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China’s Gas Choices:Straight from the source

研究机构:麦格理证券 研究员:麦格理证券研究所 发布时间:2014-11-10

5 cities, 5 flights, 500kms on the road, 3 field trips…

In the fourth edition of our China’s Gas Choices research we provide on theground colour from our recent gas value chain trip.

1. Gas demand tracking modestly below expectations

Despite a compelling anti-pollution tailwind, gas consumption YTD is trackingslightly below expectations at 10% y/y vs a 12% 7-yr cagr implied by the govttarget, due to a combination of: a) general slowdown in industrial activity; b)rising gas prices and a slower roll out of consumer subsidies; and, c) regionalsupply shortfalls, due to midstream bottlenecks. We now forecast China’s gasdemand to reach 340bcm by 2020 (govt target 360bcm, MQe 380bcm prior), stillimplying a robust 12% cagr 2013-20e. Nonetheless, a 40bcm cut to our demandforecasts is equivalent to one Russia-China gas deal, and implies furtherpressure at the high-end of the Chinese gas cost curve (LNG, pipe imports, coalto-gas). Further as we go through in Asia’s Energy – Short and Getting Shorter,we think coal will maintain its dominance in China’s energy production mix.

2. Uncertainties on the gas price outlook for 2015

Various speakers on our trip and our recent Industrials conference noted thatfollowing the material decline in oil and product prices, in theory, the price of“new” gas could be lowered such that China ends up with a uniform non-resiceiling citygate gas price of Rmb2.4-2.5/cu.m in 2015e, rather than theconsensus view of Rmb2.95/cu.m. This is a potential headwind to ourPetroChina PE re-rating thesis, but supportive for the downstream gasdistributors.

3. OFS – still a case of near-term pain, long-term gain

While everyone agreed on the bullish long-term growth outlook for Chinaonshore oilfield services (OFS), the well documented CNPC anti-corruptioninvestigations have led to a slowdown in domestic OFS activity, and a gradualrecovery is not expected until sometime next year. That said, following the 50%+sector share price correction YTD, we see an attractive risk-reward balance, andour order of preference is Hilong>SPT>Petroking>Anton>Honghua.

4. LNG outlook not broken for all

Against the consensus view of overcapacity and a loss making outlook for thesmall-scale LNG operators across China, ENN’s Qinshui LNG plant wasoperating at ~90% utilization and profitable. NewOcean Energy, in partnershipwith Sinopec, appears well placed to be the dominant distributor of LNG inGuangdong.

5. Coal bed methane activity picking up

Despite several obstacles over the past decade and while still a small part of theoverall gas supply-demand picture, following our field trip to independentproducer Asian American Gas (private), and with Green Dragon Gas makingsignificant progress across its acerage, we think China’s output from coal bedmethane is likely to surpass shale gas till the end of this decade.

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