Why China's gas demand needs to surge 14% per year

As it aims for natural gas to supply 10% of energy by 2020.

The de-rating of China's gas stocks will reverse in 2017. In 2015, the sector de-rated as demand growth fell from historical double digit rates to 3%; another leg occurred in 2016 due to policy anxiety over downstream margins, according to Jefferies' research.

Coal-to-gas substitution appears to have put demand growth back on track and midstream/distributor were never targets of the NDRC margin police. The sector should re-rate as these trends become evident.

Here's more from Jefferies:

According to our calculations, China's natural gas demand grew 8.3% in 2016. The 13th 5-Year Plan calls for natural gas to supply 10% of energy in 2020, up from 6% in 2015.

To reach this level, gas demand needs to increase ~14% per annum. While we believe that is a stretch, ever more restrictive environmental regulations should push demand growth to ~10% levels, in our view.

Given time, we believe coal burning processes will be retooled for gas and, also given time, more industrial burn of coal will be eliminated by ever tightening environmental restrictions.

Increasing seasonal peak to trough gas demand suggests that coal-to-gas substitution for winter heating has been a large driver of gas demand in recent years.