Incentives Needed For Foreign Participation In China's Natural Gas Sector

Jeff Logan, William Chandler
Battelle Memorial Institute Pacific Northwest National Laboratory
Washington, D.C.

Portions of this material appeared in an article in the July/August 1998 China Business Review, published by the U.S.-China Business Council.

This article summarizes the results of a workshop organized by Battelle Memorial Institute's Pacific Northwest National Laboratory, July 31, 1997, to identify ways to expand natural gas use in China.

The workshop was attended by representatives from four natural gas companies active in China, the U.S. Department of Energy, and the Natural Resources Defense Council.

To ensure a frank discussion, it was agreed that none of the companies' comments would be made for attribution. However, the companies attending were all major firms with deep commitments to China.

The workshop resulted in recommendations to the Chinese government for boosting the exploration and development activities of these companies and to the U.S. government for supporting those efforts (see related story, p. 54).

Overview

Although natural gas currently accounts for less than 2% of Chinese primary energy consumption, the country stands on the brink of dramatically increasing use of the fuel.

Gas consumption, currently around 22 billion cu m (bcm)/year, is projected to triple by 2010 to 60 bcm/year and rise to over 110 bcm/year by 2015.

A combination of technological, economic, political, and environmental drivers could raise these figures much higher.

China can readily boost domestic production to 150 bcm/year by 2020. Coalbed methane, internationally piped gas, and LNG imports can add another 150 bcm/year.

For every 1 bcm/year of natural gas used in place of coal to generate electricity (about equivalent to the amount used yearly in a 775-MW plant), China would reduce total suspended particulate (TSP), SO₂, and CO₂ emissions by 243,000 tons, 53,000 tons, and 2,590,000 tons, respectively.

Gas resource base

For purposes of definition, the estimate used for China's natural gas resource base is based on proven reserves and economically recoverable resources (those additional volumes that have not yet been discovered, but are estimated to be discoverable given current technology and economics).

Complicated geology, remote locations, and incomplete surveying have made it difficult to accurately estimate China's traditional resource base.

Estimates of China's proven reserves of natural gas currently cover a range of 1.2-5.3 trillion cu m (tcm), a small percentage of the world's estimated reserves of 141 tcm (Table 1 [11,842 bytes]).

At current consumption of 22 bcm/year, China's gas reserves life would total about 80 years (Table 2 [21,600 bytes]). However, estimates of both consumption rates and reserves are changing dramatically. A more generous recent estimate puts economically recoverable resources in China at 38 tcm, amounting to almost 9% of the world's total gas resource base. Based on the country's large reserves of coal and oil, most geologists believe there is far more natural gas in China to be discovered.

In the recent past, Sichuan Province has accounted for over 40% of China's natural gas production, most of it nonassociated gas.

Natural gas output in Shaanxi, Gansu, Ningxia, and Xinjiang provinces, on the other hand, is mostly associated gas and accounts for the bulk of the remaining onshore production. Output in these provinces is expected to drive most of the future onshore growth, but Sichuan may also still have sizeable undiscovered reserves.

Offshore, the South China Sea and Donghai regions account for the remainder of China's output. Production here is also expected to increase rapidly.

Coalbed methane

In recent years, China has gone from viewing coalbed methane (CBM) as a safety hazard to acknowledging it as a major source of clean, new energy.

As the world's largest producer of coal, it's natural for China to take a strong interest in CBM. Although currently recovered volumes amount to only about 500 million cu m/year , potential reserves are estimated at 35 tcm.

Because China's coal mines are extremely gassy and prone to explosions, worker safety and productivity are low. By first tapping the methane in these mines, China could raise productivity and reduce the number of miners killed each year. Coalbed methane is also a potent greenhouse gas with perhaps 20 times more heat-trapping potential than carbon dioxide on a molecular basis and would otherwise be vented to the atmosphere.

In January of this year, Texaco Inc. signed a $500 million contract with the China United Coalbed Methane Corp. to recover an additional 500 million cubic m/year of methane from coal and gas fields in Anhui Province, which are thought to contain more than 60 bcm of methane reserves. ARCO is also actively engaged in studying coalbed methane and recently signed production-sharing contracts covering prospects in Shaanxi Province.

Gas trade

Currently, China does not engage foreign countries in trade of natural gas.

There are no international pipelines crossing China's borders since Hong Kong rejoined the mainland, nor has China begun to import liquefied natural gas (LNG).

LNG Imports

China has yet to begin importing LNG despite relatively strong potential demand for that fuel in Guangdong, Fujian, Jiangsu, Zhejiang, and Shanghai.

By comparison, LNG exports to Japan, account for over 60% of the world's trade in LNG and fuel over 25% of Japan's electricity generation.

Southeastern China is well-suited for LNG imports, because large cities in that region are far from coal and hydropower resources and demand for high-quality energy is relatively well-developed.

In southern China, the levelized cost of LNG-derived power and coal-fired power with desulfurization equipment is about the same. Compared with coal-fired plants, LNG-fueled plants would operate at much higher efficiencies, require half the initial capital costs, and create a fraction of the environmental damage. As part of the Ninth Five-Year Plan, China began scoping studies to build three LNG terminals in southern China. The terminals would begin operation in 2002-05.

The technology for producing and transporting LNG is currently capital intensive and generally relies on economies of scale. Despite the large initial capital requirements, LNG imports to China may be easier to arrange than pipeline imports, which involve greater risk and cooperation among more partners.

International pipeline trade

Exporting natural gas to China via pipeline has garnered heightened attention over the past few years.

With proved reserves of over 56 tcm, countries of the former Soviet Union are a logical first choice of supply. The gas-bearing Irkutsk basin near Lake Baikal in Siberia lies only about 3,000 km from Beijing, and that and other gas deposits in Russia's Far East are under consideration as potential supply sources for a number of schemes to transport gas via pipeline to and/or through China (see map, OGJ, July 20, 1998, p. 29).

Discussions are also under way regarding a pipeline from Kazakhstan that would extend over 6,000 km to China's eastern coast.

A 1996 World Bank study on natural gas trade estimates that the fuel can be brought from Central Asia to China at $3.00/MMBTU at the rate of 27.6 bcm/year. Over a distance of 7,600 km, the delivered price would rise to $3.89/MMBTU.

There are many barriers to overcome before pipeline projects of this scale could be implemented. Financing is probably the most difficult hurdle, for even short pipelines (from Siberia or Irkutsk, for example) would require nearly $7 billion to construct.

Drivers of greater natural gas use

While none of the developments mentioned thus far appear remarkable alone, several circumstances in China now call for a rapid move to expand natural gas use.

These events include expanding oil imports, continued energy shortages, new gas-based power-generation technologies, and environmental advantages of gas over coal.

Expanding oil imports

Rapid economic development combined with stagnating oil production forced China to become a net importer of oil in 1994.

By 2000, forecasters predict the country will be importing nearly 1 million b/d of oil. This figure could rise to 3 million b/d by 2010.

The central government is uncomfortable depending on the outside world for energy and would prefer to use the foreign exchange for other purchases. Greater reliance on natural gas could help ease these imports.

While China does not use oil to generate electricity, a family of fuel cell technologies that use natural gas as an input could be commercialized within a decade. These fuel cells will be designed to help generate electricity, power automobiles, and provide heat and power to buildings.

Energy imbalance

China's economy is expected to continue growing at over 7%/year well into the next decade, despite the Asian financial crisis.

While China has achieved an energy income elasticity of about 0.5 since 1979 (meaning that energy consumption has grown at half the level of economic growth), the country is still experiencing an imbalance of energy supply and demand.

To meet the intense demand, over 15 GW of annual electricity capacity additions are planned through the first decade of the new century.

Coal is unable to fully satisfy this demand and produces severe environmental damage. Natural gas can help close the energy imbalance and efficiently fuel economic growth.

Gas-fired power technology

A new generation of gas turbines and combined cycle gas turbines offer well-suited advantages over coal in China.

First, capital costs for these technologies are generally half that of coal-based technologies. Coal-fired steam-cycle turbines generally cost $500-900/kw in China. Adding desulfurization equipment increases the price to about $1,000/kw. Combined cycle systems are available for $600-900/kw.

The time needed to construct gas-fired plants is about half that of equivalent coal-fired units, an important consideration in power-hungry and finance-poor China.

Third, using gas to generate power would allow the country to reserve the railroads to transport people and freight instead of coal.

Fourth, combined-cycle gas turbine systems currently operate at over 50% thermal efficiency, and the next generation of technologies will raise this to 60%.

This is twice the level of efficiency seen in China's current vintage of pulverized coal plants.

Finally, there are many environmental benefits in using gas over coal to generate power.

Environmental benefits

Regardless of the combustion method, natural gas has virtually no sulfur or particulate emissions.

Low-sulfur Chinese coal (1.2% sulfur), on the other hand, emits 10 g of sulfur dioxide (SO₂) and 50 g of total suspended particles (TSP) per kilowatt-hour of electricity generated (see table, OGJ, July 20, 1998, p. 32). A 775-MW steam-cycle coal plant would produce 243,000 and 53,000 tons of TSP and SO₂ emissions, respectively, each year.

The same size combined-cycle gas turbine plant would produce almost none. Nitrogen oxide emissions would also decline by about two-thirds. Carbon dioxide emissions from combined-cycle gas turbines are 60% less than those of coal-fired plants.

The reduction in CO₂ per plant amounts to about 700,000 tons/year, and waste heat would decline by 25%.

Note that combined-cycle natural gas-fired power generation would produce about half the CO₂ per kilowatt-hour as the most advanced coal-fired system, the integrated gasification combined-cycle plant.

Moreover, the costs per kilowatt-hour produced are lower.¹ Natural gas-fired combined-cycle plant systems also use less water than do coal-based ones.

Reference

1. China's Electric Power Options: An Analysis of Economic and Environmental Costs, Battelle Memorial Institute, Beijing Energy Efficiency Center, and China's Energy Research Institute, June 1998.

The Authors