PERTH (miningweekly.com) – Exporters of Australian liquefied natural gas (LNG) could benefit from a predicted tenfold increase in winter gas demand in northern China, analyst Wood Mackenzie reported on Monday.

In this peak season, China would be forced to rely more on the spot market owing to limitations in domestic production and contracted supply. Wood Mackenzie noted that more significantly, this trend was indicative of likely winter gas shortages through the rest of the decade, as production was not expected to grow in line with demand and domestic shale gas was unlikely to provide relief earlier, in spite of recent gas price reform announcements.

The implications were a tighter seasonal spot LNG market in north-east Asia, increased opportunities for suppliers and further reforms needed to accelerate shale development.

“Winter gas shortages will be exacerbated through to 2020 as seasonal demand growth in northern China increases at an annualised rate of approximately 16% per annum,” said Wood Mackenzie head of Asia Pacific gas and power analysis Gavin Thompson.

“Domestic supply cannot respond significantly due to production and storage constraints, and for this reason the struggle to keep northern China warm through winter calls for urgent action. The pace of unconventional gas development, particularly shale and coalbed methane will play a critical role, but we still do not foresee significant production of domestic shale before 2020.”

Thompson noted that China's domestic gas production was reported at 58-billion cubic meters for the first nine months of 2013, an increase of 9% on the same period of 2012.

However, the rate of China's gas demand growth would supersede production, driven mostly by northern China's winter needs. China's overall gas demand would grow by around 14% to almost 100-billion cubic metres in 2013. In the coming winter alone, China's gas demand will reach 88-billion cubic metres, with 60% of that demand accounted for by northern China.

“There has been some progress in the shale gas industry, including some positive well results reported by both Sinopec and PetroChina. In addition, gas price reforms announced this year, if fully enacted, should sufficiently incentivise investment in unconventional gas. As such, we no longer believe that price is the key bottleneck,” Thompson said.

He added that China had to move on to other critical issues to encourage the pace of development at least matching the growth in demand.

China would import about 53-billion cubic meters of gas supply in 2013, rising to 65-billion cubic meters in 2014. Thompson said that 54% would be delivered via pipelines from Central Asia and Myanmar, with the remainder coming from LNG delivered into terminals along China's coastline.

However, given the significant regional and seasonal variations, the call on winter imports into markets north of the Yangzi is increasingly significant. While volumes of gas from Turkmenistan were expected into northern China at peak capacity, additional LNG above currently contracted volumes would be required this winter.

“With rising seasonality, the need for additional spot LNG during winter, or at least more seasonal shape to China’s future long-term contracts will become a defining feature of their LNG market,” Thompson said.

“This will increase competition among Asian spot LNG buyers during peak demand periods and allow suppliers to drive spot prices upwards during winter months.”