How China is Ensuring Its Natural Gas Supply?

By Sang Jianxin, China National Chemical Information Center

1. Supply gap is expanding year by year

As it is a clean source of energy, natural gas is the preferred fuel of an increasing number of countries. Its share in China’s energy market has increased year by year. In the past three years, proven natural gas reserves are being established in China at a rate exceeding 600 bcm/a (billion cubic meters per annum). Last year, 616.433 bcm was proven (of which 381.856 bcm was technically recoverable), including three large gas fields with a reserve of at least 30 bcm each and one extra-large gas field with a reserve of over 400 bcm (CNPC Anyue Gas Field), according to the Ministry of Land and Resources of China.
In 2013, the output of natural gas in China was 121 bcm, including 117.8 bcm of conventional natural gas, 0.2 bcm of shale gas and 3 bcm of coal-bed methane (CBM). The average annual growth rate of natural gas output in China from 2007 to 2013 was 10.3%. See Table 1 for details.
In 2013, 38.1 million tons (52.96 bcm) of natural gas was imported to China, up 25% year-on-year; 20.074 million tons of that was pipeline gas (53% of the total and up 27% year-on-year) and 18.025 million tons was LNG (up 22.7% year-on-year) according to China Customs.
Before 2007, China was self-sufficient with regard to natural gas. However, consumption has soared in recent years, growing 15.9% per year on average, much faster than the growth of output, yielding an ever-widening supply gap. In 2013, about 30% of China’s natural gas was imported. It is predicted that environmental protection policies and expansion of pipeline networks will indirectly drive consumption up more than 10% this year, bringing natural gas to about 6.3% of China’s primary energy consumption. Therefore, the supply will remain tight. See Table 2 for details.

Table 1   Natural gas production in China, 2007-2013 (bcm)

Year    Newly proven reserves    Output    Reserves-to-production ratio (years)
2007    3212.36    69.24    46
2008    3404.96    80.30    42
2009    3707.42    85.27    43
2010    3779.32    94.85    40
2011    4200.0    102.53    41
2012    5161.22    106.76    48
2013    5777.65    121.00    48


Table 2   Supply and demand for natural gas in China, 2007-2013 (bcm)

Year    Output    Import
volume    Export
volume    Apparent
consumption    Net import
volume    Self-sufficiency
rate (%)
2007    69.24    4.05    2.62    70.67    1.43    98
2008    80.3    4.64    3.27    81.67    1.37    98.3
2009    85.27    7.69    3.23    89.73    4.46    95
2010    94.85    16.61    4.06    107.4    12.55    88.3
2011    102.53    31.39    3.21    130.71    28.18    78.4
2012    106.71    42.38    2.91    146.18    39.47    73
2013    121.0    52.96    2.76    171.2    50.2    70.7


2. Measures to fill the supply gap

Due to rapid urbanization and the urgent need for clean energy, the consumption of natural gas in China is sure to soar higher, so the supply gap is expected to continue expanding. To remedy the ever-tighter natural gas supply, in May 2014, China signed a US$400 billion contract with Russia under which Russia will supply natural gas through the Sino-Russia East Pipeline to China for 30 years, starting in 2018. The volume will increase year by year, growing to 38 bcm/a. In addition to increasing the import volume, multiple measures have been adopted to ensure the natural gas supply, like encouraging the development of coal-to-gas, CBM, coke-oven gas and shale gas.
(1) Coal-to-gas
At the end of 2013, the construction two coal-to-gas plants was completed, and they started functioning: the 4.0 bcm/a plant of Datang International in Hexigten Banner and the 1.35 bcm/a first-phase plant of Xinjiang Kingho in Yili (the total planned capacity there being 5.5 bcm/a).
On June 18, 2010, the National Development and Reform Commission (NDRC) issued the Circular for Matters Related to Standardizing the Development of the Coal-to-Gas Sector. It requires examination and approval of coal-to-gas projects by the NDRC. Lines connecting the plants to natural gas pipelines must be included, and transmission channels and sales markets must be ensured. Among the first four projects approved for construction, three were already included in the Program for the Adjustment and Rehabilitation of the Petroleum and Chemical Industry and approved by the NDRC. They include the 4.0 bcm/a project of Datang International in Chifeng of Inner Mongolia, the 4.0 bcm/a project of Datang International in Fuxin of Liaoning and the 1.6 bcm/a project of Huineng Group in Ordos of Inner Mongolia. After the NDRC tightened the approval of coal-to-gas projects, the first coal-to-gas project approved was the 5.5 bcm/a project of Xinjiang Kingho in Yili. By the end of 2011, the total capacity of coal-to-gas projects already approved by the NDRC was 15.1 bcm/a.
In 2013, with the dual pressures of air pollution and growing demand for gas, the review and approval of coal-to-gas projects, which had been sluggish, was expedited somewhat. More projects entered construction or planning phases.
A ceremony for constructing Inner Mongolia Ordos Coal-to-Gas Industrial Park and a 12.0 bcm/a coal-to-gas plant was held on July 24, 2013. The park is located in Dalu Industry Zone, Ordos city of Inner Mongolia. CNOOC and Beijing Enterprises Group will each construct a 4.0 bcm/a coal-to-gas plant. Hebei Construction & Investment Group Co., Ltd. will construct a 4.0 bcm/a coal-to-gas plant and a 2×350MW thermal island plant.
On September 22, 2013, NDRC approved a Xinjiang Zhundong coal-to-gas demonstration project to launch early-stage work. The scale of the project is 30.0 bcm/a, which is matched to the scale of the Sinopec Xinjiang-Guangdong-Zhejiang pipeline (capacity 30.0 bcm/a). The project includes 12.0 bcm/a coal-to-gas in Wucaiwan (8.0 bcm/a for Sinopec and 4.0 bcm/a for Xinjiang Production and Construction Corps), 4.0 bcm/a in Dajing (Huaneng Xinjiang Energy Development Co., Ltd.), 6.0 bcm/a coal-to-gas in Xiheishan (4.0 bcm/a for Xinjiang Longyu Energy Zhundong Coal Chemical Co., Ltd. and 2.0 bcm/a for Zhejiang Energy Group Co., Ltd.), 4.0 bcm/a coal-to-gas in Kamisti (Xinjiang Fuyun Guanghui New Energy Co., Ltd.) and 4.0 bcm/a coal-to-gas in Hefeng (Suxin Energy Hefeng Co., Ltd.). Total investment of the project is estimated at RMB183.0 billion.
In addition to the four coal-to-gas projects presently approved for construction, 17 coal-to-gas projects have already obtained permission to launch early-stage work. The combined capacity is 121.5 bcm/a, and the combined first-phase capacity is 65.0 bcm/a.
(2) Coal-bed methane
According to an estimate by the International Energy Agency (IEA), the world’s CBM reserves at the depth of 0-2 000 meters are about 260 trillion cubic meters, at least twice the reserves of natural gas.  The CBM reserves at the depth of 0-2 000 meters in China are 36.8 trillion cubic meters, ranked third in the world after Russia and Canada. Abundant reserves indicate that the development and utilization of CBM have a bright future.
From 2009 to 2013, China’s output of CBM at the surface increased from 1.017 bcm/a to 2.573 bcm/a; that of CBM underground increased from 6.172 bcm/a to 10.03 bcm/a. In 2013, the output of CBM was 13.813 bcm, of which 2.956 bcm was at the surface and 10.857 bcm was from underground.
CBM producers in China can get VAT refunds, and they are exempted from customs duties and VAT for importing equipment. Sino-foreign joint ventures engaging in CBM exploration are exempted from enterprise income tax for the first two years after initially making profit, and in the subsequent three years, they can receive 50% off of the enterprise income tax. Enterprises using CBM to generate electricity will be given priority to join the power grids and a higher electricity sale price, RMB1.15/kWh higher than the normal price. China’s central government will give a subsidy of RMB0.2 per cubic meter for CBM exploitation. Some local governments also have subsidies for CBM producers.
(3) Shale gas
The estimated volume of technically recoverable shale gas in China is 1.6 trillion cubic meters, the world’s largest, according to the U.S. Energy Information Administration. However, China faces several challenges to develop efficient shale gas extraction – the geology and terrain are much more complex than in the U.S., water resources are scarce, expertise is immature, etc. – so China’s output has been small. In 2013, about 150 shale gas wells were drilled and four of them began to produce shale gas; the output of shale gas was 0.2 bcm, eight times the yield of 2012. To support the industry, China has held two auctions, one in July 2011 and the other in January 2013, with more than 20 shale gas blocks being leased to 18 companies. The 16 winners of the second auction have already studied shale gas exploration in 19 blocks. China’s shale gas development has entered a stage of commercial exploration and development.
(4) Coke-oven gas
Coke-oven gas, a combustible gas produced during carbonization of coal to form coke, is a byproduct of the coke industry. Both the composition and yield of coke-oven gas vary with the quality of the raw material coal and the parameters of the coking process. Normally, one ton of dry coal can produce 300-350 cubic meters of coke-oven gas (standard state).
Coke-oven gas can be used as the fuel for high temperature industrial furnaces, and it can also be used as city gas. It contains much hydrogen (55-60% by volume), which can be separated and used to synthesize ammonia. Its other components, like methane and ethylene, are important organic raw materials.
China’s coke enterprises can be divided into two categories, independent coke enterprises and steel makers. Most steel makers have already set up recovery and recycling systems that can consume all the coke-oven gas produced. For independent coke enterprises, due to the meager profit of coke production, comprehensive utilization of coke-oven gas could be a driver of growth for them.
The construction of coke-oven gas-to-LNG plants is in full swing in China. As of the end of 2013, six projects started operation, owned respectively by Taiyuan Taigong Tiancheng Hi-tech Co., Ltd., Inner Mongolia Hengkun Chemical Co. Ltd., Wuhai Huaqing Energy Technology Co., Ltd., Henan Jingbao Coke Co., Ltd., Qujing Fuel Gas Co., Ltd. and Yunnan Fuyuan Huaxin Energy Co., Ltd. These six projects can consume 1.69 bcm/a of coke-oven gas and produce 0.59 bcm/a of LNG. In addition, 26 projects are under construction, and their combined LNG capacity is 3.27 bcm/a and combined consumption of coke-oven gas is 9.04 bcm/a.
(5) Overseas oil and gas interests
Thanks to Chinese companies’ mass-scale acquisitions in the past several years, China’s overseas oil and gas interests exceeded 110 million tons in 2013.
In 2013, the transaction value of overseas oil and gas asset acquisitions made by Chinese companies totaled US$22.2 billion, and most of the acquired assets have good potential as oil and gas resources. As its oil and gas fields in Sudan resumed production, CNPC’s overseas oil and gas output reached 58 million tons in 2013. Sinopec’s overseas oil and gas output exceeded 30 million tons as the company made a series of acquisitions in Nigeria, the North Sea Fields and Egypt. CNOOC also achieved a historical high point of overseas oil and gas output in 2013, 18 million tons, of which 8 million tons were contributed by the newly acquired Nexen. Moreover, some of China’s private capital sources and non-oil capital sources, including Hainan Zhenghe Industrial Group Co., Ltd., Meidu Holding Co., Ltd., Y.U.D Yangtze River Investment Industry Co., Ltd. and New Era New Energy Investment Co., Ltd., began to take part in the acquisition of overseas oil and gas assets, mainly shale oil in North America and heavy oil assets, and their combined transaction value in 2013 was US$1.2 billion.

3. Conclusion

China’s massive natural gas purchases will more or less close its ever-expanding supply gap. Meanwhile, technologies to transform coke-oven gas to methane and to exploit CBM are maturing, and the development of CBM is strongly supported by government policies. Due to the overcapacity and meager profit of China’s coke industry, coke enterprises should make full use of byproduct coke-oven gas. Therefore, more coke-oven gas-to-LNG plants, which require less investment and have a shorter production process than coal-to-gas, will be constructed in China in the future. Both the development of shale gas in China and the acquisition of overseas oil and gas interests by Chinese companies are expected to achieve more breakthroughs in the near future. Certainly, despite the rapid growth of natural gas consumption in China, a secure supply can be ensured.