China Ups Gas Forecast

New estimate may discourage Russia deal.
An analysis by Michael Lelyveld
2012-11-12
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Workers lay pipes at a construction site of the 2nd West-to-East Natural Gas Transmission Pipeline project in Jiangxi province, July 12, 2012.
Workers lay pipes at a construction site of the 2nd West-to-East Natural Gas Transmission Pipeline project in Jiangxi province, July 12, 2012.
ImagineChina

China has sharply raised its long-range forecast for domestic gas production, sending a signal to suppliers that its need for imports will be less than previously thought.

The new estimate from the world's largest energy consumer may be critical to plans of exporting countries like Russia, which has been trying to strike a deal with China on prices and pipeline routes for years.

"If the production forecast is correct, this means that China will not need to import so much gas," said Kevin J. Tu, senior associate in the energy and climate program at the Carnegie Endowment for International Peace in Washington.

"This is definitely not good news for Russia, especially since the shale gas boom in the United States has put tremendous pressure on them to reduce the gas price," Tu said.

On Nov. 1, the Ministry of Land and Resources (MLR) issued its new outlook for petroleum output in 2030, boosting its gas forecast by 50 percent from its estimate last year.

The MLR now expects production will reach 450 billion cubic meters (15.8 trillion cubic feet) in 2030, compared with 300 billion cubic meters (10.6 trillion cubic feet) forecast a year ago. China's production stood at 101 billion cubic meters (3.6 trillion cubic feet) last year.

Peng Qiming, director of the ministry's geological exploration department, said the higher forecast was based on "substantial increases in geological resources in the country's northeastern region," the official Xinhua news agency reported.

The added production means that China could be largely self-sufficient as it increases use of the clean-burning fuel to reduce reliance on high-polluting coal.

Previous official forecasts have called for consumption of 550 billion cubic meters (19.4 trillion cubic feet) in 2030, leaving an import gap of 100 billion cubic meters (3.5 trillion cubic feet) that could be readily covered without Russian supplies.

Heavy investment

Since 2006, China has invested heavily in Central Asian gas development, building a 2,000-kilometer (1,242-mile) pipeline from Turkmenistan that opened in 2009.

Turkmenistan alone is expected to supply China with up to 65 billion cubic meters (2.3 trillion cubic feet) of gas per year under long-term agreements. The Central Asian total could swell to over 80 billion cubic meters (2.8 trillion cubic feet) with exports from Kazakhstan and Uzbekistan.

While China imports Central Asian gas from the west, it is expected to get at least 12 billion cubic meters (423.8 billion cubic feet) from the south through a 2,800-kilometer (1,740-mile) pipeline across Burma.

China also imports more costly liquefied natural gas (LNG) by tanker for its coastal cities.

This month, China National Offshore Oil Corp. (CNOOC) signed a U.S. $60 billion deal with British-based BG to buy 5 million tons of LNG annually for the next 20 years, The Australian daily reported. The volume is the equivalent of nearly 7 billion cubic meters (247.2 billion cubic feet) of gas per year.

The totals appear to leave little room for Russia's six-year-old plan to export 68 billion cubic meters (2.4 trillion cubic feet) of gas per year to China through twin pipelines from the east and the west.

A final agreement between Gazprom and China National Petroleum Corp. (CNPC) has been stalled over Russian price demands, which Beijing views as unaffordable for domestic consumers.

Russia has also been cool to Chinese investment in its energy assets, driving CNPC and CNOOC to take stakes in Central Asia and Australia instead.

Another hitch has been Gazprom's insistence on building its western Altai pipeline from Siberia to Xinjiang first, although China has made clear its priority is for gas in the east.

Russia has relied on China's rising import demand to help make its case, but the new MLR forecast could close the door.

Two days before the ministry's announcement, Gazprom CEO Alexei Miller cited "a new dynamic in the negotiations" with China, Interfax reported, but there has been no sign of progress from the Chinese side.

The new forecast may be essential to the government's goal of nearly doubling the share of gas in the nation's energy mix by 2015 from about 5 percent now.

The government has been sensitive to the energy security implications of the country's dependence on imports for over half of its crude oil.

Increased forecast

Last year, China imported 34 billion cubic meters (1.2 billion cubic feet) of gas, or 24 percent of domestic consumption, according to CNPC data cited by Platts.

The increase in the MLR forecast is believed to be based on prospects for developing "unconventional" gas sources, which include coal bed methane and shale gas, Tu said.

The MLR figures differ from those of the Paris-based International Energy Agency (IEA) in its newly-released World Energy Outlook report.

The IEA forecasts call for China's gas production to reach 264 billion cubic meters (9.3 trillion cubic feet) in 2030, while demand climbs to 469 billion cubic meters (16.6 trillion cubic feet) under a "new policies scenario," based on efficiency measures that have already been announced.

While the IEA estimates show a need for more imports, China's forecast seems to signal greater efforts to stand on its own.

In recent months, China has announced discoveries of coal bed methane in the Ordos Basin of Shanxi province, as well as conventional gas offshore in the Bohai Sea.

The greatest potential may be in shale gas development, which has led to huge increases in production and lower prices in the United States.

The jury is still out on shale gas prospects in China, which may face higher costs for imported technology and water shortages for hydraulic fracturing, or "fracking."

But China's shale gas reserves are thought to be enormous, estimated at 25.1 trillion cubic meters (886.4 trillion cubic feet) in addition to 10.9 trillion cubic meters (384.9 trillion cubic feet) of coal bed methane, according to CNPC.

China recently held its second auction for shale gas exploration rights, drawing bids from 83 companies for 20 shale gas blocks, Xinhua reported.

If China is able to develop a fraction of the resources, the 2030 forecast would be justified, said Tu.

"This should be achievable," he said.

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