Gas share of China energy mix to increase

China has to take steps to guarantee energy supplies to support its booming economy, and gas is expected to form a major element of government's energy policy.

This is the view of Wood Mackenzie Consultants Ltd., Edinburgh, which said China's government believes that large resources of natural gas remain to be found, offshore and in the country's remote northwestern region.

The analyst said a large supply of natural gas could help China address four pressing needs: diversification of energy supply, reduction of atmospheric pollution caused by coal-fired power stations and boilers, fuel supply for combined-cycle gas turbines that can be constructed relatively quickly, and reducing costs for transporting coal from northern China to coastal provinces.

China's gross domestic product has grown at roughly 10%/year the past 15 years and is expected to continue to grow by 6-10% a year the next 15 years.

Gas demand

Natural gas provides less than 2% of China's primary energy, and currently China's gas consumption stands at about 2 bcfd. Wood Mackenzie reckons that, if the gas portion of total energy demand rises to 3% by 2010, total gas consumption would then reach 5.7 bcfd.

Much of the impetus for China's growing gas demand is expected to come from electricity generation. By 2010, power plants are expected to consume 40% of China's gas, compared with 11% presently.

"A significant, albeit less spectacular, increase has been reported from the residential and commercial sectors," said Wood Mackenzie, "and this trend is likely to continue as a result of environmental concerns in large cities.

"The industrial sector will continue to use large quantities of gas, particularly in the petrochemical industry, but the rate of growth will be much less than that of other sectors."

Domestic supply

Lack of reliable data makes estimates of China's gas reserves difficult, said the analyst, but remaining proven plus probable reserves are pegged at 35 tcf.

Thirty-nine percent of these reserves lie in the onshore Sichuan basin, with another 17% in the onshore Ordos basin. Offshore reserves make up 27% of the total.

"With the national level of production presently at more than 1.6 bcfd," said Wood Mackenzie, "these estimated reserves represent a healthy 60 years of production.

Growing gas need

"However, if, as expected, demand rises to almost 6 bcfd in 20 years time, these reserves begin to look considerably more modest. The crucial question is whether further significant quantities of commercially viable gas remain to be found in China."

The analyst reckons China will need to discover and develop, or import, a further 15-30 tcf of gas each 10 years to meet predicted gas demand.

New gas discoveries on this scale are thought most likely in the far northwest in the Tarim, Junggar, and Qaidam basins; offshore in the East and South China Seas; and in northern China in the form of coalbed methane.

However, while drilling is said to have proved significant accumulations in the Qaidam basin, other northwestern and offshore drilling has proved disappointing.

"The key risk for coalbed methane is technological," said Wood Mackenzie. "It is reasonable to expect, however, that the sheer quantity of the resource combined with China's desperate need for clean energy will result in the world's first large-scale production of coalbed methane, whether the operation is commercially viable or subsidized."

Assuming one major new gas province comes on stream in the next few years, the analyst predicts China's gas production could top 4.5 bcfd by 2010 and reach 6 bcfd by 2015.

Gas imports

Sometime during 2005-15, gas imports to China are expected to be required, and at least 1 bcfd of imported gas is thought likely to be required by 2010, mainly by coastal provinces.

Early gas imports are expected to reach China's coastal regions in the form of liquefied natural gas (LNG), with the Asia-Pacific region and the Middle East being the likely sources.

Exports of gas by pipeline from the former Soviet Union are likely to have a cost advantage over LNG imports, but hostile terrain along pipeline routes is expected to increase potential costs. Also, exposure to political risk is thought to be higher with a pipeline.

"The capacity of LNG import terminals in Japan is commonly in the range of 1-1.4 bcfd," said Wood Mackenzie. "Assuming all of China's import requirement is in the form of LNG, median and pessimistic scenarios indicate that between one and four major LNG terminals are likely to be required in China by the year 2015."

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