China's Gas Cuts Raise Pressure on Central Asia

An analysis by Michael Lelyveld
china-gas.jpg A worker welds a liquefied natural gas (LNG) tank at a factory in Nantong in China's eastern Jiangsu province, March 14, 2019.

As China cuts back on its commitments to import natural gas, it is trying to spread the shortfall among its increasingly hard-pressed suppliers.

Hints of tensions have been rising since early March when reports first surfaced that PetroChina, the listed subsidiary of state-owned China National Petroleum Corp. (CNPC), tried to halt contracted gas imports due to the COVID-19 crisis, slumping demand, and limited storage capacity.

In a move first reported by Reuters, China's main gas importer sent suspension notifications to its suppliers of both pipeline gas and liquefied natural gas (LNG), citing force majeure, an internationally recognized legal exclusion for circumstances beyond a party's control.

The attempts to invoke force majeure met with resistance and expressions of concern from some of China's suppliers.

An executive of France's Total said the company had "rejected" one force majeure claim, Reuters reported. The objection came in an apparent response to an earlier attempt by China National Offshore Oil Co. (CNOOC) to turn away a contracted LNG cargo in February.

In another instance, Russia's Gazprom denied receiving a force majeure notice from PetroChina but then agreed to shut down its newly-opened Power of Siberia gas pipeline to China for two weeks of maintenance, according to Interfax.

A government official in Turkmenistan, China's largest pipeline supplier, voiced hope that the suspension "will not affect long-term, strategic and mutually beneficial Turkmen-Chinese partnership in the gas sector," Reuters reported.

Troubling signs

Two months later, there are signs that the problems with China's force majeure declarations are continuing to trouble suppliers.

On May 5, a leading energy official in Uzbekistan told S&P Global Platts news service that Central Asian countries are still in talks about reducing deliveries to China.

"China requested a cut, but indicated that any reduction in gas supplies would be carried out proportionally between Turkmenistan, Kazakhstan, and Uzbekistan," said Mekhriddin Abdullaev, CEO of the Uzbekneftegaz state oil and gas company.

"A coordinating committee of the three Central Asian countries that supply gas to China is discussing exact volumes. A decision has not yet been made," Abdullaev said.

Other reports suggest that significant reductions in deliveries from the China-Central Asia pipeline system have already taken place.

On March 11, Kazakhstan Energy Minister Nurlan Nogayev told Reuters that PetroChina had declared force majeure on the country's five-year supply contract signed in 2018 and that deliveries had already dropped by 20-25 percent.

Kazakhstan exported 7.1 billion cubic meters (bcm) of gas to China last year, while Turkmenistan delivered 33.2 bcm, Platts said, citing Chinese customs data. Uzbekistan shipped 7.6 bcm last year, Newsbase Daily News said.

If Kazakhstan's cut were applied proportionally to the other Central Asian suppliers, regional volumes for China could drop by some 10-12 bcm this year.

The reductions would fall heavily on Turkmenistan, which has no other customer for gas exports, aside from Russia's Gazprom, which said last July that it could buy up to 5.5 bcm per year.

The country may suffer not only from reduced volumes but also lower export prices due to oil-linked pricing formulas and the global crude glut.

Turkmenistan was already expected to face a sharp economic slowdown, according to regional forecasts released by the European Bank for Reconstruction and Development (EBRD) this month.

Economic growth in Turkmenistan is expected to slide to 1 percent this year from a reported 6.3 percent in 2019, the EBRD said.

Demand likely to recover

The extent of the damage is likely to depend on how long the crisis drags on.

"It's hard to say if the cuts will go beyond this year," said Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research.

Barring a second wave of infections, Herberg said, gas demand is likely to recover through the end of this year, growing gradually through 2021.

Herberg noted that temporary disruptions in Central Asian gas supplies took place during the winters of 2017-2018 and 2018-2019, reportedly due to equipment failures in Turkmenistan. Neither episode did long-term damage to Turkmenistan's economy or China's role in the region,

But the force majeure claims have highlighted Central Asia's reliance on China's energy demand and economic growth.

Although Kazakhstan's economy is more diversified than Turkmenistan's, 76 percent of its gas exports went to China in the first quarter, according to Interfax.

The country is also struggling with lower oil revenues, Herberg said.

Kazakhstan has agreed to reduce oil production by 390,000 barrels per day in May and June under a cooperation agreement with the Organization of Petroleum Exporting Countries, known as OPEC+.

Last year, Kazakhstan's oil production edged up 0.1 percent to an average of 1.82 million barrels per day.

The EBRD estimated that Kazakhstan's economy will contract by 3 percent this year following growth of 4.5 percent in 2019.

Projections steadily falling

Economic projections for the country have been falling steadily since January, when the World Bank forecast called for 3.7-percent growth in 2020. In April, the Asian Development Bank lowered its forecast to 1.8 percent from 3.8 percent in December.

In his response to Platts, Abdullaev portrayed Uzbekistan as the least affected of the three exporting countries on the 1,833-kilometer (1,138-mile) Central Asia-China system.

The country's longer-term plan calls for reducing gas exports to "almost zero" over the next decade, Platts reported.

"Our goal is to process gas in Uzbekistan and maximize returns along the entire value chain for gas-based products,"Abdullaev said.

Despite the plans for industrial investment and gas chemical projects, the EBRD forecast estimates that Uzbekistan's economic growth will slip to 1.5 percent this year from 5.6 percent in 2019.

It is unclear whether the proportionality principle of China's cuts would also apply to Russia's pipeline deliveries or to LNG imports. The 3,000-kilometer (1,864-mile) Power of Siberia pipeline, which opened in December, is scheduled to deliver 5 bcm to China this year.

While Russia's gas prices for China at the border are believed to be significantly higher than those for Europe, they may be cheaper for delivery within China than Central Asian supplies.

"Central Asia gas has been expensive due to the enormous transportation costs of getting it to eastern China. CNPC has complained for years that they lose money on every molecule of gas," said Herberg.

"Russian gas should be far less expensive, as to shorter distance from the border," he said. "So, it's not impossible to imagine CNPC would press to retain Russian volumes while cutting Central Asian volumes due to cost differences."

Increased domestic production

While the shares of the gas reductions have yet to be settled, China is pressing ahead with efforts to increase domestic production, lessening dependence on imports during the consumption slowdown.

In the first four months of the year, China's domestic gas output climbed 10.3 percent to 64.4 bcm, while imports of combined pipeline gas and LNG rose just 1.5 percent from a year earlier to 32.3 million metric tons, according to National Bureau of Statistics and customs data.

Gas imports surged 12.2 percent from a year earlier in the comparable period of 2019.

In the first quarter, China's apparent gas consumption, based on production, net imports, and changes in inventory, increased 1.6 percent from a year before, according to the National Development and Reform Commission, the government's top planning agency.


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