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Weak demand pushes PetroChina customers to resell annual gas contract volumes

PetroChina’s customers have been pushed to resell their surplus pipeline gas volumes under 2024-25 contracts due to weak downstream demand, particularly for heating, amid a warmer-than-expected winter, according to market sources.

These surplus volumes have been sold on the Shanghai Petroleum and Natural Gas Exchange via auctions.

However, the trades are restricted to those that have existing annual pipeline gas contracts with the state-owned oil and gas company, primarily city-gas companies, industrial users, power plants and natural gas liquefaction plants, sources said.

The latest auction, initiated by PetroChina, was conducted in the afternoon of Jan. 6 for pipeline gas slated for delivery in the same month. This followed a similar auction held by PetroChina Dec. 26 for the internal transfer of pipeline gas volumes delivered in December and January, according to information from the SHPGX.

The final auction volumes and prices were not immediately available. PetroChina did not immediately respond to queries.

The volumes released by city-gas companies are expected to attract some of PetroChina’s non-city-gas customers, such as natural gas liquefaction plants, industrial users or power plants, if the auction prices are reasonable, a Beijing-based trader said, adding that their demand is less elastic.

“In some regions, even with the added transportation costs, prices should still have some advantages, potentially attracting buyer interest,” a buyer from a power plant in South China said.

Spot trucked LNG in the northern region was said to be trading at Yuan 4,000-4,300/mt, equating to around Yuan 2.90-3.10/cu m, while the spot price for pipeline gas was estimated to be about Yuan 3-3.10/cu m.

PetroChina’s annual pipeline gas contract prices are estimated to be around Yuan 2.80-3.10/cu m, varying by region and customer type, according to trade sources.

“Typically, PetroChina’s pipeline gas annual contract prices are lower than spot market prices, but current spot prices have fallen to levels comparable to annual contract prices,” a second trade source said.

This means the auction price will have to drop to be competitive.

Gas auctions

PetroChina’s pipeline gas users are categorized into several regions: Northern (including Beijing, Liaoning, Heilongjiang, Jilin, Tianjin, Hebei, Shanxi), Eastern (including Shanghai, Jiangsu, Zhejiang, Shandong, Henan, Anhui), Southern (including Guangdong, Hubei, Hunan, Jiangxi, Fujian, Yunnan, Guizhou), Sichuan-Chongqing, and Western regions (including Xinjiang, Qinghai, Shaanxi, Gansu, Ningxia, Inner Mongolia).

When the seller and the buyer are in different regions, the final settlement price will include a regional differential on top of the auction price, according to the SHPGX.

PetroChina previously conducted a handful of similar transfer deals for its customers in 2022 when downstream demand was severely impacted by COVID-19 restrictions, and once in 2023. However, those deals were limited to similar types of companies and were not interregional.

“The transaction allows PetroChina customers to allocate pipeline gas resources among each other, avoiding defaults by some customers due to their inability to complete delivery, as well as promoting the rational flow of resources,” said a market observer.

Many market participants were pessimistic about the trajectory of natural gas prices, saying that with the Spring Festival approaching amid a bleak economic landscape, gas demand in both northern and southern regions, particularly from industries, had seen a significant drop.

China’s Lunar New Year holidays begin Jan. 28 and lasts until Feb. 4, with many factories usually closing for the holiday one or two weeks in advance and resuming operations after the Lantern Festival, which falls on Feb. 12 this year.

Warm weather dampens demand

City-gas companies could be the main sellers in the auction, as many have been unable to fulfill their monthly lifting volumes under the pipeline gas annual contracts with PetroChina due to weaker-than-expected winter heating demand, sources said.

China’s big three national oil companies typically sign annual sales contracts with downstream customers that largely comprise second-tier gas distributors for supplying pipeline gas in the April-March period.

The annual contract volumes between PetroChina and city-gas companies have generally increased each year, by around 5%-10%, based on actual demand and reflecting growing natural gas demand from China’s downstream residential users.

However, this winter has seen warmer temperatures compared to last season and downstream heating demand has barely increased. As a result, the additional annual contract volumes have gone unsold, leading to a backlog at many domestic storage facilities, according to sources.

“City-gas companies could not sell the gas volumes they signed for this winter, and those volumes have become stuck in the pipeline system of PipeChina, as the pipeline’s uptake volume exceeded its offtake volume,” a source in Beijing said, adding that a large amount of gas inventory also could not be used.

China prepares for the heating season by instructing domestic gas suppliers to fill storage facilities to high levels before winter, but no cold wave materialized and average temperatures in many areas were above normal, S&P Global Commodity Insights reported earlier.
Source: Platts

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