To combat worsening environmental problems, the Chinese government has long called for controlling the use of coal and boosting natural gas consumption. The government's efforts have worked well that, in 2016, gas consumption in China amounted to 210.3 billion cu m, ranking the third in the world, just after the US and Russia.
China's gas production keeps increasing as well, rising to 134.4 billion cu m in 2016. But production growth is evidently happening at a lower rate than consumption, causing an ever-increasing gap between gas consumption and production.
In 2017, pushed by the Chinese central government's policy, the switch from coal to gas has been accelerated.
According to the China Development & Reform Commission, over the first 10 months of 2017, China's natural gas consumption increased to 186.5 billion cu m, up 18.7% over the same period a year ago. This was mainly due to unprecedented consumption from industrial users.
Meantime, gas production for the first 10 months was 121.2 billion cu m, 11.2% higher from a year ago. Gas import volumes were 72.2 billion cu m, up 27.5%.
A heating crisis
At the start of this winter heating season, coal fires have been removed from millions of homes in northern China and authorities intend to replace them with gas heaters. This was due to the new ambitious restrictions on the use of coal for heating in "2+26" cities—Beijing, Tianjin, and its surrounding 26 cities—issued in August.
According to Wood Mackenzie, the 2+26 policy alone will create 10 billion cu m of additional gas demand in Beijing-Tianjin-Hebei and the surrounding areas. On top of that, industrial users that already switched to gas over the course of the year will continue to require gas in the winter months, increasing demand from 2016 levels.
China was not totally unprepared on the supply side. Domestic gas production, pipeline imports from Central Asia, storage capacity, and LNG imports are all expected to rise this winter. However, the highly seasonal winter demand grows at a fast pace and at massive scale, outpacing the supply planned by the authority, resulting in a heating crisis.
Some regions in China, especially near Beijing, are facing an acute shortage of gas as the demand for heat rises during winter. The situation has left some residents without heat as temperatures drop below zero.
The Hebei province issued an orange alert last week, meaning the province is suffering a gas shortfall of 10-20%. This lack of heat has taken its toll on the normal operation of both the economy and society.
The state-owned producer CNOOC has leased two tankers off the coast where it is storing an emergency stash of LNG, in an unprecedented and costly step to avoid a heating crisis.
Gas supply security
The unintended consequences of the government's experiment have revealed the fragile gas supply security in China.
Even with a supply glut of gas globally, infrastructure and logistical challenges are a big concern for gas use. China does not have enough storage capacity and pipeline interconnectivity to meet its highly seasonal gas demand, WoodMac notes.
China has less than 20 underground gas storage sites, with only 8 billion cu m of gas storage capacity, or about 4% of its demand. That is much lower than an average level of 16% internationally.
LNG could step into the supply gap, but the outlook is surrounded by uncertainties. The strong demand has pushed domestic LNG prices up to a record high. Whether price-sensitive industrial users and rural residential users choose to use expensive trucked LNG will be the big question. If increasingly end users begin relying on trucked LNG, securing volume and trucks will become challenging.
In addition, the dominance of the government authority in this switching could lead to unexpected management issues. According to China-nengyuan.com, increased gas demand from half million households in Shandong province was totally missed by the government's gas supply plan.
Conglin Xu | Managing Editor-Economics
Conglin Xu, Managing Editor-Economics, covers worldwide oil and gas market developments and macroeconomic factors, conducts analytical economic and financial research, generates estimates and forecasts, and compiles production and reserves statistics for Oil & Gas Journal. She joined OGJ in 2012 as Senior Economics Editor.
Xu holds a PhD in International Economics from the University of California at Santa Cruz. She was a Short-term Consultant at the World Bank and Summer Intern at the International Monetary Fund.
