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During December 2020 and January 2021, Chinese domestic
wholesale LNG prices shot up to levels unseen since the winter of
2017/18, then owing to an aggressive coal-to-gas switching campaign
that set off a nationwide gas shortage. Just a few months ago, this
would've been hard to imagine given the below $2/MMBtu spot LNG
prices and the domestic wholesale LNG prices falling below the
regulated citygate gas price levels in some regions—something
that had never happened before.
Yet, deregulated domestic LNG prices managed to shoot up
dramatically. In the second week of December 2020, a cold spell
sent temperatures plummeting across China. With limited volumes of
piped gas for emergency supply, citygas companies rushed to the
liquid market. By the second week of January 2021, the average
wholesale LNG prices in northern China, where demand is most
seasonal, reached nearly 7,500 yuan per metric ton, or $22/MMBtu.
Despite the fact that wholesale LNG prices spiked as around the
same time as the surge in North Asian spot prices, the events were
largely unrelated as Chinese importers had already cancelled
purchase tenders at the high spot prices.
While the price spike this winter resembles the 2017/18
shortage, China's gas market has evolved since. In 2017/18, even
the highest priority gas users like homes, schools, and hospitals
had supply curtailed. Supply for these end-users has been much more
stable in the 2020/21 winter season.
The lack of storage is a well-known issue in China's gas market.
However, the rush purchasing by citygas suppliers shines the
spotlight particularly on the need not only to develop new storage
capacity but also to improve withdrawal capacity and emergency
supply capacity. When temperatures suddenly dropped, heating demand
surged almost instantaneously, but gas did not come out of the
pipeline system or large storage facilities fast enough.
In addition, PipeChina's taking over the dispatching
responsibility for the first time also played a role in changing
the market landscape. With the 2020/21 winter being PipeChina's
first peak supply season, gas suppliers and downstream players had
to adapt to changed roles and responsibilities in the new status
quo. As can be expected in a first year, cooperation among players
was not streamlined, resulting in some degree of system-wide
inefficiency contributing to periods of supply scarcity.
What we can glean from the price spike from the 2020/21 winter
is that supply resiliency challenges are not a thing of the past.
Despite efforts to increase domestic gas supply, peak shaving
capabilities—especially emergency storage response—will
still need to be addressed. Midstream unbundling and the creation
of PipeChina marks a step forward for China's gas market reforms,
yet it will also take time for the market to adjust.
