China Nears Limit on Central Asian Gas

Imports may ‘max out’ as pipeline expansion stalls.

Chinese workers weld pipes at the construction site of the second project of west-to-east natural gas transmission pipeline in Fengle town of Wuwei city, northwestern China's Gansu Province, in a file photo.

As China struggles with natural gas shortages, its pipeline system from Central Asia is rapidly running out of capacity.

Plans call for utilizing more than 93 percent of the Central Asia-China Gas Pipeline (CAGP) system's capacity this year with increased supplies from Turkmenistan, Uzbekistan and Kazakhstan to meet China's needs.

Deliveries through the three existing strands of the 2,000-kilometer (1,242-mile) cross-border network will rise by nearly a third from the 38.7 billion cubic meters (1.36 million cubic feet) supplied to China last year, according to figures from pipeline officials in Kazakhstan last month.

The planned volumes of 51.37 billion cubic meters (bcm) would be perilously close to the CAGP's rated capacity of 55 bcm per year, suggesting that the system will "max out" in early 2019.

The constraint could have serious consequences for China's huge investments over the past decade in Turkmenistan.

The isolated country has some of the world's largest gas fields, but it has become wholly dependent on the Chinese market for its gas exports and earnings after a two-year cutoff by Russia and a long-running debt dispute with Iran.

A pipeline to deliver Turkmen gas through war-weary Afghanistan to Pakistan and India is officially scheduled to start pumping in 2020, but significant progress on the project may be several more years away.

The Central Asian capacity problem would also add to China's growing reliance on imports of liquefied natural gas (LNG) by tanker from overseas as its seeks to reduce pollution from coal.

China's LNG imports jumped 46 percent in 2017 and 46.6 percent in the first five months of this year, the General Administration of Customs (GAC) reported.

China has surpassed Japan to become the world's leading LNG importer, Bloomberg News reported Sunday, citing the five-month results.

Since the start of imports in 2010 until this year, the CAGP's Lines A, B, and C have carried 203.2 bcm to China, nearly equal to the country's total consumption in 2016.

This year's scheduled imports from Central Asia include 38.7 bcm from Turkmenistan, 7.6 bcm from Uzbekistan and more than five bcm from Kazakhstan, Kazakhstan Today and Azerbaijan's Turan Information Agency reported.

Plans for another line

Plans to build a Line D over a new 1,000-kilometer (621-mile) route to China have been in the works since 2013 but have been subject to repeated delays.

The new line from Turkmenistan through Uzbekistan, Tajikistan, and Kyrgyzstan would carry 25-30 bcm per year to China's western border.

But despite official target dates for completion, initially in 2016 and then in 2020, the most recent reports suggest commissioning no sooner than the end of 2022.

Last August, Chinese officials informed Kyrgyzstan that the start of its 215-kilometer (135-mile) project through the country would be pushed back to the end of 2019 due to factors including gas development in Turkmenistan and the need for tunneling and river crossings in Tajikistan, Kazakhstan Newsline said.

Information on the Central Asia gas problems was notably lacking during the state visit of Kyrgyzstan President Sooronbai Jeenbekov to China on June 6 before the Shanghai Cooperation Organization (SCO) summit in Qingdao.

Following Jeenbekov's meeting with President Xi Jinping, officials signed a protocol with amendments to the 2013 intergovernmental agreement for the project, setting out details of land use, construction, security and local labor, Interfax reported.

But larger questions about the Line D project were not openly addressed.

Perhaps the biggest is why a new route through Tajikistan and Kyrgyzstan was ever chosen in the first place. Unlike the other Central Asian republics, both rely on oil and gas imports.

The route choice has been linked to reports of suspected diversions of pipeline gas in southern Kazakhstan and resulting pressure drops in China during the winter of 2012-13.

Although Line D would diversify China's routes and avoid excessive reliance on transit through Kazakhstan, it would do nothing for diversity of supplies.

Equally important is the apparent failure to coordinate CAGP expansion with the explosion of China's gas demand last winter, when the National Development and Reform Commission (NDRC) ordered a ban on coal-fired heating in 28 northern cities.

The NDRC directive was aimed at avoiding a repeat of the smog crisis that enveloped Beijing in the winter of 2016-17.

But the top planning agency was forced to rescind the antismog order in December when it found that gas networks could not be completed in time, leaving homes and factories in the cold as LNG prices soared to record highs.

To make matters worse, CAGP volumes dropped by half at the end of January due to "frequent equipment failures" in Turkmenistan, according to a CNPC statement at the time. The outages highlighted China's dependence on Central Asian gas.

Turkmenistan's gas production fell 7.1 percent last year to 62 bcm, marking the first annual decline since 2009, according to BP Statistical Review of World Energy.

Containers hold liquefied natural gas at Yangkou Port in Nantong, east China's Jiangsu province, Jan. 4, 2014. Credit: ImagineChina
‘Case of bad planning’

The NDRC has belatedly recognized China's need for adequate storage capacity to smooth over shortage periods, but it has yet to address the lapse in planning for pipeline expansion, which may now limit Central Asian exports for the next three to four years.

Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, said the series of missteps will put more focus on LNG and future imports from Russia's Power of Siberia pipeline project.

"To me, LNG imports always made more sense," said Chow, noting the long distances from China's western borders to eastern consuming markets.

"So, it is truly a case of bad planning and policy coordination for China to have caused the spike in LNG prices in Asia with its recent policies that led to a surge in LNG imports," he said.

Some of the squeeze will be eased when Russia completes its massive 4,000-kilometer (2,485-mile) Power of Siberia gas pipeline project, scheduled for December 2019.

"The market conditions that China created more or less all by itself would seem to now favor the Power of Siberia project that supplies the gas-short northeast and new commitments to long-term purchases of LNG, including from North America," Chow said.

The Power of Siberia pipeline is slated to supply up to 38 bcm per year over a 30-year period. In mid-May, Russia's Gazprom said it had built 1,791 kilometers (1,113 miles), or 83 percent, of the linear segment of the mammoth project, Interfax reported.

But deliveries are expected to ramp up only gradually from initial levels of 10 bcm per year to the peak of 38 bcm in 2025, Pipeline & Gas Journal said.

The timing would still leave China with an import gap to be filled with costly LNG supplies.

China's gas consumption rose 15.3 percent last year and is expected to climb by about 10 percent to 258.7 bcm in 2018, according to a forecast by state-owned China National Petroleum Corp. (CNPC), which built the CAGP system through a series of joint venture subsidiaries.

Domestic gas production will increase by 8.8 percent to 160.6 bcm, while imports will rise by 13.4 percent to 105 bcm this year, CNPC's Economics and Technology Research Institute estimated in January, based on preliminary data.

In the first five months of this year, China's gas production of 65.2 bcm was only 4.3 percent ahead of year-earlier marks, according to the National Bureau of Statistics (NBS).

Gas consumption through May rose 17.6 percent from a year before to 112.7 bcm, the NDRC reported.

China's gas imports rose 26.9 percent last year to 94.6 bcm, the GAC said. The growth rate was more than double the pace predicted by CNPC for this year.