FACTS: China to top Japan in gas imports

Aug. 23, 2010
China will surpass Japan as Asia's largest natural gas importer through a combination of LNG and pipeline gas in 5-10 years, according to FACTS Global Energy Group in an August report.

China will surpass Japan as Asia's largest natural gas importer through a combination of LNG and pipeline gas in 5-10 years, according to FACTS Global Energy Group in an August report.

China began importing gas by pipeline from Turkmenistan on the last day of 2009, becoming the first Asian country to import both LNG and pipeline gas. "Also in 2009, China surpassed Japan to be Asia's largest natural gas market. Most importantly, China is on the way to becoming a giant international player for natural gas in terms of consumption as well as imports," said Kang Wu, a managing director at FACTS Global Energy, Honolulu. Japan will remain the world's largest importer of LNG, Wu said.

In Houston, analysts with Raymond James & Associates Inc. said economic data "suggest" China has surpassed Japan as the world's second-largest economy behind the US. "This news comes on the heels of the Organization of Petroleum Exporting Countries' upward revision to its second-half 2010 and 2011 worldwide oil demand forecasts to reflect among other things, increased demand from—you guessed it—China," they said (OGJ Online, Aug. 16, 2010).

Earlier the International Energy Agency in Paris reported China last year took over the US's century-long position as the world's largest consumer of energy, by consuming 2.25 billion tons of oil equivalent (toe) in all forms of energy, compared with 2.17 billion toe for the US. The US remains the largest energy consumer on a per-capita basis and the biggest oil consumer, however.

At that time, Raymond James analysts described China's increased energy appetite as "the dawn of a new age." A decade ago, China's energy consumption was only half that of the US. "In recent years, China's insatiable demand for energy to fuel its economy has often experienced double-digit growth, supporting global oil and LNG prices along the way," they said (OGJ Online, July 20, 2010).

China has been a net oil importer since 1993, importing more than half of its present demand. It relied entirely on domestic natural gas until the middle of this decade. In 2006, China became an importer of natural gas for the first time, in the form of liquefied natural gas. It became a net importer in 2007 and by 2009, the net imports accounted for 5% of the total consumption.

China's rapidly growing gas market is supplied primarily by domestic production but imports are rising fast, Wu reported. China also has huge potential for developing coalbed methane and shale gas, "thus attracting increasing foreign investment," he said. "As such, it is fair to say that China is on the fast track to becoming a significant global player in the world gas business."

China's demand growth

In 2009, China consumed 8.42 bscfd of gas, of which 723 MMscfd was imported, all in the form of LNG. "The growth rate of natural gas consumption in 2009 was up by 11.7% year-on-year. Around two thirds of the incremental demand in 2009 was sourced from domestic production and one-third came from imports," Wu reported. "Between 2000 and 2009, the annual average growth rate (AAGR) of China's total natural gas consumption was 15.4%, exceeding total primary energy consumption (PEC) growth by a large margin. As a result, natural gas' share of China's PEC mix rose from 2% in 2000 to 3.5% in 2009."

This is far below the regional average in the Asia-Pacific and the world.

"The industrial sector accounted for 44% of China's natural gas use in 2009, followed by the residential-commercial sector at 25%. Within the industrial sector, about one third of demand is attributable to the chemical sector for fertilizer production," said Wu (Fig. 1). "In the meantime, more gas is being used for power generation. This sector currently accounts for some 18% of China's total use and has the potential to grow."

China's gas demand is expected to reach 25.3 bscfd in 2020, about three times that of the 2009 level or an AAGR of 10.5% for 2009-20. "The growth will be led by the three major sectors: industrial, power, and residential and commercial, of which the industrial sector is expected to be the most dominant driving factor. Between 2009 and 2020, the industrial sector's use of natural gas, already the largest at present, is projected to grow at an AAGR of 12.3%, followed by the growth of the residential/commercial sector's use of natural gas at an average annual rate of 10%," Wu said. "Power generation in China is forecast to have an AAGR of 9.6% and the growth is mainly due to gas' fairly low usage in the power sector relative to the industrial and residential sectors."

He said, "China is hungry for power, but there are limitations due to prices and resource availability. Gas use in the transport sector, where compressed natural gas is used, will increase by an AAGR of 25% between 2009 and 2020, albeit from a very low starting point in 2009."

Wu expects China's gas demand growth to slow from 2020 to 2030 with the Chinese government taking deliberate measures to rein-in oil and gas demand growth. "Under our base case, China's gas demand is expected to reach 39.9 bscfd, up by 57.7% from the 2020 level or an AAGR of 4.6% from 2020 to 2030. During the period, we expect that the power sector's gas use will grow by 5.5% annually, followed by the industrial sector at 4.7%, and the residential sector at 3.3%," Wu said (Fig. 2).

Domestic production

China last year produced 8.03 bscfd of gas, up by 8% year-over-year (Fig. 3). China National Petroleum Corp. (CNPC)/PetroChina accounted for 6.59 bscfd, followed by Sinopec at 819 MMscfd, with CNOOC and others at 622 MMscfd.

"China still has the potential to increase its natural gas production substantially, though uncertainty also looms large," said Wu. "The major sources of additional gas production will be in the Tarim, Sichuan, and Ordos basins, as well as offshore China. Under the base-case scenario, China's domestic natural gas output is forecast to increase to 15.3 bscfd in 2020 and 21.3 bscfd by 2030, which provides a solid foundation for China's future gas use."

Last year China imported 5.53 million tonnes of LNG primarily from Australia (63%), Indonesia (12%) and Malaysia (11%). "Under our base-case scenario, China is expected to import 9.2 million tonnes of LNG in 2010, 25.2 million tonnes in 2015, 37.5 million tonnes in 2020, and 52.3 million tonnes in 2030," Wu reported. China currently has three LNG regasification terminals in operation with a total capacity of 12.3 million tonnes/year.

Unconventional gas

"The unconventional gas sector is still at the starting point and many companies are still accessing the potential reserves in the country," Wu said.

At the moment, China has no shale gas production although both CNPC/PetroChina and Sinopec have launched shale gas programs. Foreign companies such as Royal Dutch Shell PLC, Chevron Corp., ExxonMobil Corp., Australia's Dart Energy Ltd., and others have indicated their interest in China's shale gas play.

In theory, China has opened this and other business segments for foreign investment. In reality, however, Wu said, "Because most upstream and pipeline business is in the hands of the three state oil companies, foreign investment in these areas is constrained. As for gas distribution networks and marketing, city governments are not uniform in their policies, leading to confusion and difficulties for foreign investment."

Wu sees several impediments and challenges that could prevent the Chinese gas market from taking off or growing too fast. For one, the market is still fragmented and regulation of individual fields, pipelines, city gas markets, and foreign investment varies widely. "Lack of transparency has created huge uncertainties for investment in various segments of the gas sector," Wu warned.

Despite rapid construction of gas trunk lines in the past decade, the total length is "far less" than in the US and Europe. "China still has a long way to go to build sufficient pipelines to move gas around. The fact that the Chinese government regulates transportation tariffs and keeps them does not help," said Wu. "Also it is not sustainable in the long run for the state oil companies to have monopolies over major long distance pipeline projects in China. For CBM development, lack of sufficient pipelines and the absence of a third-party access regime is a serious constraint."

China regulates gas prices, and its National Development and Reform Commission must approve all prices for new projects, imported LNG, and future imported pipeline gas. "The government may be slow in approving projects and assessing market prices," Wu said, concluding, "This has often delayed the negotiations of LNG imports and prolonged the talk on cross-border pipeline projects. Since China's natural gas consumption is partially supply driven, lack of supply leads to the use of natural gas that is below the desirable levels."

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