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IEA sees Golden Age for China gas as demand will double

Chinese gas demand will double over the next five years due to a commitment to clean up the country's pollution

China's campaign to clean its smog-filled skies will usher a new 'golden age of gas' for the country as demand doubles over the next five years, the International Energy Agency says in its latest Medium-Term Gas Market. China became the world's third-largest gas consumer in 2013 behind the US and Russia after demand surged 13%, or around 20 billion cubic metres (cm), to 166bn cm. Yet gas remains a relatively small part of China's overall energy mix, accounting for just 5% of overall energy consumption. It is also still a relatively small player on the global market, with China's gas demand accounting for just 4% of global demand, compared to around 11% of global oil demand and much higher levels for other commodities.

That is set to change. China's gas consumption will race ahead at greater than 10% a year over the next five years, reaching 315bn cm/y in 2019. The IEA's forecast for rapid short-term demand growth is largely in line with the expectations of many Wall Street analysts as well as Wood Mackenzie, a think tank. All of them expect government policy to lead a shift away from coal towards gas after the government has pledged to clean up China's noxious skies. In March this year at a major Communist Party meeting, China's premier Li Keqiang said the government would 'declare war' on pollution.

Since, local governments, especially in Beijing and around northern China where smog is the worse, have announced a raft of measures to curb coal consumption growth and junk high-emission vehicles. Despite years of pledges and hard talk on pollution, though, improvement has been slow to come. The government's annual environmental report, released in early June, found that just three of 74 cities tested met the government's own air quality standards.  

Golden age: China's gas industry on the cusp of new era

Driving demand

Power demand, the IEA says, will be the largest driver of consumption growth, but the residential, industrial and transport sectors will all see strong growth. China will have the world's largest fleet of natural gas vehicles in the world by next year as the country continues a rapid infrastructure build out of compressed natural gas and liquefied natural gas filling stations, the IEA says. In many parts of the country, government incentives make selling gas into the transport sector much more profitable than selling to industry or power generators. As a result, gas producers have gotten behind the push for natural gas vehicles, building integrated operations from the field to the pump, which has supported strong growth. 

Such high levels of gas demand growth will rely partly, the IEA says, on China's ability to ramp up relatively affordable domestic supply, supplemented increasingly by imports. Gas production is expected to rise by about two-thirds, or 76bn cm, from around 117bn cm in 2012 to 193bn cm in 2019, which will likely make the country one of the world's largest gas producers. A combination of new conventional, tight, shale, coal-bed methane and coal gasification supplies will drive production growth. PetroChina's major Anyue gas find in Sichuan province, touted by the company as one of China's largest ever discoveries, will help boost short-term output. 

The IEA reckons the country's 2015 shale production target of 6.5bn cm is within reach following a recent breakthrough for Sinopec at the Fuling shale play. The report does not say if it thinks China will be able to hit its more ambitious 2020 target of between 60bn cm/y and 100 billion cm/y, though the forecast implies China will miss the target. Another unknown is how much gas will come from the South China Sea. State-owned China National Offshore Oil Corporation (Cnooc) is keen to increase its operations in the waters. It launched its first deep-water gas project alongside Canda's Husky Energy last year. However, territorial disputes with it maritime neighbours, including Japan, Vietnam, the Philippines and others, will complicate future development. Chinese and Vietnamese ships have come to blows as anger has risen over Cnooc's drilling in disputed waters near the Paracel Islands. The drilling is taking place near what is thought to be a significant discovery by ExxonMobil in Vietnamese waters. 

Even with output now expected to grow faster than the IEA predicted in its previous outlook, it will not come close to keeping up with demand. China signed a major, long-awaited $400bn gas deal with Russia in May, but Russian supplies are unlikely to start flowing into China in a substantial way before the end of the decade. Instead, China will see a rapid increase in imports of liquefied natural gas from the global market and pipeline supplies from Central Asia, especially Turkmenistan, with a much smaller amount of gas coming from Myanmar. By 2019, the IEA forecasts, roughly half of China's imports will come via LNG and half from Central Asia. 

Beijing policymakers are obsessed with diversifying its sources of energy to avoid becoming overly dependent on any single supplier, so it is likely to see LNG supplies from all corners of the globe where supplies are available, including Australia, the US, Canada, East Africa, the Caribbean and beyond. China, the IEA says, will become the world's second-largest gas importing region in the world behind Europe as soon as 2016, a remarkable turnaround considering the country only started importing natural gas in 2006. 

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