China’s challenge: securing sufficient gas
The pandemic appears to have barely dented China’s hunger for gas. The difficulty remains building sufficient production, import, storage and transport capacity to satisfy demand
China’s natural gas demand has proved to be surprisingly resilient in the face of the Covid-19 outbreak.
GDP fell by 6.8pc during the first quarter because of quarantines and lockdowns—the first time there has been a contraction on this scale since the cultural revolution. But despite this downturn, gas demand in Q1 ended up just 8-10bn m³ lower than was expected before the pandemic, according to Michal Meidan, director of the China energy programme at the Oxford Institute for Energy Studies (OIES).
This chimes with forecasts from Sublime China Information (SCI), a provider of commodity information and analysis based in Shandong province, that predicts a total loss against expectations for the year of 10bn m³. It says demand in Q1 will have been lower than expected by 9bn m³ in the first quarter, with a further loss of 1bn m³ in the second.
This also correlates with a forecast from Wood Mackenzie that demand loss in 2020 would be 6-14bn m³, with a midpoint of 10bn m³.
In the context of a gas market the size of China’s, where consumption in 2019 reached 304bn m³, the reduction of around 3pc is described as “minor” by SCI senior analyst Michael Mao. He forecasts that overall market growth in 2020 will exceed 9pc, taking consumption to around 330bn m³, while LNG imports are expected to be 5mn t up on last year, to reach 66mn t.
“A lot of China watchers were concerned that the government’s focus on growth would…[mean] the reform agenda would take a back seat. That is certainly not the case” Meidan, OIES
Both domestic production and imports were up year-on-year in Q1. Customs data for the first quarter of the year shows LNG imports up 2.2pc, from 15mn t to 15.2mn t, while pipeline imports edged up by 1pc, from 9.3mn t to 9.4mn t (or 12.8bn m³). The lack of storage data creates some uncertainty about actual demand loss, Meidan points out, but it is still clear that gas consumption took a much smaller hit than oil.
This resilience is a powerful reminder that the nation’s big gas challenge over the medium to long term will be to source and secure sufficient supply. Market reforms and other policies continue to drive extraordinary demand growth, even if its pace has temporarily slowed.
Even before Covid-19, China’s gas consumption growth was slowing, dropping from highs of 15pc in 2017 and 18pc in 2018, to 10pc last year. Growth was dampened by a combination of infrastructure constraints and an economic slowdown, with GDP growth falling to 6pc in 2019.
While the prospects for economic growth remain highly uncertain, there are huge programmes under way to construct LNG import terminals, pipelines and storage facilities—and intense pressure from the government for domestic producers to up their game.
“A lot of China watchers were concerned that the government’s focus on growth would lead to a very singular focus on reinvigorating the economy, meaning the reform agenda would take a back seat,” says Meidan. “That is certainly not the case. It is a good sign that reforms are continuing.”
Major gas reforms have come thick and fast over the past six months, including the liberalisation of market pricing, the reorganisation of infrastructure and the opening up domestic upstream exploration to international companies.
In November 2019, the National Development and Reform Commission (NDRC) took a big step towards liberalisation of the downstream sector. Pricing at provincial hubs will in future be driven by the market, with provincial and local government playing a supervisory role rather than setting prices.
December saw the formation of the much-anticipated China Oil and Gas National Pipeline Corporation (COGNPC) in a major structural re-organisation of the nation’s midstream gas assets.
500bn m³/yr – Chinese demand forecast for 2025
COGNPC will assume ownership of all long-distance gas pipelines and underground storage facilities and many of China’s LNG import terminals, a process that will take months to complete because of the complexities of transferring these assets from the so-called big three national oil and gas companies: CNPC/PetroChina, Sinopec and Cnooc.
A key objective is to improve utilisation of infrastructure by facilitating third-party access, something China’s second-tier gas companies have long been demanding, as has the International Energy Agency (IEA). Spare cargo slots at LNG terminals will be auctioned, perhaps later this year although more likely starting in 2021. This will give second-tier companies that do not own terminals easier access to the global LNG market.
In January 2020 it was announced that, later this year, all upstream exploration and development will be opened to private and foreign companies—part of a strategy to boost domestic production and address concerns about overdependence on imports.
According to the IEA, China’s natural gas import dependence reached 43pc in 2018 and is projected to rise to 53pc by 2030. The spectacular growth that has taken place in the country’s imports of pipeline gas and LNG since 2015 can be seen clearly in Figure 1.
The picture that emerges from these reforms is an industry structure in which almost all midstream infrastructure remains under government control, while the upstream and downstream sectors are increasingly exposed to competition—a whole new commercial dynamic in Chinese gas.
In the light of these reforms, SCI forecasts that gas demand will grow at an annual average rate of 8.3pc between now and 2025, when it is expected to reach 490bn m³.
The challenge China faces in constructing sufficient production, import, storage and transportation infrastructure to meet demand growth on this scale is nicely illustrated by the new Power of Siberia pipeline, which began flowing Russian gas in December.
One of the most ambitious gas projects ever undertaken, its 38bn m³/yr of capacity will make a major contribution to Chinese supply. Supplies will ramp up by 5-8bn m³ each year, so it will not reach plateau until 2025. By that time, it will be meeting only 8pc of China’s gas demand, should SCI’s forecast prove correct.
“This means LNG is still one of the most important sources,” says Mao. “Fearing a supply shortage like the one in the 2017-18 winter, China has implemented an ambitious expansion of import terminals. That capacity, after two years of construction, will enter use from 2020.”
“Fearing a supply shortage like the one in the 2017-18 winter, China has implemented an ambitious expansion of import terminals” Mao, SCI
A decade ago, almost all of China’s gas came from indigenous production. But the big three oil and gas companies have struggled to keep up with demand, despite growing pressure from the government. Last year, China imported 136bn m³ of the 304bn m³ of gas it consumed, 51bn m³ through pipelines and 85bn m³ as LNG. Shale gas output in particular has failed to meet expectations; only 10.9bn m³ of shale gas was produced domestically in 2018.
Domestic gas production grew by 10pc in 2019, to reach 175bn m³. However, SCI’s forecast is that domestic production will grow by an average of 7-8pc between now and 2025, so import dependence will continue to rise.
In SCI’s forecast for LNG imports to 2025, supply rises steadily from 61mn t in 2019 to 109mn t in 2025. This growth would see China overtake Japan as the world’s biggest importer of LNG in 2023. SCI also expects the share of spot cargos to rise from 25pc in 2020 to 30pc by 2025.
Infrastructure constraints will ease as receiving capacity grows to 84mn t/yr in 2020 and then 136mn t/yr by 2025, and as more long-distance pipelines are built within China. The current lack of pipeline capacity and interconnection within China means that large volumes of LNG are distributed by truck and ISO containers.
Figure 3 shows SCI’s forecast for pipeline imports to 2025. Growth comes solely from the Power of Siberia pipeline as it ramps up to its 38bn m³/yr plateau.
The ramp-up will be gradual because new infrastructure is needed in both Russia and China. The 2,200km section that has been completed goes from the Chayandinskoye gas field to Blagoveshchensk near the Chinese border. The field is due to ramp up to its full output of 25bn m³/yr by 2024.
Another 800km section is being laid from the Kovyktinskoye field in Irkutsk to Chayandinskoye. Kovyktinskoye is due to start up in 2022, eventually ramping up to 25bn m³/yr.
Three new pipeline sections will be needed within China. The completed northern section runs from the city of Heihe, on the border with Russia, to Changling in Jilin province. The middle section, extending the line to Yongqing in Hebei province and providing a direct route to the Beijing and Tianjin municipalities, is due to start up by the end of this year. The southern section, extending the line to Shanghai, is due to start up in 2024.
China imports most of its pipeline gas from Central Asia via the Central Asia-China Gas Pipeline (CACGP)—a three-string (A, B and C) system running from Turkmenistan to China through Uzbekistan and Kazakhstan. In 2018, Turkmenistan supplied 33.3bn m³, Uzbekistan 6.3bn m³ and Kazakhstan 5.4bn m³. The prospects for completing Line D of the CACGP, which takes a different route to lines A, B and C, remain uncertain. SCI expects imports through the CACGP to decline between now and 2025.
China also imports gas via the Myanmar-China Gas Pipeline (MCGP) which has capacity of 12bn m³/yr but is underutilised, transporting only 2.9bn m³ in 2018.
The cost of gas from Russia, previously undisclosed, has turned out to be lower than many expected, says Mao, coming in at $6/mn Btu, including VAT. This has helped to revive interest in a proposed second pipeline from China via the so-called western route, which could transport as much as 50bn m³/yr of gas. However, this pipeline, dubbed Power of Siberia 2, is unlikely to be flowing gas until the end of the 2020s at the earliest.
Meanwhile, a gas development report published by the Chinese government last year encourages companies “to ‘go abroad’ and actively participate in the exploration and development of international gas resources and the investment and operation of international LNG liquefaction projects”. It is something the big three have already been doing with some success.
China is now coming to the end of the period covered by its 13th five-year plan. The 14th five-year plan, covering 2021-25, is due to be finalised in the autumn and ratified next year. It is already clear that environmental policy, energy efficiency, energy security and energy self-sufficiency will be key themes, according to Mao.
The National People’s Assembly that has just concluded in Beijing was dominated by Covid-19, the response to it, and the issue of what to do about Hong Kong. Next year’s assembly is set to be a key indicator of the future direction of natural gas development in China.