China Gas Utilities’ Profit Remains Steady amid Winter Gas Shortage

Gas sales volume growth accelerated for rated Chinese city-gas operators in 4Q20 and 2021 year to date due to a post-pandemic industrial production recovery and strong heating needs amid one of the coldest winters in decades, Fitch Ratings says. This partly offset the pressure on dollar margins, which were probably lower in 2H20 from 1H20, supporting the sector’s steady profitability.

The Chongqing Petroleum and Gas Exchange said the apparent natural gas consumption growth accelerated from 5.9% in October 2020 to a low-teen percentage in November 2020 to January 2021. The spot liquefied natural gas (LNG) price increased by more than 100% in northern China and 60% in southern China since November. The LNG price in Hebei, Jilin, Liaoning, and Shandong provinces rose to more than CNY10,000 per tonne in late December, from an average of CNY2,700 per tonne in June-August 2020.

We think China’s gas supply pressure is lower this winter than in 2017. As a result, we believe the spike in gas demand can be fulfilled to a large extent, translating into strong gas sales volume growth for rated gas distributors. The Chinese government pushed national oil companies (NOC), local governments and gas distributors to construct additional gas storage facilities after the 2017 gas shortage, and supply from these facilities reached above 100 million cubic meters per day, accounting for 9.7% of total daily gas consumption in the peak season this winter. The NOCs also moved some of their long-term contract deliveries to the winter and new LNG terminals and pipelines also contributed additional contracted supply.

The impact of rising spot LNG prices on gas distributors’ dollar margins should also be lower this winter than in 2017. Most rated gas distributors have signed long-term gas supply contracts with NOCs and LNG exporters. The LNG contract prices are typically linked to oil prices over a specific period, which tend to be less volatile than spot price fluctuations. The country’s gas-sector reform has also granted large national gas distributors better access to midstream facilities for gas imports and transmission, putting them in a better position to negotiate with upstream NOCs on contract pricing.

Distributors need to bear a sharper increase in fuel costs from their spot market purchases, although we think the fuel cost pass-through has become smoother since the reform of the gas distribution price mechanism, with distributors having accumulated some experience from previous rounds of fuel cost pass-through. Gas distributors can better identify target customers to optimise cost structure and maintain active communication with the government on tariff adjustments.

Fitch estimates the overall dollar margins of the rated gas distributors were flat or slightly better yoy in 2020. Kunlun Energy Company Limited (A/Stable) can count on its parent, China National Petroleum Corporation (A+/Stable), to secure stable gas resources. ENN Energy Holdings Limited (BBB/Stable) can utilise the Zhoushan LNG terminal to secure low-cost LNG with long-term contracts signed at a 20%-30% discount to the city-gate price.

Binhai Investment Company Limited’s (BB+/Positive) higher gas demand has been satisfied by additional supply from its strategic investor, China Petroleum & Chemical Corporation (Sinopec) (A+/Stable), at a reasonable cost. Beijing Gas Group Co., Ltd. (A/Stable) has a sufficient piped-gas supply from NOCs to ensure energy security for the capital and fuel cost pass-through has usually been timely in Beijing. Shenergy (Group) Company Limited (A+/Stable) has its own LNG terminal with long-term contracts, which supplies over 60% of total gas procurement.
Source: Fitch Ratings