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Heat is on as China turns up the gas

The Chinese government's target of making natural gas account for 10 per cent of its energy mix by 2020 has seen the country's gas strategy expand on all fronts, embracing both conventional and unconventional resources, writes Penny Hitchin.

China has a massive and growing requirement for power. While it has traditionally met much of the demand from its coal reserves, the government's commitment to controlling carbon emissions means that natural gas is ready to take a greater share in the energy mix.

China's 12th Five-Year Plan (2011-15) wants carbon emissions cut by reducing the use of coal and oil, particularly in older and less efficient facilities. In pursuit of this, the government has set an ambitious goal of increasing the share of natural gas in the energy mix from its current 4 per cent to 10 per cent by 2020, and of cutting carbon emissions per unit of GDP by 17 per cent between 2011 and 2015.

The International Energy Agency's (IEA) Medium-Term Gas Market Report published in June predicts that China's gas consumption will grow at a rate of 13 per cent per year, doubling from 130 billion cubic metres (bcm) in 2011 to 273 bcm in 2017. In tune with this, the first seven months of 2012 saw gas demand rise by 12.8 per cent over the same period in 2011, up to 82.8 bcm, with total gas imports up 38.6 per cent on the same period to 23.3 bcm.

Undoubtedly some of this gas will be used for power generation. A report from Barclays Research estimates that China's installed gas fired electricity generation capacity will more than quadruple from 40 GW in 2011 to 220 GW by 2020, creating an annual gas power equipment market worth RMB26.5 billion ($4.2 billion) over the next decade.

China was self-sufficient in natural gas until 2006 when it started importing liquefied natural gas (LNG) from Australia, becoming a net gas importer in 2007. It now imports natural gas through gas pipelines from Central Asia and ships LNG from suppliers around the world. China's strategy for future gas consumption is to promote domestic production from conventional and unconventional resources, to expand reserves, to construct gas storage facilities and to accelerate construction of LNG terminals and inter-regional gas pipelines to strengthen supply of gas imports.

China has embarked on an ambitious pipeline expansion plan to meet its skyrocketing need for gas

China's domestic natural gas production surged from 27 bcm in 2000 up to 130 bcm in 2011. In 2010, domestic supplies met 90 per cent of consumption. But, as demand grows, investment in pipelines, LNG terminals and gas storage facilities will see imports play an increasing role.

China's upstream natural gas sector is dominated by three giant government-owned companies that shape the nation's natural gas industry. China National Petroleum Corporation (CNPC), the largest natural gas producer and supplier, owns 36,116 km of natural gas pipelines, accounting for nearly three quarters of China's total.

China Petroleum & Chemical Corporation's many businesses include Sinopec, which is responsible for exploration, refining, and marketing, storage and pipeline transportation of natural gas.

The China National Offshore Oil Corporation (CNOOC) focuses on the exploitation, exploration and development of China's offshore oil and natural gas.

Each of the three heavyweights above, as well as developing its indigenous assets, is actively pursuing the acquisition of overseas assets, partly to assure national gas supply, partly to develop technological expertise and above all for robust financial reasons.

Infrastructure boost

LNG is natural gas that has been cooled to -162 °C, changing it into a liquid that occupies 1/600th of its original volume. The liquid gas can then be shipped onboard specially designed vessels. After arriving at its destination, LNG is warmed to return it to its gaseous state and delivered to customers through local pipelines.

China's first LNG receiving terminal was developed by CNOOC on the basis of a long-term sales and purchase agreement with Australia's North West Shelf project. The first cargo was delivered to the terminal in 2006. Rapid developments have followed and China's growing LNG imports are now serviced by five terminals at Guangdong, Fujian, Shanghai, Jiangsu and Dalian, with a combined capacity of 22 bcm (16.3 tonnes per year).

China map

China's LNG terminals are located at ports on its south and east coast close to the areas of industrial demand. Five more LNG terminals are under construction, scheduled to be completed by 2015. Along with the expansion of existing facilities, these will more than double China's LNG import capacity to more than 50 bcm annually.

China's LNG market is dominated by the same three giant enterprises - CNOOC, PetroChina, a listed subsidiary of CNPC, and Sinopec - with each actively exploring business opportunities in Central Asia, East Africa, Australia and Canada.

In August 2012, it was reported that China Investment Corporation, the country's sovereign fund, is investing about $500 million in an LNG export facility being built by US company Cheniere Energy. The $5.6 billion expansion to Sabine Pass natural gas liquefaction plant and export terminal on the Louisiana coast will be the first US liquid natural gas export facility to open since 1969. The facility, due to be completed in 2015, will have an annual capacity to liquefy 3.5 million tonnes of LNG. Singapore is another Asian country investing $500 million in the facility.

The expansion of the Panama Canal is key to the viability of Cheniere's project. Currently less than 10 per cent of the world's LNG fleet of 400 ships can fit through the canal, which links the east coast of the US across the Pacific Ocean to Asia. But the completion of the expansion project - scheduled for 2014 - will enable some 80 per cent of the LNG fleet to use the canal, opening up the Asian market to North American gas. The success of the US shale gas extraction industry is also pivotal to the scheme's viability.

A new Silk Road

China's investment in major international gas pipelines projects will see hydrocarbons imported from Central Asia, Myanmar and possibly Russia. While LNG terminals are being developed on China's east coast, pipelines carry gas from the west, following the route of the old Silk Road through Central Asia. China has replaced Russia in providing an outlet for Turkmenistan's vast gas resources, shaking up the geopolitics of Central Asia.

In 2007, Turkmenistan, ranked fourth behind Russia, Iran and Qatar in world gas reserves, contracted to supply China with 30 bcm of natural gas annually for 30 years. CNPC built the Central Asia-China gas pipeline, which runs from the border of Turkmenistan and Uzbekistan, through central Uzbekistan and southern Kazakhstan to China's Xinjiang Uygur region, where it connects to China's second West-East gas pipeline.

Natural gas produced from the Amu Darya project in Turkmenistan is fed into the two parallel 1833 km lines of the Central Asia-China gas pipeline. Line A became operational in December 2009 and Line B a year later. In 2011, the first year of the pipeline's operation China imported 14.25 bcm gas from Turkmenistan. In November 2011, at a celebration to mark the arrival of Turkmenistan gas across 6811 km to Guangdong, Turkmenistan signed a new gas supply agreement adding 25 bcm to the annual delivery, bringing the total up to 65 bcm.

Construction work on Line C is underway and further lines may follow. It is designed to deliver 25 bcm of natural gas annually from Turkmenistan, Uzbekistan and Kazakhstan to China. It is estimated to start gas supply from January 2014, reaching full capacity by the end of 2015.

Moscow signed an agreement with Beijing to build and supply a gas pipeline into China a decade ago, but repeated discussions between the two countries have failed to set a price for the gas. China has held talks with Tajikistan, Kyrgyzstan and Afghanistan on possible construction of branch-offs from the existing transit pipeline into each of the three countries, which all lack natural gas resources and infrastructure.

:NG receiving terminals

CNPC has offered to conduct feasibility studies for a potential Turkmenistan-Northern Afghanistan-Tajikistan-China pipeline route, or a possible Kazakhstan-Kyrgyzstan-China route. The presence of transit pipelines would boost the total export capacity for Central Asian gas; diversify the delivery routes to China for enhanced security of supply, supply Kyrgyzstan, Tajikistan and Afghanistan with energy and enhance Beijing's influence in the game of politics and influence in Central Asia.

What is striking about the Central Asian pipeline development is the rate of progress: within five years of the initial agreement thousands of kilometres of pipeline have been installed and China's gas supply is being transformed along with the economies of the Central Asian republics.

The Central Asia gas pipeline brings gas from Turkmenistan into China to feed its internal second West-East sas pipeline. Construction of this line started in February 2008. It consists of one trunk line and eight branches, with a total length of 8704 km and a designed annual transport capacity of 30 bcm.

The pipeline starts in Xinjiang Uygur region, where it connects to the Central Asia-China gas pipeline and travels east across China as far as Hong Kong. The pipeline transports natural gas imported from Central Asian countries and gas produced domestically in the Tarim, Junggar, Tuha and Ordos basins to the Pearl River and Yangtze River delta areas and the central part of west China.

In June this year, CNPC secured funding for the proposed third West-East gas pipeline. This will consist of one trunk, five branch trunks, and three branches, with a total length of more than 5000 km and an annual design capacity of 30 bcm. The pipeline will be supplied with gas from central Asia at Horgos in Xinjiang and terminate at Fuzhou in Fujian. The project is estimated to be operational in 2015.

In a separate development in the south of China, work is underway on the Myanmar-China pipeline project, which will see an oil pipeline and a gas pipeline running between the two countries. The pipeline links Myanmar's deepwater Kyaukryu port on the Bay of Bengal with China's border city of Ruili in Yunnan province.

The natural gas pipeline will cover a total distance of about 2500 km: 793 km in Myanmar and 1727 km in China. A major strategic advantage offered by this $1 billion investment is that it will facilitate gas imports to China from Africa and the Middle East by bypassing the congested Malacca Straits and cutting the shipping distance by approximately 1200 km.

Within China, new regional gas pipeline networks have been formed in the southwest, the Bohai Rim, Yangtze River Delta, the central south and the northwest of China, connecting production centres to new markets. China's total capacity of the main national and regional gas pipeline network now exceeds 100 bcm a year.

A gas shortage crisis in the winter of 2009 led the Chinese government to encourage construction of gas stock facilities in 2010. Three facilities have been built with a total working capacity of 1.4 bcm, and ten gas storage facilities, including in the Huabei oil field and the Liao He oil field, with a total storage capacity of 24 bcm, are under consideration.

Price reform

China's natural gas price is determined mainly from production costs, which are less than for alternative energy sources. Gas prices in some major Chinese provinces are still 30 to 50 per cent below market rates for LNG or pipeline gas from Central Asia. The government controls energy prices to prevent volatility affecting industrial development.

But state-owned businesses that import foreign gas are making a loss on the transaction. CNPC's PetroChina, for example, says it lost $3.4 billion on LNG imports and pipeline imports from Turkmenistan in 2011.

In December 2011, the government started a pilot scheme in Guangdong and Guangxi aimed at liberalising the upstream prices. The city gate gas price will be linked to fuel oil and LPG prices (Shanghai imported prices), which will lead to price increases.

The extent and pace of the reform is still unknown but the industry hopes the natural gas price will eventually be set by market competition, with the government supervising monopoly prices such as pipeline transportation prices and urban gas distribution fees. Price reform will lead to increased gas imports, reduce the country's reliance on coal, and also boost the prospects for China's development of unconventional gas production.

China's natural gas reserves are estimated to be about 56 trillion cubic metres (tcm) of which recoverable gas reserves make up 22 tcm. Reserves are mainly distributed in inland basins in the western and north-central parts of the country. Three major basins -Tarim, Ordos and Sichuan - hold more than half of its total proven reserves. Offshore gas fields have been discovered in the East China Sea, the South China Sea and Bohai Bay.

China also has substantial reserves of unconventional gas, including coal bed methane (CBM) and shale gas. CBM resources are estimated at nearly 27.4 tcm of gas. CBM production began in China in 2005 and is currently around 5 bcm annually. In December 2011, China announced its aim to produce 30 bcm of CBM by 2015. About 16 bcm of this is expected to come from ground-based projects and the remaining 14 bcm from coal mine projects. If this is successful, by 2015 annual CBM production could supply over 10 per cent of Chinese gas demand.

But CBM development has been hampered both by complex geological conditions and by the lack of infrastructure to move large quantities of gas to markets in China. CBM development in China centres on Shanxi and Shaanxi provinces. Localised CBM pipelines are now being built by individual provinces to transport CBM to market.

China LNG imports by source

The Ministry of Land and Resources earlier this year estimated onshore shale gas reserves at more than 130 tcm and technically recoverable reserves at 25.1 tcm

In its 12th Five-Year Plan (2011-15), China set the goal of producing 6.5 bcm of shale gas by 2015. The government aims to ramp up shale production at least ten-fold between 2015 and 2020, but obstacles to this ambitious expansion include a lack of key technologies and hardware. Expertise in exploration and hydraulic fracturing is required, as well as the development of pipeline infrastructure. Providing the large volumes of water needed for shale gas production may also present a resource issue.

Natural gas vs king coal

As China's policymakers lean towards cleaner fuel sources, natural gas looks set to play an increased role in the country's energy mix. The speed at which essential infrastructure such as LNG terminals and international and inter-regional pipelines have been planned, approved and constructed speaks volumes for this commitment.

But price regulation is hampering progress and, while gas consumption is set to increase, China's growing energy demands mean that coal is likely to be the mainstay of generation for many years. Nor will natural gas's enhanced role in China's 21st century energy mix come cheaply. Investment is needed to develop the technology and skills to harness the resources of indigenous unconventional gas that could improve the security of the country's future energy supply.

The last six years have seen phenomenally swift development of gas pipelines, LNG terminals and storage facilities that have diversified China's gas supply options. Yet, despite the speed and extent of development of new gas sources, China's voracious appetite for energy means that King Coal is not about to be replaced by gas generation.

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