Gas prices are difficult to break, and gas consumption continues to improve

1. The global gas supply and demand gap is obvious, and some regions are seriously short of gas

1.1 Long-term stable growth of gas consumption, the proportion of LNG supply continued to increase

From the perspective of the Gas supply structure of a region, gas supply is mainly composed of pipeline gas and Liquefied Natural Gas (LNG). Pipeline gas is transported through the mining site or treatment plant to the urban gas distribution center or the pipeline of industrial enterprise users for transportation. LNG manufacturing is to purify the natural gas produced in the gas field first, and then liquefied at ultra-low temperatures, and then transported by liquefied natural gas ships, tankers, etc. LNG has the advantages of colorless, tasteless, non-toxic and non-corrosive, and is recognized as the cleanest fossil energy on earth, and its volume is only about 1/625 of the volume of the same amount of gaseous natural gas, so LNG can be stored and transported as safely and conveniently as oil. The global pipeline gas and LNG trading is very active, among which the same continent is mostly transported by pipeline gas, trans-oceanic transport is LNG. LNG collection and transportation need to use LNG receiving station, after receiving gasification into natural gas, through the domestic pipeline for transportation.

The main uses of gas are city gas, industrial fuel, gas for power generation and chemical raw materials. There are three main natural gas consumption patterns in the world, namely the balanced gas consumption pattern represented by the United States, which shows that the proportion of the three uses is relatively balanced, between 30% and 40%; The city gas model is dominated by the United Kingdom and the Netherlands. The United Kingdom and the Netherlands have rich natural gas reserves, and the development and utilization of natural gas were early. In the 1970s and 1980s, relatively complete natural gas pipeline network and infrastructure were formed, and the improvement of infrastructure promoted the utilization rate of urban gas. Japan, South Korea as the representative of the power generation gas model, Japan and South Korea are natural gas shortage countries, almost all rely on imports, while taking into account the requirements of environmental protection, natural gas power generation accounts for 50% to 60% of its gas.

On the whole, in the past ten years, natural gas production and consumption are basically consistent, supply and demand balance, showing a steady growth trend. Global natural gas production in 2020 is 3,853.7 billion cubic meters, down 3.08% year-on-year, and consumption is 3,822.8 billion cubic meters, down 2.08% year-on-year. The significant decline in production and consumption in 2020 is mainly due to the impact of the COVID-19 pandemic, and the energy consumption of the global economy has declined. In addition, the mild winter in the Northern Hemisphere in early 2020 also reduced heating demand. Production of natural gas slightly exceeds consumption and supply slightly exceeds demand, depressing LNG prices.

From the perspective of global gas trade, pipeline gas is the main trade mode, accounting for up to 61%, but its transmission range is limited, so it needs to be supplemented by LNG. In recent years, the volume of natural gas trade has fluctuated, with a compound growth rate of 3.6% in the past five years. The trade volume of pipeline gas maintained a relatively constant level, 755.8 billion cubic meters in 2020, down 5.7% year-on-year, and a compound growth rate of 0.1% in the past five years. The trade volume of LNG is growing rapidly, to 487.9 billion cubic meters in 2020, an increase of 0.85%, and a compound growth rate of 7.6% in the past five years. The proportion of LNG trade volume increased from 31% in 2010 to 39% in 2020, and the status of LNG in the global natural gas trade structure is gradually improving.

The major players in the global gas market can be divided into three categories. The first is self-sustaining countries, including Iran and Saudi Arabia, whose production capacity mainly covers their own gas needs. The second is the big exporters, mainly Russia, Australia and Qatar. The third type of gas importing countries are mainly distributed in Europe and Northeast Asia.

European countries such as Germany and Italy mainly import pipeline gas, mainly supplied by Norway and Russia. On September 10, the construction of the Nord Stream 2 gas pipeline between Russia and Europe was fully completed. "Nord Stream -2" total gas transmission capacity of 55 billion cubic meters per year, if the project can pass the German "gas transmission" certification, it will greatly increase the natural gas trading volume between Russia and Western European countries. In 2020, China imported 45.1 billion cubic meters of pipeline gas, accounting for 32.4% of the total natural gas imports (139.1 billion cubic meters of total imports), mainly from Russia and Turkmenistan. The global LNG market pattern has initially taken shape, with importers mainly concentrated in the Asia-Pacific region. In 2020, the three East Asian countries, China, Japan and South Korea, will import 94 billion cubic meters, 102 billion cubic meters and 55.3 billion cubic meters of LNG, respectively, accounting for 19%, 21% and 11% of the total global LNG imports. The three East Asian countries are mainly the United States, Australia and Qatar.

In terms of price, the price of pipeline gas is usually determined by the long-term agreement between the two sides, and the gas price is relatively stable, while the price of LNG is constantly changing with the change of market demand, and the pricing difference is large among different regions. Specifically, due to geographical distance and transportation costs, the gas market is significantly regional. The supply and demand structure of different regions has significant differences, which makes the gas pricing mechanism of regional markets different. In places with sufficient gas resources, such as North America and the United Kingdom, the gas price is mainly determined by the domestic supply and demand relationship, while in the Asian continent and Central Asia, the price is mainly monopolized by the governments of both supply and demand sides. Gas resources are relatively poor and rely on foreign gas sources in regions such as continental Europe, continental Asia and Central and Northeast Asia, which are related to the characteristics of local gas. For example, gas in Europe is mainly used for winter heating, so gas prices are linked to competitive fuels such as diesel prices, while in Northeast Asia, gas prices are linked to oil prices. China's domestic pipeline gas and imported pipeline gas prices are relatively stable, the LNG trade pricing system originated from Japan, the long-term contract adopts the weighted average price of crude oil imports from Japan (JCC) pricing formula, the spot price adopts the general JKM spot price.

1.2 Short-term gas supply and demand imbalance, long-term natural gas price rise is supported

In 2021, gas prices have risen rapidly. As of October 5, the trading price of Henry Hub in the United States was 1.37 yuan/square ($6.37 / million British thermal units), an increase of 232% year-on-year, in addition to the extreme high price caused by the cold winter of 2020, the highest value in nearly 7 years. As of October 7, IPE British natural gas futures traded at 7.18 yuan/square (245.51 pence/color, exchange rate 8.776:1), an increase of 556%, the highest value in nearly 10 years.

We believe that the short-term supply of global natural gas is insufficient and demand is strong, and climate factors combined with energy transition drive this round of price increases. In the short term, the sudden COVID-19 pandemic in 2020 will tighten the global gas supply side. On the one hand, the epidemic will lead to global work stagnation, affecting the input and output of the energy industry, including natural gas extraction. On the other hand, the pandemic has put a drag on economic growth, reducing global demand for production materials, including methane, and further reducing gas production. In 2020, global natural gas production was 3,853.7 billion cubic meters, down 3% from the previous year, which is the first year-on-year decline in natural gas production in nearly a decade. On October 6, Russian President Vladimir Putin said that Russia was increasing gas supplies to Europe.

At the same time, in September 2021, the United States Climate Center issued a "La Nina" re-emergence warning, and the probability of "La Nina" phenomenon increased from 70% to 70% to 80%. At the October press conference, China's meteorological Bureau also said that it is expected that the cold water will further strengthen in the next three months (October-December) and enter a "La Nina" state. In 2021, the probability of "La Nina" phenomenon is high, and "La Nina" phenomenon is likely to cause a major cold wave in the Pacific Ocean and usher in a cold winter on both sides of the Pacific Ocean. In the case of cold winter, China, the United States and other countries that use natural gas for winter heating will remain strong natural gas demand in the fourth quarter.

With the gradual improvement of the epidemic prevention and control situation in various countries, the resumption of work and production has promoted the prosperity of industrial production and commercial activities to continue to rise, and the consumption of natural gas in various countries has been driven by the strong demand side. As the largest natural gas consumer, the impact of the epidemic on the US economy has come to the middle and late stages. According to EIA data, after April 2021, the growth rate of natural gas consumption in the United States turned from negative to positive, increasing from April to June, decreasing 4% in July, and increasing 7.4% month-on-month. As the third largest natural gas consumer, China has been the most effective in epidemic prevention and control. Since the beginning of the first half of the year, domestic industrial and commercial activities have recovered steadily, production and life have resumed and the "coal to gas" policy has continued to advance, driving domestic gas demand to continue to improve. According to the data of the National Energy Administration, from January to July 2021, the apparent consumption of natural gas was 211.2 billion cubic meters, an increase of 17.1% year-on-year. In addition, as the main regions of natural gas consumption, the United States and Northeast Asia due to high summer temperatures in 2021, local natural gas demand is relatively strong.

In summary, it is expected that the global gas supply and demand pattern will remain tight in 2021-2023. According to estimates, the supply of natural gas in 2021-2023 will be short of 89, 301 and 52.7 billion cubic meters, respectively. In addition, seasonal supply and demand contradictions and geopolitical uncertainties may still make the supply and demand of natural gas in some regions appear very tight.

At the same time, in September 2021, the United States Climate Center issued a "La Nina" re-emergence warning, and the probability of "La Nina" phenomenon increased from 70% to 70% to 80%. At the October press conference, China's meteorological Bureau also said that it is expected that the cold water will further strengthen in the next three months (October-December) and enter a "La Nina" state. In 2021, the probability of "La Nina" phenomenon is high, and "La Nina" phenomenon is likely to cause a major cold wave in the Pacific Ocean and usher in a cold winter on both sides of the Pacific Ocean. In the case of cold winter, China, the United States and other countries that use natural gas for winter heating will remain strong natural gas demand in the fourth quarter.

In the context of energy transition, carbon awareness and environmental awareness will promote the increase of natural gas demand in the long term. Natural gas is the only clean and low-carbon energy among the three traditional fossil energy sources. Compared with coal, oil and other energy sources, natural gas has the advantages of safe use, high calorific value and clean. During combustion, natural gas produces very few substances harmful to human health, such as sulfur dioxide, and produces only about 40 percent of the carbon dioxide of coal. Due to the tidal characteristics of new energy generation and the substantial increase in installed capacity of renewable energy, the peak-valley difference of power grid load is getting larger and larger, and stable and flexible gas-powered power plants are needed to adjust the load peak and valley. Therefore, natural gas will become an excellent transition energy from traditional fossil energy to new energy.

Under the pressure of more and more stringent environmental regulations, the change of countries and regions seeking to "coal to gas" will also become a trend. According to BP's 2020 Statistical Review of World Energy, global natural gas generation in 2019 was 6,297.9 TWH, up 3.5% year-on-year; It accounted for 23.3% of the world's total power generation, an increase of 0.5 percentage points year-on-year. In addition, in all types of power generation, natural gas power generation ranks second, only lower than coal power; In terms of growth rate, the growth rate of natural gas power generation also ranks second, second only to new energy power generation. Regionally, natural gas generated 1,700 terawatt hours of electricity in the United States in 2019, an increase of 7.7%. Natural gas generation in Europe increased by 5.2% to 768 TWH. China's natural gas generation was 236.5 TWH, up 9.7% year on year.

From the global gas supply side, according to the "Gas Analysis and Outlook 2021-2024" released by the International Energy Agency and the "2021 Edition of the Middle East and North Africa Energy Investment Outlook" released by the Arab Petroleum Investment Company, the future global gas supply is almost entirely from large conventional assets that are already under development. It is mainly distributed in the United States, Russia and the Middle East. U.S. natural gas production is expected to rise, with overseas demand being the main driver. According to oilfield services company Baker Hughes, the number of shale gas RIGS has risen from less than 70 at the start of the epidemic to more than 100 by early September 2021. Stimulated by the current high natural gas prices and increased overseas demand in the future, we expect more RIGS to re-enter the natural gas market, driving continued growth in natural gas production.

In addition, the report's data shows that countries in the Middle East and North Africa remain relatively cautious about gas development projects, with a total of $75 billion in gas investment committed in 2021-2025, a decrease of $9.5 billion compared to the forecast. Many large projects, including Qatar's northern oil field expansion project, will not be completed until 2024, so the short-term increase in gas supply in the Middle East is expected to be limited. The increase in Russian production is mainly due to the development of new projects in gas fields, in addition to the Bovanenkovo gas field, which will increase its capacity to 115 BCM/year, the Kharasavey field is expected to come online in 2023, with a capacity of 32 BCM/year. If the political problems of Nord Stream 2 are eased, Russia's ability to supply gas to Europe will be further enhanced. We predict that the global natural gas supply will increase slowly in 2021-2023, and we will calculate the gas production in the main gas producing regions. According to the calculation results, the global natural gas supply in 2021-2023 will reach 39,686, 40,417 and 41,117.2 billion cubic meters, respectively. Year-on-year increases of 2.98%, 1.84% and 1.87% respectively.

From the perspective of the global demand side of natural gas, we believe that gas demand will show a long-term growth trend. On the one hand, global economic activities are gradually recovering from the pandemic, and energy demand continues to rise. On the other hand, the pressure of carbon emission reduction has led to the inclination of national energy policies to the use of clean energy, and the potential of switching from coal and oil to natural gas has been greatly exploited. From a regional perspective, the Asia-Pacific region will be the main driver of future gas demand growth.

The increased demand in Southeast Asian countries is mainly from natural gas power generation. At the same time, the rapid increase in demand also makes the gap between supply and demand balance in the Asia-Pacific region gradually expand. In addition, there will be a significant increase in gas demand in the Middle East. Saudi Arabia and Iraq are looking to invest in gas-fired power generation projects, while countries such as Iran are increasingly focusing on petrochemicals projects. After taking the above factors into consideration, the global demand for natural gas will continue to increase in 2021-2023, and the demand for natural gas will reach 39,755, 40,718 and 4,169.9 billion cubic meters, respectively, an increase of 4.05%, 2.37% and 2.41%. Natural gas demand in 2021 is expected to return to pre-pandemic 2019 demand levels.