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The global oil market is finding itself in a truly extraordinary
situation whereby global demand is dropping while supply floods the
market. Even with the recent agreement to reduce oil production,
the impact of coronavirus disease 2019 (COVID-19) on oil demand is
expected to far surpass this production cut. In the current IHS
Markit outlook, the Brent oil price will average below $40/bbl this
year. This new oil price environment will shuffle the order of the
cost curve in the Chinese gas market in 2020.
Figure 1: The low oil price environment: Shifting China's 2020
gas cost curve
Domestic production costs are expected to remain largely
unaffected, but landed price for imports will fall by varying
magnitude depending on contracts. Pipeline imports typically have a
long lag time and single-digit percentage slopes to oil price and a
high fixed-price portion for pipeline imports is generally high to
account for the cost of pipeline transmission in exporting
countries. On the other hand, the slopes to oil price in LNG
contracts vary widely from as low as single-digit percentages to
over 16%, but mostly fall in the 11-14% range, with 3-6 months
typical lag time to oil price. On the delivered price basis,
pipeline imports need to travel thousands of kilometers within the
Chinese borders to deliver gas to coastal demand centers. LNG
imports, on the other hand, have the advantage of arriving at the
coast.
As a result, the oil price decline will shift China's gas supply
cost curve. At the current oil price outlook for 2020, the average
landed price of Chinese term LNG imports will fall by over $3/MMBtu
compared with 2019. Spot prices will also be under the pressure of
COVID-19-induced low gas demand growth and low-term LNG prices. On
the other hand, the average landed price of Chinese pipeline
imports will only decline by a little over $1/MMBtu. Bringing all
national supply to the Shanghai citygate for comparison, on
average, LNG imports—both term contracts and spot—are on
the low end of the cost curve in 2020 in Shanghai.
Many other factors will contribute to setting the supply mix.
Geographically, China is a large market and needs all supply
sources to meet its regional demand requirements. In addition,
domestic production in China receives strong policy support to
ensure supply security, local economic growth, and tax revenue,
with many targets—shale and coalbed methane production targets
in particular—set for the end of 2020 under the 13th Five-Year
Plan. Delivered volumes from pipeline imports may also depend on
non-market factors such as Chinese companies' vested interest in
upstream and midstream projects and loan repayment schedules being
tied to delivered volumes. On the other hand, LNG trades will face
trade disruption across the globe owing to COVID-19. In our
preliminary outlook, which projects a 2% China GDP growth in 2020,
LNG imports are projected to rise by 2.5 million metric tons year
on year, about half of the forecast incremental LNG imports in the
pre-outbreak outlook.
Jenny Yang is a Director covering Greater China's gas
and LNG analysis. Tianshi Huang is a Senior Research Analyst
covering Greater China's gas and LNG analysis.
