China's Gas Plans Unsettled by Oversupply

An analysis by Michael Lelyveld
2017-08-14
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Chinese workers of China Petroleum and Chemical Corp. (Sinopec) install pipes at a natural gas gathering station in Puyang, central China's Henan province, July 31, 2016.
Chinese workers of China Petroleum and Chemical Corp. (Sinopec) install pipes at a natural gas gathering station in Puyang, central China's Henan province, July 31, 2016.
ImagineChina

Prospects for a new Central Asian gas route have resurfaced nearly five months after they were declared dead as China sends mixed signals about demand for the clean-burning fuel.

In a surprise statement on July 25, a Tajik government official told reporters in Dushanbe that China's work on a 1,000-kilometer (620-mile) pipeline from Turkmenistan through Uzbekistan, Tajikistan, and Kyrgyzstan was already underway.

"China National Petroleum Corporation's (CNPC's) subsidiary, which is involved in implementation of the project, has already begun its activities," said Tajikistan's minister of energy and water resources, Usmonali Usmonzoda, according to the ASIA-Plus Information Agency.

Usmonzoda said that CNPC's Trans-Asia Gas Pipeline Company Ltd. had "started supplies of equipment and machinery ... for the construction of tunnels" through mountainous Tajik regions, Azerbaijan's Trend News Agency reported.

The project to carry up to 30 billion cubic meters (1 trillion cubic feet) of gas annually through the 410- kilometer section is expected to be completed in two years, the minister said.

Word of progress on the project, known as "Line D," follows an Interfax report in early March, quoting an unnamed official of Uzbekistan's oil and gas company Uzbekneftegaz as saying that the pipeline had been "postponed indefinitely with the agreement of the Chinese side."

The reported suspension caused analysts to write off the fourth branch of China's Central Asia Gas Pipeline (CAGP) system, with some suggesting that the route plan was "dead."

The network's three existing lines from Turkmenistan through Uzbekistan and Kazakhstan have a combined capacity of 55 billion cubic meters (bcm) per year.

The Line D plan to bypass Kazakhstan with the new route through the region's two poorest countries sparked doubts since it was announced in 2013. Both Kyrgyzstan and Tajikistan rely on imports for gas, raising risks for diversion and energy security.

Chinese officials have not commented on either the reported suspension or the startup reports.

Analysts continue to view the Line D project skeptically.

"My guess is that the Tajik minister does not want the project to be declared dead and the Chinese, for their own reasons, decided not to dispute this by remaining silent," said Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington.

The Line D plan has given rise to a host of questions about China's goals and motives in Central Asia.

Did Beijing hope to reduce its risks by diversifying routes and building a detour around Kazakhstan? Or was it seeking a hegemonic role in the region by trying to tie all of Central Asia's countries together with pipelines? China hasn't said.

A need for more gas?

But aside from strategic issues, there are questions about whether China needs more Central Asian gas in any case.

China's National Energy Administration (NEA) recently reported a return to strong demand growth for gas in the first half of the year with consumption of 114 bcm, an 11.7-percent increase from a year earlier, Argus Media said.

But growth before that was sluggish for two years, falling far short of previous performance and bullish forecasts for the Chinese market.

Last year, consumption rose 6.6 percent to 205.8 bcm while domestic gas production of 137.1 bcm edged up only 1.5 percent, according to National Development and Reform Commission (NDRC) data.

In 2015, consumption increased only 3.4 percent, BP Statistical Review of World Energy said. The NDRC estimated the growth at 5.7 percent, but that rate was the lowest in 10 years, the official Xinhua news agency said.

Stronger forecasts have pointed to the government's environmental push to reduce reliance on coal and boost the natural gas share of total energy to 10 percent by 2020 and 15 percent by 2030 from about 6 percent now.

During the past two years, the gas market has been hampered by pricing issues as gas charges struggled to find a "sweet spot" that would encourage both output and demand.

Wholesale gas prices in China last year were nearly three times more than those in the United States, according to an International Gas Union survey cited by Bloomberg News.

On top of that, consumption growth has been weighed down by high distribution costs.

In June, the NDRC tried to address the problem by issuing a guideline that limited the after-tax total return on investment by distributors to 7 percent.

The new rule "should encourage gas companies to lower costs and improve efficiency," the NDRC said.

"In the short term, it should lower what many deem to be the current overpriced gas distribution costs in some cities," Xinhua quoted the NDRC as saying. In the longer term, the agency said the rule will lead to "more reasonable prices" on all links of the supply chain.

But also in the longer term, gas growth may depend on promised policies like carbon taxes that the government has yet to implement.

china-lng-carrier-beihai-guangxi-province-july10-2017-400.jpg
The liquified natual gas carrier Cesi Beihai docks at the Beihai LNG Terminal in Beihai, southern China's Guangxi Zhuang Autonomous Region, July 10, 2017. Credit: ImagineChina
Competition from coal

In the meantime, coal continues to pose stiff competition as the dominant fuel, undercutting gas when prices are low and forcing the government to order more production when supplies shrink and prices are high.

The challenges for Central Asian gas have been compounded by concerns that CNPC has never made a profit on the imported fuel after investing heavily in infrastructure and field development in Turkmenistan.

In an apparent effort to tweak CNPC into action on the Line D project, Turkmen President Gurbanguly Berdymukhammedov talked up an alternative route during a visit by Afghan President Ashraf Ghani to Ashgabat on July 4.

"In addition, it is possible that the move to establish gas supply to China via Afghanistan is to replace an earlier discussed planned route through Uzbekistan, Tajikistan, and Kyrgyzstan," Interfax said.

Last year, Turkmen gas deliveries to China rose 6 percent to 29.4 bcm, far short of an agreement to supply 65 bcm per year by 2016, according to Interfax.

Ashgabat will be eager to increase supplies to China as its only remaining export market before 2019, when Russia's deliveries from its massive Power of Siberia pipeline are scheduled to begin.

Uzbekistan may also squeeze existing CAGP capacity by pressing its three-year agreement with China to increase exports up to 10 bcm per year by 2020.

China reportedly took no deliveries from Uzbekistan in the first quarter, sparking speculation that Beijing may have been angered by the Line D suspension report.

Central Asia pipeline gas may face pressure from both domestic production and imports of liquefied natural gas (LNG).

China's first-half production rose 8 percent from a year earlier to 74.1 bcm while total gas imports climbed 16.2 percent to 41.7 bcm, the NEA said.

LNG imports jumped 38.3 percent during the period to 15.89 metric tons, the equivalent of 21.9 bcm, according to customs data. Including LNG from the United States for the first time, imports of the super-cooled fuel by ship accounted for more than half of the total gas volumes from abroad.

Last week, China's General Administration of Customs reported that total gas imports rose 20.7 percent in the first seven months with a 55.4 increase from a year earlier in July, supporting bullish views.

Gas production of 11.7 bcm in July gained 14.7 percent from a year before, pushing seven-month output of 85.8 bcm up 8.8 percent, National Bureau of Statistics (NBS) data said Monday, according to Reuters.

End of a slump?

But it remains to be seen whether the first-half recovery of gas demand growth marks the end of China's two-year slump.

Recent forecasts suggest that China could be in a condition of significant oversupply for the next several years.

In its Gas 2017 report for the medium term, the Paris- based International Agency (IEA) noted that China has targeted 365 bcm of supplies in 2020 under its five-year gas plan presented in January.

The IEA study forecasts China's demand in 2020 will be just 292 bcm, potentially putting 73 bcm, or 20 percent of supplies, in surplus.

The figures suggest that China's gas glut may be growing substantially.

Last November, a senior economist at CNPC's Research Institute of Economics and Technology estimated that China could have a surplus of 50 bcm in 2020, in part due to contracted LNG supplies, Platts energy news reported at the time.

CH. 1: MANDARIN | CANTONESE

CH. 2: VIETNAMESE | BURMESE | KOREAN

CH. 3: KHMER | LAO | UYGHUR

CH. 4: TIBETAN

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