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Chinas natural gas market Liberalization and its Regional impact
SHI Xunpeng, Energy Studies Institute, National Univeristy of Singapore.
Tel: +65 6516 5360; Email: HYPERLINK "mailto:shi@nus.edu.sg" shi@nus.edu.sg
Hari M. P., Energy Studies Institute, National Univeristy of Singapore.
Tel: +65 65167083; Email: esihar@nus.edu.sg
Overview
The regional and global impact of Chinas gas sector has become increasingly significant but is a relatively new issue to most energy researchers. While much attention has been focussed on the cases of oil and minerals such as Copper, Nickel and Iron ore, an emerging impact is seen in the world natural gas and LNG markets. The rise of China as a rapidly growing gas consumer will be a game changer in the regional and global gas markets. While pipeline gas (PPG) is not sourced through open market, the contract pricing mechanisms will have implications for East Asias LNG prices. The diversity of supply of natural gas makes it possible for China to generate a hub prices that can have regional impact. The scale of Chinas demand will also have significant impact on the regions, and even the global, gas market.
In the past decade, the focus of China gas sector policy is on market liberalization, which aims to let markets determine the prices. The ongoing market liberalization of the gas sector in China would also be a key factor that is influential for the East Asian regional market and the global gas markets. Chinas gas pricing could be an important benchmark for the East Asian region because the largest importing capacity in Asia, the most diversified (and relatively balanced) portfolios of supplies, and the most diversified means of transport and routes ADDIN EN.CITE Chen20141487(Chen, 2014)1487148727Michael ChenThe Development of Chinese Gas Pricing: Drivers, Challenges and Implications for Demand2014OxfordOIES(Chen, 2014). The key issue for this study is: what are the possible impacts of China gas market liberzation on China and the worlds gas and LNG market?
Methods
The impact of Chinas gas market liberalization the trade flows and prices of pipeline gas and LNG to the year 2035 was examined with the Asian Gas Trade Model (AGTM), which was developed based on the Nexant World Gas Model ADDIN EN.CITE NEXANT20131454(NEXANT, 2013)1454145427NEXANTUser Manual (Version 3.05 for Office 2010)2013LondonNexant(NEXANT, 2013). The AGTM model covers every country in the world which consumes or produces natural gas. The historical data are available from 2006 to 2011 and outlook period is up to 2035. This model includes all known sales contracts and all known and planned infrastructure (pipelines and LNG terminals). The Model captures flows at the country level by pipeline and LNG and identifies contracted and un-contracted flows separately. It is balanced on a quarterly basis and includes seasonal demand variations, supply swing and storage capacities (working volume and deliverability). The exogenously specified demand forecasts are estimated based on Economic growth, energy intensity and population growth at sectoral level. The Model minimizes cost of production and transportation to meet projected demand. A Base Case to study how the international gas market may evolve to 2035were developed .
In addtion to the base case, the China Benchmark scenario was assumed. Key assumptions in this alternative scenario are: Chinas Shanghai spot prices become regional becnmark for both pipeline gas and LNG trading; all contracts in the East Asian Rregion (China, Japan, Korea and Chinese Taipei) will be indexed to this China Benmark prices from 2025; all the new contacts, or expired contacts in the East Asian Rregion that starts from 2020 will also be indexed to the Benchmark. Key East Asian gas playes, namely China, Japan, South Korea and Chinese Taipei, India, Russia and Australia were modelled separately as their impacts on global gas markets could be significant. Singapore is also separated because of its potential role to be a regional trading hub and pricing centre in the future.
Results: Impact of China bechmark price
We first summarize our East Asian base scenario results and then compare the same with impact of Chinese benchmark price. We find a CAGR of global natural gas production and consumption at 1.49% during the outlook period (2015-35) in our base case simulation. Spot prices generally show steady increasing trend, with decline (inline with decline in oil prices) till 2019 and then increasing thereafter. Increased demand from China results in a faster increasing spot price trajectory for China, where the Spot price is highest among the nodes ($12.90/mmbtu), closely followed by Japan and Korea prices. This would imply that Asian premium remains in the market. European spot prices also move upward in light of increased LNG exports and decreased pipeline exports from Russia.
When we index all the regional contracts to Chinese spot market price, the gas production in China is increased (mainly from higher cost shale and CBM plays, upto +22bcm in 2026) while domestic production in Russia marginally declines. This is partly due to the increased spot prices incentivizing Chinese domestic production, and also due to optimistic production outlook on Chinese domestic gas from unconventional sources. We see increased Chinese supply security stemming from higher domestic production, marginally reduced pipeline and LNG contracts in a higher spot priced buyers market. Consumption profile is maintained in the region in the Chinese benchmark scenario. We also separately studied the behavior of major trading partners in the region. Japan, Korea and Chinese Taipei receives increased gas flows from Middle EAst, South East Asian exporters and Russia while reduced flows from Africa and North America in a market where contract prices are indexed to China spot price. LNG flows from Africa, South Asia and Middle East decreases in china, while other key trade flows remain the same in this scenario. Increased domestic production and slightly decreased import dependence of China see the domestic pipeline flows increase (upto +45 bcm in 2028) in the scenario compared to base case. True cost of extraction of gas in China goes up by upto +$1.2/mmbtu in China. Spot prices in China are observed to be marginally lower in the spot benchmark (averaging close to -$1/mmbtu post 2030), and the regional price in North East Asia is also lower (upto -$1.4/mmbtu) when compared to the base case.
Conclusions
From our simulations, it is demonstrated that Chinas domestic market liberalization will have significant impact on the gas and LNG trade patterns and price for East Asia and global markets. Moreover from the simulation results shows increased regional impact in trade flows and prices than production and consumption.
References
ADDIN EN.REFLIST Chen, M., 2014. The Development of Chinese Gas Pricing: Drivers, Challenges and Implications for Demand. OIES, Oxford.
NEXANT, 2013. User Manual (Version 3.05 for Office 2010). Nexant, London.
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