A Tough Year Ahead For LNG, Sinopec’s China Natural Gas Supply and Demand Forecast Implies Zero Growth in China LNG Imports in 2020
Dec 19, 2019
There should be at least one common prediction in all the analyst 2020 oil and gas outlooks – it will be a tough year for LNG, even tougher than 2019. China has been the driving force for YoY growth in LNG demand in the last five years, but there will be a pause in 2020 with YoY growth in LNG imports likely close to zero. Last night (Thurs morning Beijing time), Bloomberg reported on the release of Sinopec’s forecast for China’s oil and natural gas supply and demand growth for 2020. Sinopec’s +0.44 mmb/d YoY growth in China oil demand for 2020 is right in line with the IEA’s Oil Market Report forecast. But Sinopec’s forecast for natural gas supply and demand is a big negative to LNG in 2020. Last night, we tweeted [LINK] “…#LNG. #NatGas demand +2.6 bcf/d, domestic supply +1.8 bcf/d, means net pipeline + LNG imports only +0.8 bcf/d. China LNG imports likely flat YoY with only modest ramp up of Gazprom 3.6 bcf/d pipe to China that started Dec 1/19. No LNG growth in China = Weak 2020 Global LNG.” Sinopec’s forecast is for China to need +0.8 bcf/d natural gas imports YoY in 2020, but that can be satisfied by either LNG or pipelines. And Gazprom’s 3.6 bcf/d Power of Siberia gas pipeline to China just started up on Dec 1, 2019. We expect a modest ramp up in the pipeline volumes, but at least enough to more or less cover the +0.8 bcf/d. If so, Sinopec’s forecast means China’s LNG import growth in 2020 is effectively zero growth. It also hasn’t helped that its been a warm start to winter in key Asian LNG markets. With China at effectively zero LNG import growth, there will be more surplus LNG cargoes looking for a home and moving first to NW Europe storage. What makes it tougher for LNG in 2020 is that Europe storage is starting at way higher levels than last year and will get full even earlier in 2020 than in 2019. An early full Europe storage means a push back on LNG prices, including US LNG export prices. And if there is a push back on US LNG export prices, it will also flow back to hit US Henry Hub prices. A really cold end of winter in Asia will help, but, even still, if China’s LNG imports aren’t growing YoY in 2020, the setup is for a tougher 2020 for LNG.
Sinopec’s 2020 forecast for China oil and natural gas supply and demand. Last night, Bloomberg @TheTerminal posted a brief, but excellent, report “China’s Oil Demand Growth to Outpace Production in 2020: Sinopec” that referenced today’s new forecast from Sinopec Economics and Development Research Institute that included Sinopec’s forecasts for China’s 2020 oil and natural gas supply and demand, as well as its refining output. The key data forecast points included in the Bloomberg report are:
- Crude oil demand +3.4% y/y to 667m tons [~13.36 mmb/d of crude oil]
- Crude oil output +1% y/y to 194m tons
- Natural gas demand +8.8% y/y to 329 bcm
- Natural gas output +6.7% y/y to 186.8 bcm
- Coal demand +1% y/y to 3.92b tons
- Coal output +2.7% y/y to 3.76b tons
- Oil refining capacity to rise to 905m tons, +24.5m tons y/y
- Oil refining +3.1% y/y to 670m tons
- Oil products demand +2.2% y/y to 403m tons
- Surplus oil products to rise by 4m tons in 2020, with exports at 59m tons
Sinopec’s forecast for China’s 2020 YoY increase in net crude oil demand of +0.40 mmb/d is right in line with IEA’s YoY forecast. There were no surprises in Sinopec’s forecast for China’s oil demand and imports, which is right in line with the IEA’s Oil Market Report Dec 2019 for China’s net oil imports YoY growth in 2020. Converting to b/d, Sinopec forecasts 2020 demand to be +0.44 mmb/d YoY to reach 13.36 mmb/d and China’s domestic supply to be +0.04 mmb/d, which results in a Sinopec forecast of net crude oil imports of +0.40 mmb/d YoY in 2020. The IEA OMR forecast is for China net oil imports of +0.40 mmb/d YoY.
China has been the driving factor for global LNG markets and why we saw a wave of new LNG export projects in the Q3/18 to Q3/19 period. The problem for LNG markets is that China has been the driver of LNG market strength so, at least for LNG markets, its fair to say if China sneezes, the world catches a cold. China’s turning serious on emissions was the driving force to convince the biggest LNG suppliers that it would be the anchor for continued strong global LNG growth thru 2030, which led to a wave of new LNG export projects going FID from Q3/18 thru Q3/19. And there was clear data to show that China, by itself, could move LNG markets. China’s LNG import growth in 2017 and 2018 provided the data support for this bullish LNG view. We first highlighted this 2017 change to be serious on emissions in our Sept 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG” [LINK], wherein we wrote “The news flow from China this summer on its increasing fight and urgency to fight pollution supports China’s plan to increase natural gas to 10% of its energy mix in 2020 and 15% of its energy mix in 2030. This is a game changer to global natural gas markets and, by itself, can bring LNG to undersupply 2 to 3 years earlier than expected. China’s natural gas consumption increased by ~15% per year from 2005 thru 2016 and ~1.5 bcf/d per year vs China’s 8.5% growth rate in energy in total.” The below graph shows China’s LNG imports vs total world LNG imports.
China’s YoY Growth In LNG Imports vs Rest of World LNG Imports (bcf/d)
Liquefaction Capacity FIDs by Year
China’s natural gas and LNG demand has been hit by weaker economy and weather. Our Twitter handle is @Energy_Tidbits and we try to tweet on items that ultimately become part of our Sunday Energy Tidbits memos or blogs. We have been highlighting how the weak China economy seems to have led to less aggressive push on emissions in the past several months and how that is translating into thermal coal imports increasing at a faster rate relative to LNG imports. And its also been a warm start to winter. Two of our recent tweets highlight these reasons for weak China’s LNG demand in 2019. Our Dec 2 tweet [LINK] “Nov isn’t the big winter #NatGas #LNG month, but not off to a good start in Asia. Started Nov 1 w/ winter LNG stockpiling done. Warmer than normal Nov, weak China economy + less push on emissions = shifting back to cheaper thermal coal imports, means more surplus LNG cargoes …” Our Dec 12 tweet [LINK] “China’s 2017/18 push to reduce emissions led to huge YoY #LNG #NatGas import increases. But weak economy relaxed emissions push = low LNG vs thermal coal imports (likely continuing in 2020) especially with Bloomberg “China’s Gas-Fired Power Costs Twice as Much as Coal, CNPC Says”.
But China 2020 natural gas supply/demand forecast is only for +0.8 bcf/d YoY growth in imports. There is a big negative in Sinopec’s forecast – the modest 8.8% increase in natural gas demand. There is no explanation given, but a big factor is the weakening Chinese economic outlook. Earlier today, Reuters reported China Premier LI Keqiang said on state television “Next year, China’s economic development is likely to encounter greater downward pressure and face a more complex situation“. Converting to bcf/d, Sinopec forecasts China natural gas demand in 2020 to be +8.8% YoY or +2.6 bcf/d YoY to 31.7 bcf/d. Sinopec’s numbers imply 2019 growth is only +1.7 bcf/d YoY in 2019 vs BP’s 2018 estimates. Sinopec also forecasts all time record YoY increase in China domestic natural gas production in 2020 to be +1.8 bcf/d to reach 18.0 bcf/d. Most recent years have seen YoY growth+ ~1 bcf/d and Sinopec’s numbers imply 2019 YoY growth of +0.6 bcf/d vs BP’s 2018 estimates. The big negative to the Sinopec forecast is that it means that China’s net natural gas imports growth in 2020 will only be +0.8 bcf/d YoY. And this would include from LNG and/or via pipelines.
Estimated YoY Change In China’s Natural Gas Demand vs Domestic Natural Gas Supply
Means effectively zero growth in LNG imports with the recent Dec 1 startup of Power of Siberia pipeline to China. This +0.8 bcf/d increasing natural gas imports in 2020 YoY can be satisfied by increasing LNG or pipeline imports. This is the issue because of the recent Dec 1 startup of Gazprom’s 3.6 bcf/d gas pipeline from Russia to northern China. We have been highlighting this event since our March 30, 2019 blog “LNG Price Pressures 2020/2021 With Gazprom Adding ~8.9 bcf/d Export Gas Pipeline Capacity Into Europe And China” [LINK]. Our blog was on Gazprom’s 3.6 bcf/d Power of Siberia pipeline to China and its 5.3 bcf/d Nord Stream 2 pipeline to Germany. Power of Siberia started up on Dec 1, 2019. We don’t have any schedule for ramp up volumes, but we expect only modest ramp up in the first year, but that any modest level should effectively cover the net increase of +0.8 bcf/d YoY in 2020. And with the start up of Power of Siberia, its why we believe Sinopec’s outlook points to China’s LNG import growth of effectively zero in 2020 vs 2019. Please note that we believe LNG markets regain strength post 2021 and reach balance sooner than expected. However, for 2020 and 2021, the set up is much like from our March 30 blog – price pressures on LNG.
Gazprom’s 3.6 bcf/d Power of Siberia Pipeline To China Started Dec 1, 2019
Means more surplus Asian LNG cargos will be looking for a home and that normally means Europe – the dumping ground for surplus LNG cargos. For over two years, we have been highlighting the LNG concept that if there are surplus LNG cargoes, they will first go to NW Europe storage and we started to call NW Europe the dumping ground for surplus LNG cargos in our Sept 20, 2017 blog “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer” [LINK] that referenced a Bloomberg terminal broadcast of a Shell investor presentation in Sydney. In that blog, we wrote “In the Q&A, Wetselaar said the data support for his comment that the market is absorbing all of the new LNG supply is to look at NW Europe storage. Wetselaar did not use the description dumping ground, but it is the right term. Webster’s defines “dumping ground” as “a place to which unwanted people or things are sent”. He noted that if LNG was in oversupply, there would be surplus LNG cargos looking for a home and these surplus LNG cargos would find their way to NW Europe storage. Shell is not seeing any YoY increase in NW Europe storage. Hence, he is firm in his view that demand was absorbing all the new LNG supply in 2017. We pasted the NW Europe storage data into the below graph and it shows exactly what Wetselaar said – the monthly YoY changes in storage do not show increases in the net storage withdraw/injections, which implies that there isn’t any dumping of surplus LNG cargos in NW Europe storage. We have not been following NW Europe natural gas storage, but now have it on our regular data check list because of Wetselaar’s comments.”
The problem for 2020 is that surplus LNG cargoes were already dumped in 2019 ie. starting 2020 from a worse YoY storage position prior to more surplus LNG cargoes coming from China in 2020. The LNG 2020 market problem from Sinopec’s forecast is worsened by the fact that LNG markets are starting 2020 in an oversupplied situation. LNG markets were on a positive entering Dec 2018: LNG prices were twice as high, new LNG projects were going FID (ie. LNG Canada), China’s Nov 2018 LNG imports were a new record 9.6 bc/d and +48.5% YoY and Trump had just agreed to not raise tariffs on $200b of imports in Jan and the parties were working to a deal within 90 days. The big hit to 2019 and the start to surplus LNG started to come in Dec 2018 with the start to a warmer than normal winter in Asia. This started the big increase in LNG cargoes to NW Europe and that continued thru the winter with the warmer Asian winter. The big ramp up in LNG to Europe led to Europe storage getting full and entering winter much higher storage levels. Storage reached 95% full on Sept 17 and peaked at 97.83% on Oct 17. This has continued with Europe storage being 90.06% full as of Dec 16, 2019, which compares to 74.64% on Dec 16, 2018 and 70.48% on Dec 16, 2017.
Net LNG Flows to NW Europe
Europe Gas Storage Utilization
It hasn’t helped that its been a warm start to winter 2019/2010 – the next month in Japan is expected to be much warmer than normal. Earlier today, we tweeted [LINK] on the new Japan Meteorological Agency’s month ahead average temperature forecast. Every Thurs, the JMA provides an updated average temperature forecast for the next 30 days. Today’s JMA forecast [LINK] is for much warmer than normal temperatures for key Japan regions in the Dec 21 to Jan 20 period. Note that key regions of Tokai/Kanto/Koshin in central Japan are approx. 2/3 of the population, whereas the northern region, Hokkaido, is only ~5% of the population.
Average Temperature Forecast For Japan For Dec 21 to Jan 20
Japan LNG Imports (bcf/d)
If Europe fills early, it will push back on US LNG export prices and US Henry Hub gas prices. One way or another, we believe US HH prices get hit by Europe storage being full earlier than 2019. The below graph shows how Europe LNG imports from US have increased significantly in 2019. We believe this is partly due to China importing less US LNG during the trade war but also because of the overall LNG supply/demand fact that Asian LNG markets are over supplied and the US LNG cargoes were also forced to the dumping ground for surplus LNG cargoes – NW Europe. Markets are still waiting for details on the US/China Phase 1 agreement reached last week. Earlier today, China announced tariff exemptions for four chemical products, but we haven’t seen any specifics yet on LNG. But LNG, oil and other commodities have to be the anchor for China’s agreement to increase imports from the US. The US/China deal won’t increase overall LNG demand or the overall LNG supply/demand unless it leads to a quick jump up in the Chinese economy strength such that China returns to push on emissions and shifts back from thermal coal to more expensive natural gas power ie. more LNG. Rather the US/China agreement should provide some preferential reason for China to increase LNG imports from US but we don’t expect to see China pay a premium for US LNG. And if all the US does is squeeze other uncontracted LNG supply away from China to the dumping ground in Europe or to other global customers or into floating storage, then we expect the earlier fill of Europe storage to push down on global LNG prices including US LNG prices and that will ultimately flow back to impact US HH prices.
US LNG Exports By Destination