China Oil &Gas:Winter gas shortage resurfaces;+ve for PetroChina and China BlueChem
Gas shortage spreads across China
The aggressive "coal to gas" (CTG) conversions in China have significantly boostedgas demand, particularly in Beijing and the surrounding area; governments needto divert gas from other provinces, causing regional gas shortages. The FinancialTimes reported on Dec 13that the Sichuan and Chongqing governments askedchemical-makers to reduce or halt production until Mar 2018. In Northern China,gas supply for industrial usage has been cut and limited, in order to satisfyresidential usage first, while some regions do not have adequate gas supply forresidential use even after the cut. This pushed up the LNG price to a new high;
in Daqing and Heilongjiang even the spotted LNG price recorded RMB9,000/t inDec, almost tripling from Sep. Thus, NDRC / NEA has stepped in to regulate thegas price and supply allocation for SOE suppliers; however, we see the strong gasprice continuing due to the gas shortage.
Tight situation to continue through winter unless there's a change in storageChina’s Ministry of Environmental Protection issued an urgent notice last weekthat those regions among the "2+26" cities that have not completed CTGconversions can continue to use coal and the usual fuels for heating. Thiswould temporarily cool the government's ambition on CTG conversion intensity.Conversely, the gas storage issue will not be solved in the near-term and wouldintensify efforts in gas storage development. The medium-term implications couldbe: 1) increasing of gas supply / production capability; 2) capex on gas storagedevelopment; 3) potential slowdown in CTG conversion ambitions.
Positive for upstream gas supplier - PetroChina
PetroChina (PTR) is the key beneficiary of gas price hikes during the winterheating season, as it is China's largest gas supplier with 67% market share, and40% of E&P production is gas. Hence, the gas price hike improves upstreamprofitability and narrows its import gas loss. We derive our target price for PTR viaa sum-of-the-parts valuation. We value the upstream segment and the midstreampipeline segment using DCF and the downstream segments with P/B vs. ROEmethodology. We rate it Hold with a target price of HK$5.55. Risks: oil & gasprices, refining & chemical spreads, and policy changes.
China BlueChem key beneficiary of urea & methanol price spike
China urea / methanol prices have climbed above RMB1,800/ton / RMB2600/ton,by 8% / 40% since the end of June. Gas-based urea / methanol are at the top-endof the industry cost curve which equals c. 20%/ 10% of capacity in China. Withgas shortage and feedstock price hikes, we see cost push and falling production