LNG drop to China’s Guangdong won’t trigger power crisis

Singapore (ICIS)–The outlook is weak for LNG demand in Guangdong province, China’s economic and export powerhouse and top gas consumption hub, according to ICIS LNG Edge data and forecasts. analysts.

Moderate air-cooling demand, low manufacturing output and high gas costs for gas-fired power plants limit potential gas consumption growth in Guangdong over the summer.

ICIS cut China’s July-September aggregate LNG demand by 10% to 15.5 million tonnes in the latest forecast, compared to the June assessment.

To date, the province has six LNG receiving terminals in operation with a total nameplate capacity of 16.6 mtpy.

One-off LNG imports fell sharply in the first half of 2022, with 26 fewer cargoes in the region compared to the same period last year, according to data from ICIS LNG Edge.

Demand for long-term supplied cargoes also declined year-over-year, from six to eight cargoes, from January to June 2022.

“This change is in line with our expectations, as most of our terminal user agreement customers are shifting their gas purchase plans from LNG to domestic pipeline gas,” said a major LNG terminal operator.

This reduction is one of the ways in which the global LNG market could balance out in 2022 given such high European demand.

ALTERNATIVE OPTION TO TOWN GAS

China’s main natural gas supplier, CNPC, has welcomed record flows of Russian gas through the Power of Siberia pipeline.

In the first half of 2022, Gazprom increased China’s supply by 63% under the 30-year contract with CNPC, according to the July 1 Gazprom statement.

Separately, domestic gas production, including conventional gas and coal bed methane, is steadily increasing, based on company updates.

Along with increasing long-term LNG supplies from Qatar, CNPC has established a resource pool at competitive prices.

Domestic pipeline gas sold at regulated prices can be piped directly to town gas distributors in the south.

According to several market participants, the additional gas pipeline they have received is sufficient to compensate for the loss of volume due to the non-purchase of spot LNG cargoes, as demand is much lower than in 2021.

While utility gas consumption remains stable, industrial gas consumption is still low and the economy has yet to recover.

NEED A STRONGER ECONOMY

The two main Purchasing Managers’ Indexes (PMI) for China’s manufacturing sector returned to more positive territory in June. The recent removal of Covid restrictions and the whole government stimulus package has led to a gradual resumption of business by manufacturers.

But input costs and output prices continue to diverge, raising profitability issues.

Especially for an export-oriented market like Guangdong, subdued demand is hitting new orders, which means manufacturing output is weak.

Less than 50% of energy-intensive ceramics factories are operating at full capacity, market sources said.

“We used to load about 900 LNG cargo trucks per day last July. But now we can say it’s a good one if we load 400 trucks,” said a truck LNG trader.

“Small businesses are still floundering. They hope to have a turnaround as early as September if industrial demand can pick up, but not too hopeful before then,” he added.

REDUCED GAS NEED FOR ELECTRICITY

Soaring gas prices have caught up with power plant operators, leaving them to either cut operating rates or fire up more coal-fired generators.

According to multiple sources, power plants in Guangdong can break even when the gas price is around $13-15/MMBtu, well below current spot LNG prices.

Although the province has the highest gas-fired power generation capacity, 30.55 GW at the end of 2021, according to the Guangdong Power Exchange Center, it still accounts for less than 20% of capacity. total electricity production in the province, i.e. less than 5% of the Chinese electricity mix.

“The severe electricity crisis that occurred last summer was partly caused by a severe drought in southern China, which meant that more gas-fired power plants were needed for hydro support. from this, a warmer than normal summer hit the region and the electricity demand for air cooling was even higher in 2021,” said Xu Fei, Principal Analyst of ICIS.

But this year the weather has been cooler.

According to the Guangdong Meteorological Service, this year’s rainfall for parts of May and June was at the highest level in the past decade, supporting hydroelectric power generation.

This offers better hydropower prospects for power generation in Guangdong for both baseload and peak power supplies.

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