Meeting China's surging gas demand
China is now the world's largest consumer of energy and its rising demand represents the most formidable geopolitical challenge of the foreseeable future
GAS USE in China has increased dramatically in the last decade and is set to surge. Consumption of 24.55bn cubic metres (cm) in 2000 almost quadrupled to 88.7bn cm in 2009, according to Cedigaz, accounting for nearly 4% of Chinese primary energy consumption.
Increasing gas use will pose an acute challenge for the country: the National Development Reform Commission has decreed that, by 2020, gas's contribution to primary energy consumption should increase to 10%. This would require a further quadrupling of gas supply to more than 340bn cm/y by 2020. Where all this gas will come from is a fundamental and difficult question for both China and the rest of the world.
China's energy mix is dominated by coal. Compared with the world's second-largest energy consumer, the US, the dissimilarity is striking (see Figure 1). Replacing a large amount of coal-fired power generation with natural gas is a high priority to reduce pollution, but also to meet the Chinese government's November 2009 proclamation that, by 2020, carbon emissions will be 40-45% lower than the total amount in 2005.
In the US, at the end of 2009, proved gas reserves stood at over 8 trillion cm, an increase of 11% over 2008 and the highest level since 1971, thanks to shale-gas development, says the Energy Information Administration. Production and consumption were 0.58 trillion cm and 0.68 trillion cm, respectively. In comparison, Chinese reserves stood at 2.5 trillion cm and production and consumption were 85.2bn cm, and 88.7bn cm, respectively, according to Cedigaz.
On a per capita basis (see Table 1), the US uses more than 35 times more gas than China, which indicates the vast potential for gas penetration in the Chinese energy mix, but also the enormous task ahead for the country.
A very positive development is that the Chinese have been successful in developing and increasing domestic natural gas supply. From 2000 to 2009, production increased by an average 13% a year, according to Cedigaz. However, consumption rose by an average of 14.5% a year and this gap will widen substantially over the next decade.
Gas production in China will accelerate considerably. But although domestic production in 2010 is likely to have exceeded 90bn cm, according to domestic reports, demand will have reached 120bn cm. And the gas deficit in China is only expected to grow, to 30bn-40bn cm in 2010; 50bn-60bn cm in 2015; and 80bn-90bn cm in 2020 – or 50% of forecast consumption.
Conscious of a looming supply shortfall, the country is accelerating foreign acquisitions by its national oil companies (NOCs) to secure access to gas resources. In November 2010, Sinopec bought an 18% stake in Indonesia's $6bn-plus, deep-water Gendalo-Gehem project. Gas production will be used domestically, but also exported from the Bontang LNG facility.
In March 2010, CNOOC signed a 20-year agreement with BG for 3.6m tonnes a year (t/y), or nearly 5bn cm/y, of LNG derived from the UK firm's extensive coal-bed methane (CBM) resources in Queensland, Australia. Press reports estimated the deal to be worth over $40bn. Also in March, CNPC, in partnership with Shell, bought Arrow Energy, Australia's largest CBM producer for over $3bn. The partnership aims to export 8m t/y of LNG from 2015.
On a separate tack, in October 2010, CNOOC signed a $2bn deal with the US' Chesapeake Energy, including $1.1bn for a 33.3% stake in Chesapeake's Eagle Ford Shale acreage. The purchase is a transparent attempt by the Chinese to learn from a shale-gas-industry leader, as the country looks to explore for and tap its own unconventional gas resources.
The Chinese are keen to emulate the US' success with unconventional-gas development – the government believes it has up to 150 trillion cm of shale-gas resources – but with a dearth of proved domestic conventional gas reserves, the only way to meet demand is to import by both pipeline and in the form of LNG. Over the last decade, China has fast-tracked construction of gas-pipelines, both import and domestic connections. In addition, three LNG regasification terminals have been built; five more are under construction; and a further four have been proposed.
Pipeline imports have become vital for China. Gas deliveries from Turkmenistan, across central Asia, began in 2010, under a 30-year contract for supplies of 40bn cm/y. The 1,833 km, double pipeline from Turkmenistan to Horgos, Xinjiang province, should achieve a capacity of 30bn cm/y by the end of 2011, with the contracted 40bn cm/y capacity to be achieved at some point in the future. The pipeline connects with China's second West-East pipeline, which delivers gas as far as Hong Kong, to the south, and Shanghai, on the east coast.
This pipeline has clearly affected Russia's presumed dominance of regional gas markets and also demonstrates how fast the Chinese can move to secure vital energy resources. Russia has been in continuous negotiations with the Chinese over oil and gas supplies for several years. As early as March 2006, the two countries signed a memorandum of understanding over gas supply and Russia agreed to build two pipelines to China to deliver 68bn cm/y, from 2011. However, price disputes and the economic crisis of 2008, stalled developments, although an agreement on prices was apparently reached in September 2010 and imports from Russia could begin in 2015.
A deal to build oil and gas export pipelines from Myanmar (Burma) was signed in June 2010 and CNPC, one of China's NOCs, will build the parallel links. The 12bn cm/y gas pipeline, to Guizhou province, could be operational by 2013 – the bulk of construction work on both pipelines should be finished by 2012, says CNPC.
These transnational pipelines will be integrated into a large domestic network of trunk lines that has been under construction for almost a decade. The first West-East pipeline, an initial step in supplying gas from fields in the west of the country to demand centres in the east, came on stream in October 2004. The 4,000 km trunk line has a designed capacity of 12bn cm/y. Construction of the second West-East pipeline began in 2008. Including branch lines, its total length is about 7,000 km, connecting with the Central Asia pipeline in Horgos, then passing through 13 provinces, en route to Shanghai and Hong Kong.
A third West-East pipeline, with a capacity of 30bn cm/y, is planned to carry Central Asian gas from Horgos, through eight provinces, terminating in Shaoguang, Guangdong province. The first phase of the link will begin operating in 2012, with the second phase on line by the end of 2014.
By the end of 2009, China had 36,000 km of gas pipelines with a combined capacity of 100bn cm/y, and a further, massive construction programme is planned over the next few years. By 2015, a further 24,000 km of trunk lines and 8,000 km of branch lines will be built. Local distribution pipelines will be constructed at a pace of 20,000-30,000 km a year. According to state-owned Sinopec, China will build 300,000 km of gas pipelines during the next 12 years.
But while these construction plans are impressive, there are still big hurdles for China's gas-development plans. One is the NOCs oligopoly over upstream exploration and development, as well as imports, which may constrain investment. The second is a shortage of midstream pipeline capacity. These obstacles must be negotiated if China's gas evolution is to move forward successfully.
In June 2006, China's first LNG import terminal came on line and imported 0.68m tonnes. In 2008, imports reached 3.2m tonnes – 81% from Australia – just short of the terminal's 3.7m t/y capacity. In 2009, with another two terminals operating, China imported 5.5m tonnes of LNG, with over 83% supplied by southeast Asian producers and Qatar delivering 7%. China's main LNG sources for now, and the foreseeable future, are Australia, Indonesia, Malaysia, Papua New Guinea and Qatar – in 2010, Qatar was contracted to supply another 5m tonnes.
PetroChina is the dominant player in China's gas industry, handling 70-80% of production and supply, but on the LNG side, CNOOC has been the dominant player so far, operating the country's three operational terminals. But PetroChina has two terminals under construction, both expected to start up in 2011, and Sinopec signed a LNG contract with ExxonMobil in December 2009 for 2m t/y, from Papua New Guinea, for delivery to a planned facility at Qingdao LNG plant.
Combined, the country's existing, under construction terminals, and those in development could have a combined LNG-import capacity of more than 35m t/y (48bn cm/y) by 2015 (see Table 2).
So how much gas does China need?
For a number of reasons, it is clear that China will need to import significantly larger volumes of natural gas in the future. But how much gas might china need? Using the data in Table 1, a gas-usage forecast for China can be made.
Table 3 makes four Chinese demand forecasts, under which per capita consumption reaches 30%, 50%, 75% and 100% of US per capita demand in 2008, with the following assumptions: US gas use remains constant; China's population remains at 1.35bn; 50% of the gas will be delivered by pipeline and 50% as LNG.
With limited potential to significantly increase pipeline deliveries, by increasing demand to 30%, China will have to add another 81 LNG receiving terminals – each with an average capacity of 4m t/y. If Chinese consumption were to reach 100% of US per capita demand, the number of new LNG terminals required would have to more than triple to 271.
These numbers are staggering and demonstrate the enormous task ahead for both China and the global energy industry in attempting to modernise the country's energy mix and reduce its carbon emissions.
Michael J Economides is professor of chemical and biomolecular engineering, University of Houston