In this undated file photo, a technician checks a gas pipeline in Yongqing county, Hebei province. (PHOTO / XINHUA)
Shenergy Group recently signed a sales and purchase agreement with Russia's second-largest gas producer Novatek to receive more than 3 million metric tons of liquefied natural gas (LNG) over a 15-year period.
The LNG will be sourced from Arctic LNG 2, a new project in Russia, and will come online around mid-2023 at the earliest.
Analysts said this will help the Shanghai-based company to ensure its energy needs. It is also in accordance with a growing trend for Shanghai to diversify its LNG supply mix.
China's gas demand has recovered faster than expected after the pandemic, driven mostly by the industrial sector, which has recovered to 2019 levels in May. The trend is expected to continue as the Chinese economy roars back to life and offices reopen
"Russia's Novatek has entered Petronas' Shanghai LNG turf, adding to a growing trend of Shanghai diversifying its LNG supply mix, where currently about 80 percent comes from Petroliam Nasional Berhad (Petronas)'s Malaysia complex," said Cao Lujia, an analyst at BloombergNEF.
Petronas has a long-standing relationship with Shenergy and delivers 3 million tons of LNG a year to Yangshan, Shanghai. The two companies also signed a deal last year to send 1.5 million tons of LNG a year to Wuhaogou terminal starting in 2022.
Yangshan and Wuhaogou terminals supply over 50 percent of the total gas consumed in Shanghai.
Backed by the Shanghai municipal government, Shenergy was the first State-run company in addition to China's dominant State energy giants to own and run a receiving LNG terminal.
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Cao said Shenergy is also actively diversifying its LNG sources. Centrica Plc will deliver 500,000 million tons a year, starting in 2024, potentially sourced from the United States and Qatar. Total SE and Shenergy established a joint venture in 2019 to expand LNG sales in the Yangtze River Delta, she added.
Novatek Chairman Leonid Mikhelson said the Chinese market is one of the key regions in the company's LNG marketing strategy and Novatek plans to further increase its supplies of LNG to this country.
"Our LNG commercial strategy is to diversify our client base and target end consumers in the fast-growing Asia-Pacific region and the LNG volumes produced from our Arctic LNG 2 project are core to our long-term objective of delivering affordable, secure and sustainable natural gas for many decades," Mikhelson said.
Partners in the LNG project are Novatek with 60 percent of interests and Total, China National Petroleum Corp, China National Offshore Oil Corp and Japan Arctic LNG, each with 10 percent stakes.
China's gas demand has recovered faster than expected after the pandemic, driven mostly by the industrial sector, which has recovered to 2019 levels in May. The trend is expected to continue as the Chinese economy roars back to life and offices reopen.
The Economics & Technology Research Institute, a think tank under China National Petroleum Corp, expects the country's average annual increase in natural gas demand will exceed 20 billion cubic meters in the 14th Five-Year Plan period (2021-25) and reach 430 bcm in 2025.
Li Ziyue, an analyst at Bloomberg-NEF, said that demand for natural gas had been suppressed in 2020, which will lead to robust growth this year.
Russia has increased LNG supply to China in recent years, reaching 4.8 tons in 2020, according to BloombergNEF. It exported 1.1 million tons of LNG to China in 2018, followed by 2.8 million tons in 2019.
The country is also the fifth largest LNG supplier to China in 2020, followed Australia, Malaysia, Qatar and Indonesia.
Russia started launching gas deliveries to China via the Power of Siberia pipeline in 2019－one of the most anticipated energy projects in Asia. It is expected to gradually ramp up supplies to 15 billion cubic meters in 2022 and 38 billion cubic meters in 2025.
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By 2023, as much as 40 percent of Chinese gas demand growth will be met through Russian gas from Power of Siberia, which will make Russia one of the major natural gas suppliers to China in the future, in addition to Australia and Turkmenistan.