Demand for natural gas use in China is being driven by rapid urbanisation, industrialisation and a focus on green initiatives to reduce China over dependence on high polluting coal. Coal still accounts for nearly 70% of China’s primary energy mix, despite progress in recent years, while political pressure is mounting to improve the country’s poor air quality.
China’s 12th Five-year plan (endorsed by National People’s Congress in March 2011, covering 2011-2015) strongly favoured gas consumption and provided economic incentives, in the form of both pricing reform and infrastructure investment, to accelerate unconventional gas projects. The 13th Five-year plan (endorsed by the National People’s Congress in March 2016) prioritises improving the environment as a key goal. Continuing to promote the use of natural gas, in conjunction with renewable energy sources, is expected to play a major role in the Energy Sector Five Year Plan (based on the 2014-2020 Energy Development Action Plan).
Natural gas can be readily substituted for inefficient coal in power generation and given it currently represents just 6% of total Chinese energy demand, compared with ~30% in the rest of the world (2014), there is significant scope for using more natural gas in the country’s expanding industrial, residential, transportation and power sectors.
Change in natural gas demand by region: China is major growth driver
Gas demand by sector in China: 2001-2021
Source: International Energy Agency, Medium Term Gas Market Report, 2016-2021, published June 2016
Although China accounts for 23% of world energy consumption, it consumes only 5.4% of the world’s natural gas due to its low share in the energy mix with gas accounting for only 5.6% of China’s energy mix as compared to 29% in the rest of the world given China’s heavy dependence on coal.
Chinese total energy use has more than doubled since 2000, yet per capita use is still low. Meanwhile natural gas has experienced double digit demand growth, overtaking domestic supply in 2006. Demand is unevenly distributed and concentrated in the industrial cities near the Eastern coast. Only about 20% of the population have access to natural gas.
Gas price reforms based on market pricing have begun with a stated goal of continuing to liberalise gas prices over the coming years. The stated policy goals of the National Development and Reform Commission (NDRC) in setting gas prices are to encourage natural gas adoption, incentivise growth in domestic production and limit losses on imports, which now accounts for over 30% of China’s natural gas supply.
Massive urbanisation, modernisation and industrial growth is already underway and is fuelling further demand with the potential for even more rapid growth in the coming decades supported by strong macroeconomics and policy initiatives.
The Chinese government targets increasing the share of natural gas as a portion of total energy consumption from ~6% in 2015 to over 10% by 2020 to alleviate pollution caused by their heavy reliance on coal and substitute consumption of more costly oil.
The NDRC’s 2020 gas consumption target (as of year end 2014) is 360 bcm. The Chinese Government is working to encourage domestic gas production to lessen their increasing dependence on imported gas, including incentives for unconventional gas production. As China energy consumption continues to expand, the country will face ongoing challenges in meeting that demand
Source: IHS, April 2016
Significant pricing reforms were first announced in 2011. These reforms moved pricing from a “cost-plus” basis to a “city-gate” price based on ‘market based pricing’ including reference to the cost of imported natural gas, fuel oil and LPG prices. Prices also ‘flex’ in accordance with an affordability constraint. This initially applies to incremental supply over 2012 baseline level and non-residential users.
The new price regime initially applied to incremental supply over 2012 baseline level and non-residential users. Further reforms were announced in March 2015 to harmonise ‘existing’ and ‘incremental’ gas prices for industrial uses.
Prices for industrial users were revised in November 2015 to take into account the significant decrease in the price of oil and the corresponding cost of competing oil based products such as LPG and Fuel Oil. City gate prices were lowered by RMB 0.7 per cubic meter (~US$3.10/Mscf). The new city gate prices in Shanxi is RMB 1.91 per cubic meter (~US$8.50/Mscf).
Nation-wide residential pricing reforms have been announced with implementation initially planned by the end of 2015. Under the new scheme, three pricing bands were to be introduced depending on the amount of gas consumed with the stated goal of reducing the gap of residential gas prices to non-residential prices. However, these reforms have not yet been implemented and discussions are ongoing on the anticipated structure and timing of implementation.
As a precursor to the release of the 13th Five Year Plan, the State Council published a new Energy Development Strategy Action Plan (2014-2020) on November 19, 2014. This Action Plan is expected to form the basis of the 13th Five Year Plan for the Energy Sector which is anticipated to be released in late 2016, following the approval of the overall 13th Five Year Plan in March 2016.
The stated goals of the Action Plan are to provide more efficient, self-sufficient, green and innovative energy production and consumption. We see the Action Plan as providing continued support to promoting natural gas as a cleaner and more affordable part of the energy mix in China as well as the promotion of domestic supply to meet this demand. Sino Gas is proud of the role we can play to help China achieve these goals.
Key points of the Action Plan with regards to the natural gas industry include:
- Capping annual primary energy consumption at energy equivalent amount of 4.8 billion tons of standard coal with total coal use capped at 4.2 billion tons
- Increase Natural Gas share of energy mix to over 10% by 2020
- Source 85% of energy from domestic sources
- Establish eight new natural gas production bases by 2020, each capable of producing 10 bcm/year
- Increase unconventional gas production to 60 bcm
- Focus on the eastern margin of the Ordos basin to increase support and accelerate the pace of exploration and exploitation of CBM
- Break the bottleneck in production of unconventional natural gas as soon as possible
- Increase availability of natural gas to urban residential sector, build out infrastructure for the use of natural gas in the transportation sector, orderly development of natural gas fired peaking power plants, combined heat base load and gas – steam combined cycle cogeneration in the key areas of control for air pollution (Beijing, Shanghai and Guangzhou and surrounding areas).
13th Five Year Plan and Energy
CCTV: China 13th Five-Year Plan: Deepening energy revolution
China Energy Market background
United Stated Energy Information Administration, China Briefing
BP Statistical Review of Energy 2016, China in 2015
China Energy Fund Committee: Natural Gas 2013
China gas policy documents
English translation of China’s 12th Five Year Plan
KMPG Overview of the China’s 12th Five Year Plan: Energy
Clean Air Action Plan announcement
China Energy Development Strategy Action Plan 2014-2020
Source document (in Chinese)
CNPC ‘Green Development Forum’ discussion of Natural Gas Priorities over 2016-2020
China gas market forecasts
International Energy Agency: World Energy Outlook 2011 Special Report: Are We Entering a Golden Age of Gas?
The National and Regional Development of China’s Gas Market: Beyond Evolutionary Change?
BP Energy Outlook 2035, China
The Economist China Society Series – July 2016
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Pollution: Beijing vs. Belching Chimneys – http://www.economist.com/news/china/21701804-central-government-pressing-heavy-industry-clean-up-beijing-v-belching-chimneys
Chinese society: The new class war – http://www.economist.com/news/special-report/21701653-chinas-middle-class-larger-richer-and-more-vocal-ever-threatens
Chinese nationalism: East, west, home’s best – http://www.economist.com/news/special-report/21701649-do-not-expect-chinas-middle-class-be-liberal-east-west-homes-best
Family, identity and morality: A nation of individuals – http://www.economist.com/news/special-report/21701650-chinese-people-increasingly-do-what-they-want-not-what-they-are-told-nation
Wealth: Keeping up with the Wangs – http://www.economist.com/news/special-report/21701655-chinas-growing-wealth-unevenly-spreadand-good-investments-are-hard-find-keeping-up
Public opinion: Crowd control – http://www.economist.com/news/special-report/21701652-views-chinese-people-matterbut-only-up-toa-point-crowd-control
Civil society: Daring to think, daring to act – http://www.economist.com/news/special-report/21701654-civic-engagement-all-sorts-becoming-much-more-widespread-daring-think-daring
Emigration: The long march abroad – http://www.economist.com/news/special-report/21701651-chinas-brightest-and-wealthiest-are-leaving-country-droves-long-march-abroad
Looking ahead: The writing on the wall – http://www.economist.com/news/special-report/21701647-communist-partys-policy-balancing-freedom-expression-repression-not