Natural Gas Supply Pattern in China after Price Adjustments

By Luo Zuoxian, Sinopec Research Institute of Petroleum Exploration & Development

On November 20, 2015 China drastically cut the prices of natural gas for non-residential uses. The purpose is to encourage industrial and commercial enterprises to consume natural gas and further optimize the consumption structure of primary energy sources in China. The adjustment does not mean that natural gas pricing in China is now fully market-geared, but it is a significant step in that direction. In the market-geared pricing of natural gas, not only macro-level basic setups such as the supply/demand mechanism but also physical industries that support the supply/demand mechanism – pipelines and storage/transportation facilities in particular – have to adapt. The severity of environmental problems in China and the practical need to restructure primary energy sources to fundamentally change the environment must also be heeded. In follow-up reforms, China will likely also have to use policies to promote the consumption of natural gas. Reform of the prices of natural gas is only one important step. Long-term and arduous tasks still need to be made.

Natural gas pipelines in China are rather scattered; natural gas production, transmission and dispatching systems need to be improved

The storage capacity of natural gas underground depots in China was only 4.7 billion m3 in early 2012. Despite an increase to 7.3 billion m3 in early 2013, the capacity was not yet 5% of the total natural gas consumption in China. The natural gas underground storage capacity in advanced countries is usually 20% of consumption.
China has constructed a few natural gas trunk lines, such as the west-east gas transmission pipeline and the Sichuan-east gas transmission pipeline, but the total length of natural gas pipelines is only 50 000-100 000 km. Inadequacy in natural gas infrastructure is one of the major factors for the low consumption and the low market penetration of natural gas in China.

Policies for natural gas utilization leave much to be desired

China issued the “Policies for the Utilization of Natural Gas” in 2012. Requirements were defined for the utilization of domestic natural gas, shale gas, coal-bed methane and coal-based gas, as well as imported pipeline gas and LNG. The document was issued in an environment of long-term high prices of natural gas in the international market and frequent supply shortages of natural gas in the domestic market. Considerable changes have appeared in the energy market environment since then. Natural gas prices around the world have plummeted, while economic restructuring in China is strengthened and emphasis is no longer laid on development speed but on development quality. It is therefore necessary to reassess policies for natural gas utilization and make appropriate revisions and modifications.

China promotes natural gas consumption; gas sources are ensured from world markets

Central Asia will be a major pipeline gas supplier for China in the future. Several natural gas pipelines have already been constructed in Central Asia. Talks on the construction of China-Russia natural gas pipelines are in progress. Since the proposition of the One Belt & One Road strategy, China has made great endeavors in developing economic cooperation with countries along the belt and the road. Cooperation in energy will be an important component of economic cooperation.

Domestic production will be the main natural gas supply for China

Based on resource appraisals made by the Ministry of Land and Resources, the output of conventional natural gas in China entered a stage of rapid growth from 2005. The output will reach around 200 billion m3 in 2020 and 300 billion m3 in 2030. Shale gas, coal-bed methane and coal-based gas are also important sources for natural gas supply. Shale gas planning data recently released show that the output of shale gas in China is to reach 6.5 billion m3 in 2015 and 30 billion m3 in 2020.
According to the “Twelfth Five-Year Plan for the Development and Utilization of Coal-Bed Methane”, the output of coal-bed methane is to reach 16 billion m3 in 2015. It is expected that the output of coal-bed methane in China will be 90 billion m3 in 2030.
According to the “Twelfth Five-Year Plan for the Development of Natural Gas”, the annual capability of natural gas supply in China is to reach around 176 billion m3 in 2015. Of the total, the output of coal-based gas is to be 15-18 billion m3. It is expected that the output of coal-based gas will be 55 billion m3 in 2020.
The final goal for the construction of natural gas infrastructure in China is to form natural gas pipeline networks covering major market regions all over China, ensure stable gas supply in major natural gas markets, develop diversified main consumers and accelerate the construction of multiple-source gas supply networks (integrating continental, marine, domestic, imported and pipeline LNG).