NATURAL GAS

Background

In 2018, China was the world’s third largest consumer of natural gas, behind the United States and Russia. Natural gas accounted for roughly 7.5% of China’s primary energy use—a much smaller share than the global average (24%).[1]  

Natural gas consumption in China is growing rapidly. In 2018, natural gas use in China grew by roughly 18%—almost three times the rate of economic growth—due mainly to government policies to help clean the air in China’s cities. Annual consumption reached 283 billion cubic meters (bcm).[2]  

Natural gas in China is used mainly in industry (roughly 42%), residential and commercial buildings (roughly 22%) and power generation (roughly 22%).[3]    

Across much of northern China, a massive conversion of heating infrastructure from coal to natural gas is currently underway. Seven million households were connected to the natural gas grid in 2017 and 2018. Industrial boilers, district heating networks and building furnaces are being converted. These conversions have helped cut air pollution, although at times they have run ahead of natural gas supply infrastructure. In the winter of 2017–2018, Beijing and surrounding areas had the cleanest air in many years, however natural gas shortages left many buildings cold.[4]

China’s natural gas comes from three sources: domestic production, pipeline imports and imports of liquefied natural gas (LNG).

  • Historically, most of China’s natural gas has come from domestic production, mostly from conventional wells. In 2018, domestic production increased roughly 8% to reach 160 bcm. These gains continued in the first half of 2019, with a roughly 10% year-over-year production increase.[5]
    • China’s shale gas resource is the world’s largest, however much of the shale gas is very deep, in mountainous areas and challenging to produce. Shale gas production in 2018 was roughly 10 bcm, mostly from Sinopec’s Fuling field in Chongqing and CNPC’s Changning-Weiyuan field in Sichuan.[6] 
  • China currently imports natural gas through two pipeline systems: the Central Asia gas pipeline (from Turkmenistan, Kazakhstan and Uzbekistan) and  China-Myanmar pipeline. Total pipeline imports in 2018 totaled approximately 50 bcm. A natural gas pipeline from the Russian Far East is scheduled to open in December 2019. The capacity of the pipeline, known as the Power of Siberia, will eventually reach 38 bcm per year.[7]
  • In 2018, Chinese LNG imports grew by 41%, nearly matching the blistering 46% growth rate of 2017, to reach 73 bcm. LNG infrastructure has been severely stressed, but new LNG receiving terminals, natural gas pipelines and natural gas storage facilities are under construction to meet rapidly growing demand. As of August 2019, 22 LNG receiving terminals are operating in China, with more under construction. China has roughly 70,000 kilometers of long-distance natural gas pipelines, shown below.[8]
Figure 11-1

Policy

Converting coal-fired furnaces and boilers to natural gas is a high priority of the Chinese government. Tools for achieving that goal incude financial support for conversions, regulatory requirements and directives to state-owned companies. The principal purpose of these policies is to improve urban air quality. The 13th Five-Year Plan (2016–2020) identifies reducing CO2 emissions as an objective of these policies as well.[10]

Production and Consumption Goals

The Chinese government has several targets with respect to natural gas. They include:

  • increasing the share of natural gas in primary energy consumption to 10% by 2020 and 15% by 2030;
  • increasing the share of natural gas in urban dwellings to 50%–55% by 2020 and 65%–70% by 2030; and
  • increasing the share of natural gas generating capacity in China’s power sector to 5% by 2020.[11] 

The 13th Five-Year Plan also calls for increasing domestic production of unconventional natural gas, including shale gas and coalbed methane. The current annual production targets are 30 bcm for shale gas and 10bcm for coalbed methane production 10 bcm  2020. Several government targets for shale gas production have been missed or revised downward in recent years.[12]

Market Reforms

China’s natural gas industry is in the midst of significant reforms.

Historically, the National Development and Reform Commission (NDRC) set natural gas prices by adding production costs, transmission costs and fixed margins. Gas prices were kept high for industrial users to help cover the costs of subsidizing residential gas use. In recent years, a growing percentage of Chinese nonresidential natural gas sales have been priced based on market value. Citygate tariffs for residential users are being deregulated as well. These price reforms are intended in part to bring down the cost of natural gas for industrial users, encouraging the switch from coal to natural gas.[13]

Structural changes are underway in China’s natural gas pipeline network. Historically the China National Petroleum Corporation (CNPC) has controlled most of China’s long-distance natural gas pipeline network. Several years ago, CNPC began transferring pipelines into a subsidiary as part of a plan to establish a separate national pipeline company. In 2016 NDRC reformed pipeline pricing, granting a flat 8% return on investment for interprovincial pipelines and promoting transparency in pipeline costs.[14]

As part of the effort to relieve shortages in natural gas supplies, several private companies are being allowed to build and operate LNG receiving terminals in China.[15]

Environment and Safety Standards

China’s 13th Five-Year Plan (2016–2020) emphasizes the importance of protecting the environment when developing natural gas resources. Implementation is left largely to the state-owned enterprises responsible for natural gas production.[16]

China does not have regulations addressing methane leaks from natural gas production, transport or use. China is a Partner Country in the Global Methane Initiative -- “an international public-private partnership focused on reducing barriers to the recovery and use of methane as a clean energy source.” CNPC is a member of the Oil and Gas Climate Initiative, a voluntary industry initiative working to reduce methane emissions.[17]

Several ministries and industry associations set national safety standards for long-distance transport and local distribution of natural gas. The Ministry of Transport, State Administration of Work Safety and China Natural Gas Standardization Technology Committee all have roles.[18]

Climate Change Impacts

The role of natural gas in fighting climate change is controversial. 

  • On the one hand, burning methane (the principal component of natural gas) produces roughly half the CO2 emissions per unit of energy as burning coal. Conversion of China’s vast coal-based heating and power infrastructure to natural gas could significantly reduce Chinese CO2 emissions.[19]
  • On the other hand, each molecule of methane has roughly 84 times the warming impact of a molecule of CO2 over a 20-year period and roughly 28 times the warming impact of a molecule of CO2 over a 100-year period. As a rough rule of thumb, if more than 3%–8% of natural gas leaks during production, transport or consumption, that would cancel the climate change benefits of switching from coal to natural gas. There are very little data on the extent of methane leakage in China.[20]
  • In addition, new natural gas infrastructure such as pipelines and receiving terminals will likely last for decades. Emissions from use of that infrastructure could make it difficult or impossible to achieve the goals set forth in the Paris Agreement (including limiting the global average temperature increase to 2°C/3.6°F above pre-industral levels). Much lower-carbon alternatives to natural gas including solar, wind, hydro and nuclear power are available in the power sector.  (Lower-carbon alternatives to natural gas are less available in industry and some forms of heating, in particular for the production high grade heat in industry.)[21]

As the Chinese government develops its long-term low carbon development plans, the role of natural gas will be an especially important topic.[22]

References

[1] BP Statistical Review of World Energy (June 2019) at pp.9, 34.

[2] BP Statistical Review of World Energy (June 2019) at p.34; “China's LNG consumption growing rapidly,” Xinhua (April 2, 2019); IEA, Gas 2019: Executive Summary (June 2019) at p.3

National Bureau of StatisticsStatistical Bulletin on National Economic and Social Development in 2018 (February 28, 2019) (2018 GDP growth = 6.6%)            

[3] IEA, Gas 2019 (June 2019) at p.21 (Figure 1.4). Percentages are for 2018. Industry figure includes energy industry own use.

[4] BP Statistical Review of World Energy (June 2019) at p.32; IEA, The Role of Gas in Today’s Energy Transitions (2019) at p.14; NDRC, Natural Gas 13th Five-Year Development Plan (December 2016) at p.3; Lucy Hornby and Archie Zhang, “China hit by gas shortages as it moves away from coal,” Financial Times (December 3, 2017); IEA and Tsinghua University, District Energy Systems in China (2017),

[5] National Bureau of StatisticsStatistical Bulletin on National Economic and Social Development in 2018 (February 28, 2019) at Table 3; BP Statistical Review of World Energy (June 2019) at p.32; Tim Daiss, “China’s Natural Gas Output in May Spikes Nearly 13%,” Natural Gas Intelligence (June 19, 2019).

[6] IEA, Gas 2019 (June 2019); Ocean Zhou et al., “Analysis: China to miss 2020 shale gas production targets amid tough upstream conditions,” S&P Global (April 30, 2019); Trent Jacobs, “China Flexes Shale Muscles as CNPC Ups Gas Output 40%,” Journal of Petroleum Technology (January 10, 2019); David Sandalow, Jingchao Wu, Qing Yang, Anders Hove and Junda Lin, Meeting China’s Shale Gas Goals, Columbia University Center on Global Energy Policy (September 2014) at pp.5–6.

[7]  Stephen O’ Sullivan, China: Growing import volumes of LNG highlight China’s rising energy import dependency, Oxford Institute for Energy Studies (June 2019) at p.6; “Outlook Of Liquefied Natural Gas Versus Pipeline Gas In China After LNG 2019,” Seeking Alpha (April 8, 2019)                                            ;

[8]  “China's LNG import terminals and storage facilities,” Reuters (August 16, 2019; “Research Report on Natural Gas Import in China, 2019-2023,” Business Wire (May 9, 2019); ); “Outlook Of Liquefied Natural Gas Versus Pipeline Gas In China After LNG 2019,” Seeking Alpha (April 8, 2019); Michael Lelyveld, “China Revives Oil And Gas Reform Plan,” Radio Free Asia (March 11, 2019); David Sandalow, Akos Losz and Sheng Yan, A Natural Gas Giant Awakens, Columbia Center on Global Energy Policy (June 27, 2018)

[9] Horace Tse et al., China Gas Sector, Credit Suisse (June 3, 2019)

[10] IEA, The Role of Gas in Today’s Energy Transitions (2019) at p. 74; NDRC, Natural Gas 13th Five-Year Development Plan (December 2016) at pp.5 and 11.

[11] NDRC, Natural Gas 13th Five-Year Development Plan (December 2016); State Council, Energy Development Strategy Action Plan (2014–2020) (June 7, 2014)

[12] NDRC, “Chapter 30, Build A Modern Energy System,” in 13th Five-Year Plan For Economic and Social Development (December 2016); Zhen Wang and Qing Xue, “An understanding of China's National l3th Five-Year Plan for Natural Gas Development,” Science Direct (July 2017); Akira Miyamoto and Chikako Ishiguro, The Outlook for Natural Gas and LNG in China in the War against Air Pollution, Oxford Institute of Energy Studies (December 2018).

[13] IEA, The Role of Gas in Today’s Energy Transitions (2019) at p.89; Anders Hove and David Sandalow, Understanding China’s Growing Natural Gas Sector, Paulson Institute (September 14, 2017).

[14] Benjamin Haas, “PetroChina to Sell Pipeline Assets Valued at $6.3 Billion,” Bloomberg (May 12, 2014); Anders Hove and David Sandalow, Understanding China’s Growing Natural Gas Sector, Paulson Institute (September 14, 2017).

[15] Author interviews (2018).

[16] NDRC, Natural Gas 13th Five-Year Development Plan (December 2016) at p.10.

[17] Global Methane Initiative website (accessed August 24, 2019); Oil and Gas Climate Initiative website (accessed August 24, 2019).

[18] National Natural Gas Standardization Technical Committee et al., “Mandatory National Standard for Natural Gas Transportation GB17820-2012” (October 2012).

[19] See IEA, The Role of Gas in Today’s Energy Transitions (2019) at p.89.

[20] Intergovernmental Panel on Climate Change, Climate Change 2014: Synthesis, Fifth Assessment Report (2014) at p.87; International Energy Agency, World Energy Outlook 2017 (November 2017) at pp.416–417; Daniel Raimi, The Fracking Debate, Columbia University Press (2017) at p.111.  

[21] See IEA, The Role of Gas in Today’s Energy Transitions (2019); Dave Roberts, “More natural gas isn’t a “middle ground”—it’s a climate disaster,” Vox (May 30, 2019); Tim Gould, “The Environmental Case for Natural Gas,” International Energy Agency (October 23, 2017).

[22] The Chinese government is expected to submit a “mid-century, long-term low greenhouse gas emission development strategy” to the UNFCCC Secretariat in 2020, pursuant the Paris Agreement and a decision of the Conference of Parties to the UNFCCC. See “Communication of Long-Term Strategies,” UNFCCC website (accessed August 24, 2019)

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