Natural gas: Steady growth is still in sight



Industrial chain company influence geometry

The industrial chain of natural gas can be roughly divided into three links: upstream gas production, midstream gas transmission and downstream consumption. From the upstream perspective, although natural gas sales fell for the first time, it did not have much impact due to the high concentration of upstream exploration and production companies. In the first three quarters of 2022, petrochina ranked first in the "three barrels of oil" with a production of 93.329 billion cubic meters, a year-on-year increase of 5.1%, accounting for 58.31% of the total domestic natural gas production; Sinopec's natural gas output was 25.88 billion cubic meters, up 4.1% year-on-year, accounting for 16.17% of the country's total output; Although the production of CNOOC is only 11.885 billion cubic meters, with the development of Baodao 21-1, the first deep-water and deep gas field in China, the natural gas production of CNOOC increased by 20.6% year-on-year, which is the fastest growing company in the "three barrels of oil". From January to September 2022, the total production of "three barrels of oil" natural gas reached 131.094 billion cubic meters, accounting for 81.90% of the total national production.

From the perspective of midstream natural gas supply channel structure, domestic gas accounted for 55.07% in 2021, and imports included imported LNG and imported pipeline gas, accounting for 29.21% and 15.72% respectively. As domestic gas accounts for more than half, the vast majority of China's natural gas extraction and main pipeline transportation are completed by "three barrels of oil" and its companies.

From the perspective of downstream consumption, in 2021, China's urban gas consumption will account for 38% of the total natural gas consumption, industrial gas consumption will account for 36%, power generation gas will account for 18%, and chemical gas will account for 8%. The natural gas industry is characterized by high concentration in the upstream and more dispersed in the downstream, and the two biggest factors determining the performance of downstream natural gas sales companies are price and volume.

From the point of view of pricing, there are three main pricing models: 1. Cost plus pricing, the price of natural gas is determined according to the production cost plus reasonable profit of production and operation enterprises. This method is usually adopted by countries with rich natural gas resources in the initial stage of natural gas development, which is convenient for government supervision and can better protect the interests of consumers. It is also easy to underestimate the market value of natural gas, and blind expansion causes resource waste and aggravates the contradiction between supply and demand; 2. Market net return pricing is a pricing method in which prices of all links of the natural gas supply chain are formed by push-back based on the market value of natural gas in the terminal market. The drawbacks of cost plus pricing can be avoided by adopting market net return pricing; 3. Market competition forms the price. At present, the United States, Canada, the United Kingdom and other natural gas resources are rich and the market is mature. In addition to the transmission and distribution links are strictly regulated by the government due to the typical characteristics of natural monopoly, the import and terminal sales prices of natural gas are formed by market competition, and the typical characteristics of the price formed by market competition are determined by supply and demand.

China's natural gas pricing model mainly adopts the "market net return" pricing mechanism. The price of upstream natural gas is guided by the government and issued by the National Development and Reform Commission. The specific price is determined through negotiation between the supply and demand parties within the maximum price range stipulated by the government. Upstream gas supply units are usually determined according to their respective natural gas production costs or procurement costs as well as petrochina or Sinopec's internal pricing standards, and the actual floating space is very small.

The sales prices of natural gas for all types of downstream users are set by the pricing authorities of local governments, and the sales prices of other users have no floating space, except that some industrial users and CNG wholesale can negotiate the upper limit of the prices set by the local pricing authorities.

From the perspective of volume, the natural gas sales company usually signs a one-year written contract with the gas supplier every year, in which the purchase price of natural gas, the gas supply or the determination method of the gas supply, the measurement method, the quality requirements, the settlement method and other matters are agreed. The annual gas purchase is usually agreed in the contract, or it is agreed that the company will submit the gas consumption plan to the gas supplier every month or quarter, and then the gas supplier will determine the gas supply plan to the company next month or next quarter according to the actual supply and demand balance. The measurement of the actual purchased gas is usually confirmed by the two parties to the contract at the natural gas pipeline junction at regular intervals every day according to the flow meter display. In general, the consumption of natural gas in each city will not change much.

Natural gas doesn't seem to have much room to move, either in price or volume. While gas sales declined for the first time in 2022, the impact on both the price and volume sides was very limited. Therefore, companies in all links of the natural gas industry chain do not have much impact.

Earlier, the "three barrels of oil" in the upstream released a series of 2022 performance forecasts.

Cnooc expects full-year profit for 2022 to range from 139.6 billion yuan to 143.6 billion yuan, up 99% to 104% year on year. Petrochina expects full-year profit of 145 billion yuan to 155 billion yuan in 2022, up 57 percent to 68 percent year on year. In accordance with Chinese Accounting standards for Business Enterprises, Sinopec expects to achieve a net loss attributable to shareholders of the parent company of approximately 2.605 billion yuan to 3.184 billion yuan in 2022.

Sinopec explained the reasons for the loss as follows: in 2022, the price rose sharply, the market demand was weak, the average price increase of petrochemical products was less than the average increase of crude oil prices, and the gross profit of products decreased; Affected by the COVID-19 epidemic and the company's installation accidents, the company's crude oil processing volume decreased significantly compared with the previous year; The company's investment income fell sharply.

Despite Sinopec's turnaround from profit to loss, the performance of CNOOC and petrochina remains strong.

The same goes for downstream sales companies.

Anhui Natural Gas is expected to achieve annual net profit attributable to shareholders of listed companies in 2022 of 238 million to 291 million yuan, an increase of 15.41% to 41.05 percent; Non-withholding net profit attributable to shareholders of listed companies ranged from RMB234 million to RMB286 million, up 17.66% to 43.80% year-on-year.

Kaiten Gas achieved operating income of 455 million yuan in 2022, down 0.91% year-on-year; Net profit was 60.62 million yuan, down 16.99% year-on-year; Profit after deducting non-payment was 56.16 million yuan, down 20.44% year-on-year.

The total operating revenue of Chengdu Gas Company in 2022 was 4.838 billion yuan, an increase of 10.41%, of which the sales revenue of natural gas was 3.913 billion yuan, an increase of 2.83%; Net profit attributable to shareholders of listed companies was 493 million yuan, an increase of 0.96%.

Shaanxi Natural Gas is expected to achieve net profit attributable to shareholders of listed companies of about 636 million yuan in 2022, an increase of 51.011%.

In other words, although natural gas consumption has declined for the first time in history, the impact on related companies in the industry chain is very limited.

The transformation of the energy structure accelerated

Natural gas is a traditional energy source, but it is also a clean energy source. Under the background of carbon peak and carbon neutrality, the development prospect of natural gas is still good.

In 2021, China's natural gas consumption reached 378.694 billion cubic meters, an increase of 12.50% year-on-year, and the compound annual growth rate from 2017 to 2021 reached 11.93%, and the demand for natural gas maintained a rapid growth trend.

Shandong Laibai's "14th Five-Year Energy Development Outlook" shows that from 2016 to 2020, the growth rate of coal consumption is only 0.42%, and the growth rate of natural gas consumption is 10.7%, and the role of natural gas for coal is obvious.

Not only that, since the "14th Five-Year Plan", China's energy transformation has continued to break through, and the performance of the new energy power generation industry is especially bright. According to the "year-end report card" released by the National Energy Administration at the end of 2021, the installed capacity of renewable energy in China exceeded 1 billion kilowatts, the installed capacity of hydropower and wind power exceeded 300 million kilowatts, and the installed capacity of offshore wind power ranked first in the world. The annual power generation of new energy sources such as wind power, solar power and biomass power generation exceeded the 1 trillion KWH mark for the first time, continuing to maintain its lead.

According to the "Notice on Matters related to the development and Construction of wind power and photovoltaic power generation in 2021" issued by the National Energy Administration in 2021, the proportion of wind power and photovoltaic power generation in the whole society reached about 11%. By 2022, that share will increase to about 12.2 percent.

With the rapid growth of natural gas and new energy sources, the proportion of coal power generation continues to decline. From 2012 to 2021, the share of coal in China's total energy consumption will decrease from 68.5 percent to 56 percent, the share of natural gas will increase from 4.8 percent to 8.9 percent, and the share of wind power and photovoltaic power generation will increase from 2.14 percent to 11.73 percent.

According to the Statistical Review of World Energy 2022, the proportion of global natural gas consumption in primary energy consumption in 2021 is 24%. Compared with the world, China's natural gas share is still at a low level. Chinese government authorities have set a goal of raising the share of natural gas in primary energy consumption to about 15% by 2030. From this point of view, China's natural gas proportion is still large room for improvement.

At the same time, China's urbanization rate in 2022 is 65.22%, "Urban Blue Book: China's Urban Development Report No.12" is expected to reach 70% by 2030, as China continues to promote new urbanization to the depth of development, the size of the urban population will continue to expand, so as a clean and efficient energy demand for natural gas is expected to continue to increase.

In the context of "carbon peak, carbon neutral", the transformation of the energy structure will continue to accelerate, and natural gas as a clean energy is also expected to achieve steady growth.