China preps to expand gas output and distribution amid challenges

Keun-Wook Paik
Royal Institute of International Affairs
London

Quan Lan
Xinhua News Agency
Beijing

• China's Natural Gas Resources [148,017 bytes]
• China's Natural Gas Pipelines [177,203 bytes]
• Northeast Asia Gas Options [154,372 bytes]
• China's Proposed LNG Projects [285,443 bytes]
• China's Gas Producing Areas [59,575 bytes]
• China's Gas Production Forecast [22,553 bytes]
• China's Gas Import Outlook [55,863 bytes]
• China's Gas Demand By End Use [43,391 bytes]
• Power-Generation Emissions In China [85,942 bytes]

A stable energy supply is essential to ensure China's continued rapid economic development. Since the early 1990s, China has begun to recognize that it is set to import massive amounts of oil and gas in the coming decades in order to sustain its economic development. The country is now leaving no stone unturned in its endeavor to explore for and secure all possible energy sources, both domestically and abroad.

Increased production and distribution of natural gas is key to achieving this goal.

In this context, however, the expansion of natural gas use in China is only a part of the country's comprehensive development plan for an energy supply system. The first step in the practical implementation of gas expansion in China is to overcome many leaders' prejudice that natural gas is a very expensive fuel source, to be used exclusively for the production of fertilizer.

Barriers to gas expansion

China's energy sector faces a number of problems. Among the most difficult and burdensome to tackle are an energy supply shortage and environmental degradation.

For example, China is currently importing a relatively large percentage of its oil supply, and the level of imports is going to reach at least 2 million b/d in 2010. As for coal, a supply shortage of around 100 million metric tons is projected for 2010.

This supply shortage issue is a serious challenge for those deciding China's energy policies.

Environmental issues are also a serious challenge for Chinese energy planners.

China depends on coal as its primary energy source. According to a study by the U.S. Department of Energy, China will need roughly 350 gigawatts (GW) of coal-fired power generation capacity in 2015. (In 1995, China had around 142 GW of generating capacity fueled by hydrocarbons.)

This massive consumption of coal in power generation is, and will remain, the main source of environmental pollution in China.

The dire energy supply shortage and environmental degradation issues are providing a favorable basis for expanding the use of gas in China.

China's Xinhua News Agency and London's Royal Institute of International Affairs (RIIA) undertook a joint study of China's natural gas industry. The results of this study were published in a report titled, "China Natural Gas Report," by the authors of this article.

The purpose of this study was to determine the main issues regarding China's gas market expansion. The report forms the basis for this article.

The main questions to be answered are:

• How large are China's proven gas reserves?
• What is China's targeted gas production based on current reserves?
• How large is China's projected domestic natural gas demand?
• How will the gap between gas supply and demand be balanced?
• What is the projected scale of gas imports, as both liquefied natural gas (LNG) and pipeline gas?
• Which sector will play the biggest role in China's gas market expansion?
• What is the reality of gas pricing policies and what are the implications?
• Why has only a limited gas distribution network been developed in China?
• How will the burden of financing China's gas sector expansion be handled?
• What are the prospects for foreign participation in China's gas business?

CNPC's view

Before summarizing the main findings of the study, it is worth noting the principal perceptions of natural gas development in China, as presented by gas specialists from China National Petroleum Corp. (CNPC) at the 15th World Petroleum Congress in Beijing, Oct. 12-16, 1997.

These were:

1. Development of China's gas industry will be accelerated, while development of the oil industry will be stabilized. Special attention will be paid to gas exploration in the Xinjiang area, the Shaan-Gan-Ning basin, and the East Sichuan area.
2. Cooperation with Russia and other neighboring countries will be strengthened. A detailed preparation plan for gas imports will be arranged.
3. A natural gas transmission and distribution network-including pipe- lines, gas supply and distribution networks, and large-scale underground gas storage-will be developed.
4. In parallel with upstream gas development, downstream gas facilities, including a number of large gas-fed fertilizer and chemical plants, will be built.
5. Natural gas's share in the energy mix used in big cities such as Beijing, Tianjin, Shenyang, Nanjing, Shanghai, Xi'an, Zhengzhou, Lanzhou, and Urumqi, will be increased to improve the energy infrastructure and protect the environment.
6. In certain areas, natural gas will be used for power generation.
7. The gas-fueled vehicle industry will be developed, not only for environmental protection but also for alleviating oil product shortages in certain areas.

• Preliminary engineering studies for natural gas utilization projects-including overall planning, preliminary feasibility studies, and full feasibility studies-will be strengthened.

Basically, this CNPC perception envisions the development of a comprehensive trunk pipeline and distribution network.

The real question is: How and on what schedule will China's gas expansion be realized? The following main findings of the Xinhua-RIIA study will provide some clues.

Gas supply/demand

China's current gas production is inadequate to support rapid expansion of its gas sector. So importing substantial volumes of both LNG and pipeline gas is inevitable.

Although China's total estimated gas resource is about 38 trillion cu m, its proven reserves are only 1.5 trillion cu m.

In 1997, China's natural gas production was only 21 billion cu m. It remains to be seen whether the country's ambitious gas production targets of 72 billion cu m in 2010 and 95 billion cu m in 2020 will be realized.

China's main gas-producing areas will be the Sichuan and Ordos basins, the Xinjiang region, and offshore areas (see map, p. 27). It is not an exaggeration to say that the scale of gas imports will be fundamentally affected by the level of gas production from these four major producing areas, and by the level of consumption in the power and residential sectors.

The sources of gas production in China, however, are quite limited, and the lack of investment in developing a gas transportation and distribution network creates some difficulty in achieving an accelerated gas development. As a result, relatively few consumers are currently us- ing the limited gas supplies.

The main consumers of natural gas in China are fertilizer and chemical plants. Some residential areas are receiving gas, and a small portion is being allocated to power generation.

The difficulty in finding new consumers for increased gas use can be easily seen in both the Ya 13-1 and Changqing pipeline cases (see map, p. 28). Actual demand falls far short of current production. In other words, Chinese consumers cannot yet afford to pay for expensive gas.

Unlike consumers, producers are complaining about low gas prices and high production costs. Unless China tackles this price issue, its gas expansion will not materialize as projected.

The ideal option seems to be a gradual price increase, which could minimize the burden on consumers while providing a healthy incentive for production increases.

It is worth noting that China is targeting a new market for its gas expansion.

Projected gas demand in 2010 is 95 billion cu m, of which 50 billion cu m is expected to come from power generation, 21 billion cu m from the chemical sector, and 24 billion cu m from city fuel use. The demand figure for 2020 is estimated to be as high as 140 billion cu m, of which 75 billion cu m will come from power generation, 30 billion cu m from the chemical sector, and 35 billion cu m from city fuel.

These projections show that the power-generation sector will provide the biggest market for China's gas expansion. And price issues will be critical to the increasing role of gas in power generation.

Gas distribution

Development of a comprehensive transportation and distribution network is another essential factor in China's increased gas use.

China aims to develop a national grid capable of transporting 150 billion cu m/year of gas. The country also intends to develop gathering centers and storage capacity of 15-17 billion cu m.

The importance of developing a domestic gas pipeline network in China lies in the fact that the country could be connected easily to the proposed transnational pipelines, which could deliver a relatively large volume of gas from Russia and the Central Asian republics of the former Soviet Union (OGJ, July 6, 1998, p. 27).

Unlike the LNG option, which would allow only the already prosperous eastern coastal provinces to be the beneficiaries of gas imports, development of a nationwide trunk line will be instrumental in expanding the scope of gas use.

The projected volume of imported gas in 2010 is 30 billion cu m, of which 20 billion cu m will be by pipeline and 10 billion cu m as LNG. In 2020, gas imports are expected to increase to 60 billion cu m, of which 40 billion cu m will be by pipeline and 20 billion cu m as LNG.

With the establishment of a national trunk line network, a substantial volume of imported gas could be distributed to inland areas, where significant economic development benefits could be seen.

LNG plans

As has been mentioned, China's gas demand is large enough to absorb both LNG and pipeline gas options.

Although the final decision has not yet been made, eastern coastal provinces are certain to implement an LNG import plan. Guangdong pro- vince is expected to be the first, followed by Fujian province, and the Yangtze River delta area, which includes the Shanghai region and Jiangsu and Zhejiang provinces (see map, p. 29).

The timing and scale of LNG imports through the Yangtze River Delta will be balanced by the import of gas through the transnational pipelines that are to be developed.

Some may argue that import volumes of 30 billion cu m in 2010 and 60 billion cu m in 2020 are not realistic, but the figures could be even greater if the introduction of long-distance east-west and north-south pipelines are realized in a timely manner.

Foreign investment

The potential for foreign participation in China's gas business is enormous. China's upstream, midstream, and downstream gas sectors all are aiming to attract foreign investment.

The investments involved will be astronomical. For example, the construction of a transnational gas pipe- line, either from Russia to China or from Central Asia to China, could cost $8-10 billion.

If the scope of the distribution network and related downstream business developments are considered, the cost will be even greater. This financial burden is beyond China's capacity.

The strength of gas infrastructure development lies in the fuel's environmentally friendly nature, which could enable the development projects to win financial support from multilateral financial institutions, such as the World Bank and the Asian Development Bank. Once these institutions are involved, private-sector support could follow easily.

Foreign investment opportunities also are being opened up in China's coalbed methane sector. China United Coal Bed Methane Corp. was established in 1996 and aims to produce 10 billion cu m/year of gas in 2010, based on its 35 trillion cu m coalbed methane resource. The target is realistic, and already a number of foreign companies have taken up positions in coalbed methane development.

Gas outlook

The Xinhua-RIIA study revealed a number of important implications for China's gas industry.

First, gas's growing role in China's energy's mix will make a significant contribution to easing the domination of coal in China's energy mix. If gas's projected shares of 8% in 2010 and 8.5% in 2020 are realized, the effect on China's energy structure will not be small.

This target might be regarded as too ambitious, but it is not impossible if relatively large and stable gas supply sources are secured in China and abroad. China's neighboring countries-in particular Japan and South Korea-will respond very positively to this radical energy structure change.

Expanded gas use in China also will help improve China's environmental difficulties, particularly with regard to air pollution. A large-scale increase of gas use in China's power generation will have two major benefits: the rate of increase in coal use for power generation could be slowed, and pollution levels would decline considerably.

The benefit will not be confined to China. Its neighbors such as South Korea and Japan, which have been casualties of China's pollution, will be indirect beneficiaries of increased gas use in China.

It is also worth noting that advanced technologies, including gas-to-liquids processes and fuel cells, could be applied in China for effective and efficient use of gas in the coming decades.

If policy changes could be made in a timely manner, these new gas-related technologies could improve China's deteriorating environment.

But widespread application of these technologies in China's gas sector would require at least 5-10 years of lead time. During the transition period, existing technologies can be applied in coal and emerging gas consumption sectors.

This could substantially reduce the current environmental burden of massive coal use and consequently improve China's environmental condition. Efficient energy consumption is just as important in reducing overall environmental degradation as is efficient energy production.

Finally, the simultaneous introduction of LNG and transnational pipeline gas during the next decade can provide fresh momentum for China's balanced economic development. The widening gap in the level of economic development between the coastal provinces and the interior areas is, and will continue to be, a serious burden on the Chinese government, as it is a source of social instability.

In addition, redundant manpower resulting from government restructuring of state-owned enterprises will become another source of social instability. Without a national infrastructure development to absorb these human resources, the Chinese government would have a difficult time handling the potential instability problems.

Thus, energy issues in China are closely related to economic development and social stability. Gas expansion in China could play a role in positively alleviating current and pending difficulties in these arenas.

In short, increased use of natural gas will not, alone, be an all-encompassing panacea for China's energy supply and consumption problems, but it could at least play a significant role in changing China's inefficient and environmentally unfriendly energy production and consumption patterns.

The most important finding of the study is that China is determined to expand its gas industry and is ready to attract foreign investment in most aspects of its gas business. Understanding the changing role of gas in China's dynamic energy balance is clearly the starting point for initiating foreign participation in China's energy sector and in taking a positive role in the country's overall economic development.

The Authors