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Cost could curb China’s gas appetite

The post-Tiananmen Square compact of rising living standards in return for political obedience may prioritise affordable residential energy over blue skies

An unpalatable truth it may be, but, in China, clean urban air and camera-friendly blue skies may be a ‘nice to have’. On the other hand, guaranteed affordable household energy, from any source, is core business.

Thus, if the ruling Communist Party has to make a choice between cutting pollution and household bills rising to consumer-hurting levels, it is only going to jump one way.

In addition, energy security is inextricably linked with China’s overall stability. Should gas import dependency reach levels that concern the authorities, it could further motivate a slowdown in the switch from coal to gas.

Chinese gas demand growth rates of 15pc and 18pc in 2017 and 2018 were largely due to a focus on improving air quality, says Anne-Sophie Corbeau, head of gas analysis at BP. Chinese gas demand growth might otherwise not have reached double digits, she says.

A government move to push for the conversion of boilers from coal to gas pushed up gas demand and imports in 2017-18, agrees Philip Andrews-Speed, principle fellow in energy studies at the National University of Singapore. But “there is no sign of [further government gas demand stimulus] just at the moment”, he says.

Government policy is the ultimately unpredictable variable Speed, NUS

Government policy is the “ultimately unpredictable variable”, says Speed, and, while pollution has previously driven its own low-level dissent, there is no guarantee that air quality will always trump other policy concerns—particularly after the 1 October celebrations of the 70th anniversary of the People’s Republic are out of the way. 

Old King Coal

The official narrative of a rapid move away from the dirtiest fuels is potentially questionable in itself. A report by environmental NGOs Global Energy Monitor, Greenpeace and Sierra Club drew on satellite photos to support its claim that China restarted construction on more than 50 gigawatts of suspended coal-fired power plants in 2018. In March, the China Electrical Council, the industry body representing China’s power sector, called for an increase of up to 30pc in the national coal power capacity to 1,300GW by 2030.

Rather than trying to remove coal from its energy mix, China has been working to install emissions control technology at coal-fired plants. China says that 80pc of coal capacity was using such technology by the end of 2018.

Current US tariff tensions will further encourage Chinese policymakers to limit gas import dependency Corbeau, BP

The country is also moving once again to increase its domestic coal production, while its investment in new coal-fired generation both home and abroad means Chinese financing is behind over 50pc of all global coal power capacity currently under development, according to the Global Energy Monitor report. 

Slowdown under way

In an analysis of forecasts published by ‘big three’ Chinese oil and gas firm CNPC in late August, thinktank The Oxford Institute for Energy Studies concludes that 2019 has been “a year of softening” in China’s gas demand growth. CNPC revised down its 2025 gas demand prediction for China from 455bn m³ to 420bn m³—lower growth estimates than those of the IEA, which expects an average annual rate of 8pc out to 2024 due to weaker economic growth. The IEA concedes, admittedly that its projection is “fraught with uncertainty” in the short and medium term.

420bn m³, revised CNP forecast for 2025 gas demand

Switching from coal to gas is expensive and heavily subsidized by the government. It also carries political risks. A colder-than-expected winter in 2017-18 led to a gas supply crunch in northern China. Due to infrastructure constraints, China still finds it hard to ensure an uninterrupted supply of gas during seasonal demand swings. State planners are unlikely to countenance a repeat of sudden residential gas price hikes seen in 2017-18.

Lack of gas storage capacity remains a major concern. China has only 26 storage facilities with 8bn m³ of capacity, or 3pc of the country’s consumption, well below the global norm. Closing the gap would mean heavy investment and long lead times.

Increasing domestic gas production is also going to be a slow process. Forecasts of more unconventional gas volumes have been “a bit too optimistic”, says Xi Nan, a Singapore-based vice-president for gas and power markets at consultancy Rystad Energy in  Norway, In part due to this lack of domestic supply step-up, Rystad has conservative forecasts for Chinese gas demand—390 bn m³ in 2025 and 510 bn m³ in 2035. Coal-fired plant capacity, is likely to be little changed in 2040 from today, says Nan.

The current US tariff tensions, which largely shut China out of receiving fast-growing US LNG exports, will further encourage Chinese policymakers to limit gas import dependency, says BP’s Corbeau. Using policy to dampen gas demand growth by slowing down switching in the residential and industrial sectors is an obvious way to retard an increase dependency, she argues. 

Weaker growth

Weakening Chinese economic growth further raises the prospect that current gas demand projections may err to the upside. Even if the Chinese central bank cuts interest rates more aggressively than markets currently expect, a further economic slowdown will not be avoided, according to consultancy Capital Economics. Stimulus is losing its effectiveness: increased corporate bond defaults are dampening the transmission of lower policy rates to non-bank credit.

390 bn m³, Rystad’s more conservative 2025 demand projection

Demand forecasts are based on assumed robust Chinese industrial growth that is no longer in evidence, argues Cristina Alfonso, a Philippines-based energy economist—a 4.4pc industrial production growth rate is the lowest since 2002. A further escalation of the tariff war will “definitely stifle industrial growth”, she says.

Lower than expected GDP growth would have a double impact on gas demand, says Corbeau. Industrial gas use would take a direct hit, and there would also be an indirect impact on the power sector.

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