China’s Gas Use Takes Slower Track

An analysis by Michael Lelyveld
2015-06-22
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Containers hold liquified natural gas at Yangkou Port in Nantong, east China's Jiangsu province, Jan. 4, 2014.
Containers hold liquified natural gas at Yangkou Port in Nantong, east China's Jiangsu province, Jan. 4, 2014.
ImagineChina

China's natural gas consumption will grow more slowly than expected a year ago as the economy cools, raising the risk of oversupply and delay in import plans.

After a decade of breakneck development and pipeline projects, China's expansion in the world gas market has been moving at a more moderate pace that could force choices about which plans should be pushed back or imports should be cut.

The outcome may affect China's efforts to improve air quality by reducing reliance on coal, which now meets nearly two-thirds of the country's energy needs.

In its annual Medium-Term Gas Market Report released earlier this month, the Paris-based International Energy Agency (IEA) sharply lowered its five-year forecast for China's gas demand growth, citing weaker-than-anticipated consumption last year.

China's gas demand in 2014 rose to 178 billion cubic meters (6.28 trillion cubic feet), increasing at a rate of 8 precent-9 percent compared with average annual growth of 14 percent over the previous five years, the IEA said.

In January, the government's National Development and Reform Commission (NDRC) said the gain in gas use was even smaller at 5.6 percent, underperforming the country's official economic growth rate of 7.4 percent, the lowest in 24 years.

The IEA noted several factors, including a slower pace of energy consumption, ample hydroelectric supplies and relatively high prices for imported gas.

Economic slippage may be the biggest reason, but China's "strong resolve to combat pollution" should continue to buoy consumption of the cleaner-burning fuel, the study said.

Cloudy forecast for gas use

Even so, the forecast for gas use is considerably cloudier than it was before.

The IEA now projects China's annual gas demand will reach 314 billion cubic meters (bcm) in 2020, slightly less than the agency expected for 2019 in its year-earlier report.

The new estimate is about 10 percent lower than the 2020 forecast of 350 bcm that China National Petroleum Corp. (CNPC) and the government have used since 2012, and also substantially less than the 420-bcm supply target announced by the NDRC last year.

The IEA pointed to several factors that have created uncertainty at a time of sweeping changes in the world energy market, driven largely by cheaper oil and increases in shale gas.

While China paid high prices for imported liquefied natural gas (LNG) during much of last year, spot prices in the Asian market have since dropped by about half.

"All these numbers are roughly consistent with what looks like a heavily oversupplied Asian gas market and probably an oversupplied Chinese gas market," said Mikkal Herberg, energy security research director at the Seattle-based National Bureau of Asian Research.

The world gas glut means that most LNG imports for China's eastern cities are now cheaper than gas piped from Turkmenistan, the IEA said.

Falling prices may challenge the economics of buying gas from Central Asia, where CNPC has invested heavily in new resources and pipeline projects to raise import capacity to 85 bcm per year.

The IEA suggested that planned imports of Russian gas along an eastern pipeline route would also undercut Turkmen supplies at a time when Moscow has slashed its own imports from Turkmenistan, making Ashgabat more reliant than ever on China's demand.

"Whether the relatively uncompetitive position of Turkmen gas becomes an issue depends on the degree of over (or under) supply of the Chinese gas market over the next few years," the study said.

"Our balances indicate a Chinese market better supplied than in the recent past, which suggests that the risk of price tensions may be rising," the IEA said.

Unusual times for world energy

Usually, lower prices would be expected to increase demand, but these have been unusual times for world energy.

The annual BP Statistical Review of World Energy, also released this month, noted that world gas production rose 1.6 percent last year, well below the 10-year annual average of 2.5 percent. But consumption increased only 0.4% compared with the decade average of 2.4 percent.

The result is that the surplus of gas on the world market more than doubled last year.

With rising supplies and slack economic growth, gas prices have fallen so sharply that they have added to pressures on coal, depressing prices even further for China's bargain fuel.

This month, benchmark coal prices in China are down by some 20 percent from already-low levels a year before.

Cheaper coal makes it harder to expand gas use, despite the government's push to phase out coal-fired power and boilers in major cities.

"It's slow going in trying to build a gas market when they're fighting against coal that's one-third the cost for power generation," Herberg said.

Forces acting on China have been mirrored in forecasts of world gas growth.

The IEA has lowered its estimate of annual growth in world gas demand to 2 percent over the forecast period from 2.3 percent in last year's study, while China's rate of increase has fallen from 11.3 to 10 percent.

The downward adjustment in China's gas demand in 2020 accounts for about one-fourth of the decrease in the global gas forecast.

The IEA expects lower prices and pollution pressures to restore some of the growth that China lost in 2014.

High projections could spark concern

But weaker economic performance, falling trade figures and nearly flat power consumption this year may raise concerns that the projections are still high.

Even at the current forecast level, China may have to decide whether to postpone or reduce planned supplies.

The IEA has lowered its 2020 forecast for China's domestic gas output, largely reflecting the government's decision to cut its shale gas production target by more than half.

But the figures suggest that China could also scale back its schedule of imports, which account for about one-third of consumption.

Despite cheaper options, China will be committed to buying some volumes of higher-priced LNG under long-term contracts, but these could come under pressure for renegotiation.

If demand continues to decelerate, China may move more slowly to utilize the full capacity of its Central Asia Gas Pipeline, including the planned "Line D" through Uzbekistan, Tajikistan and Kyrgyzstan.

The 30-bcm-per-year line was expected to be completed in 2020, according to the official Xinhua news agency.

Construction was officially launched in Tajikistan last September, but Uzbekistan plans to start work only later this year, Russia's Interfax said.

China may also be in no hurry to receive Russian gas from the eastern "Power of Siberia" pipeline, despite an agreement last year that envisioned completion by end-2018.

Initial supplies of 5 bcm from the planned pipeline would start in 2019, rising to 38 bcm annually by 2024, according to Interfax.

But Gazprom's reported starting price for gas at the border under the $400-billion agreement is now nearly 14 percent higher than China's average LNG price last year, cited by the IEA study, and about 45 percent more than the Russian monopoly's expected prices for Europe this year.

The disparities are unlikely to spur China's demand for Russian gas without significant price adjustments.

"Everything suggests the eastern line from Russia is getting more complicated," Herberg said. "It's one place where they might say, do we really need it? Probably not."

Russia has also been promoting a western line from Siberia to Xinjiang, but China has insisted that the eastern project for its industrial centers and coastal cities should come first.

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