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China: Enter the smokeless dragon

Part of China’s blue-sky strategy is the switch from coal to natural gas—with an unexpected impact on the global LNG market

Between 2015 and 2017, China's liquefied natural gas imports doubled. Pipeline gas imports more than doubled. Yet last winter China faced an unprecedented gas supply crisis that left homes, schools and hospitals without heating—prompting a scramble to divert gas from industry.

The immediate cause of the crisis was an air pollution-prevention-and-control programme stipulating that coal-fired boilers in key regions should be replaced with gas-fired ones.

The deadline, October 2017, coincided with the Communist Party's 19 th National Congress and so implementation was exceptionally forceful. In some places, coal boilers were ripped out before gas replacements were available. In others, the switch was made without gas supply being available. Even where coal and equipment to burn it could be found, restrictions were in place forbidding its use.

Confounding forecasts

The impact of these policies was an unprecedented surge in demand for natural gas, which the country's gas suppliers and delivery infrastructure simply couldn't meet. The consequences for China's LNG imports were dramatic.

Data from China's General Administration of Customs shows imports grew by 33% in 2016 and 46% in 2017, almost a doubling from 19.7m million tonnes in 2015 to 38.3m tonnes in 2017. This year they're on track to grow by just over 50%, which would take volumes to 58m tonnes, exceeding even the most bullish of forecasts.

China's rampant LNG import growth has had several consequences for the global market. According to a recent report from the International Gas Union (IGU), global LNG trade rose by 35.2m tonnes, meaning that China alone accounted for over one-third of the increase. As a result, it has become the second-largest LNG importer behind Japan, overtaking South Korea.

Balancing the market

Most importantly of all, Chinese import growth has been the single biggest factor in averting a widely expected LNG glut, as supply continues to ramp up from new liquefaction projects in Australia, the US and elsewhere.

According to the IGU, 43m tonnes a year of new liquefaction capacity is expected to start up this year, so once again—with a potential 20m-tonne import increase looking likely for 2018—China looks set to play a key role in balancing the market.

58m tonnes – China’s 2018 LNG import forecast

Pipeline gas imports have also been growing strongly. China imports gas from Turkmenistan, Kazakhstan and Uzbekistan through three pipelines from central Asia, originating in Turkmenistan, and from Myanmar. Pipeline gas imports grew from 12.5m tonnes in 2015 to 28m tonnes in 2016, a rise of 124%. However, growth in 2017 slowed to just 9%. Pipeline imports are on track to grow by 20% in 2018, which would take them to 36.6m tonnes for the year.

Total imports of natural gas grew by 69% in 2016 and 27% in 2017. The growth rate so far in 2018 is 37%, which, if maintained for the rest of the year, would see imports rise to an astonishing 93.9m tonnes. 

The big question now is: how fast can China's gas imports continue to grow, especially its imports of LNG?

Demand drivers

The drivers behind further gas demand growth are policy, policy and policy.

China has long suffered from severe air pollution in its cities because for decades economic growth was prioritised over environmental issues. Since Xi Jinping took over as president in 2012, there has been a series of initiatives to bring back blue skies.

Alongside its quest for cleaner air, China has assumed a leadership position on climate change, heightened by the decision of US president Donald Trump to abdicate from that role.

There's no doubting China's determination. Despite the gas shortages of last winter and the publicity that surrounded them, at the height of the crisis the government issued a clean winter heating scheme for northern China covering the period to 2021. So, the policy of switching from coal boilers to gas ones is far from finished.

 

China LNG, Pipeline and Other gas imports in m tonnes - Source: China Customs Statistics

 

China has taken immense strides towards developing renewable energy sources, such as wind and solar power. But the government has acknowledged that natural gas has a vital role to play in complementing these variable energy sources.

In recent years, the focus has been on the coal-to-gas switch in heating; but China is also working to expand gas-fired electricity generation capacity from 67.5 gigawatts in 2016 to more than 110GW by 2020.

In its Nationally Determined Contribution (NDC) climate pledge under the Paris Agreement, China has an ambitious target to increase the share of gas in the primary energy mix from 6% in 2016 to 10% by 2020. This target also appears in the 13th Five-Year Plan for Energy Development and in the 13th Five-Year Plan for Natural Gas Development.

The five-year gas plan projects a total requirement of 360bn cubic metres (265m tonnes), up from 207bn cm (152m tonnes) in 2016. Of this, 207bn cm (152m tonnes) would be produced indigenously—mainly by China's 'Big Three' state-controlled oil and gas companies: China National Petroleum Corporation (CNPC)/PetroChina, Sinopec and China National Offshore Oil Corporation—and 153bn cm (113m tonnes) imported, a 109% increase on 2016's 73bn cm (54m tonnes).

The gas plan is more pragmatic than the NDC in recognising the scale of the challenge. It sets a target range of 8.3-10%, rather than insisting on just 10%, which is probably unachievable in the time available.

Delivery challenge

The constraints that China faces in meeting its natural gas targets under the five-year gas plan are explored in a paper published by Wang Zhen of the CNPC Policy Research Centre, and Xue Qing of the Academy of Chinese Energy Strategy.

They identify challenges in all links of the value chain: indigenous gas production capabilities, especially when it comes to meeting shale gas production targets; import infrastructure, such as LNG regasification terminals; pipeline infrastructure; and, not least, underground gas storage capacities, which are woefully inadequate to meet daily and seasonal demand peaks.

For this year at least, regasification capacity will probably be sufficient, according to Michael Mao, senior analyst and consultant with Sublime China Information, a leading Chinese provider of commodity data and analysis. He expects regas capacity to rise to between 60 and 64m t/y by the end of the year. However, that means terminals will need to operate at very high utilisation rates if the current growth trend continues.

The pressure on pipeline infrastructure is highlighted by a remarkable statistic. In 2017, a quarter of all the LNG imported by China, some 10m tonnes, was delivered to customers by truck, because of pipeline constraints.

As for storage, according to Wang Zhen and Xue Qing, in 2015 China's apparent gas consumption was 193bn cm (142m tonnes), while underground storage capacity was 5.5bn cm (4m tonnes), meaning less than 3% of consumption. The ratio tends to be much higher in mature gas markets, sometimes as high as 25%, but with 12% generally regarded as adequate.

A huge national effort is now under way to reinforce physical production, import and delivery infrastructure, with numerous new projects being proposed and construction schedules accelerated.

It wasn't long ago that China's main LNG importers—the Big Three—appeared to be significantly over-contracted. Not anymore.

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