and a real maturation of that asset," she said. This comes as Prelude Floating LNG facility faced several outages since it started production in June 2019, with one such shutdown resulting from a fire that broke out at the facility in December 2021 and caused a full power loss. Wake anticipated that volumes at Prelude this year will likely be higher than last year as the facility does not have a statutory turnaround. "So, when we look at it through the utilization of the facility and the reliability of the facility, it has come out of that statutory shutdown with both higher reliability and a much tighter band of where we think the performance range is," Wake shared. Steering through regulations The Western Australian Domestic Gas Policy seeks to make gas equivalent to 15% of exports available for Western Australian consumers. "We felt that we were well engaged and had the opportunity to put our views forward in the context of WA Dom gas. We are firm in our view that in both WA and the East Coast, a functioning domestic market is key and that we've got a positive role in that," Wake said. "And we would also say that we believe that giving producers the opportunity to access export markets as well as domestic markets will result in more gas coming out of the ground and therefore more gas available for domestic markets," Wake added. When it came to the consultation on offshore EP, Shell had an opportunity to put across its views as part of a consultation, she said. "However, it is very disappointing that that a really important and vital reform of that legislation had been delayed," Wake added. The legislation to implement outcomes of the review that included a focus on clarifying the consultation requirements for offshore approvals did not pass the Senate last week, as worker safety provisions and ensuring certainty of the Petroleum Resource Rent Tax reforms had been prioritized, Minister for Resources and Minister for Northern Australia Madeleine King said May 21 at the same event. An adequate and appropriate offshore regulatory regime would not only benefit gas producers but will also be in the interests of the community, Wake said. "Stakeholders needed that reform to come through. So, we would certainly be looking for that to come forward again as soon as possible," she added.