By Michael Lelyveld
China is expecting lower growth in natural gas consumption and imports this year despite claims of economic recovery and plans to promote cleaner-burning fuels.
In an official report on Sept. 18, government forecasters said that combined use of pipeline and liquefied natural gas (LNG) would rise just 4.2 percent to 320 billion cubic meters (11.3 trillion cubic feet), less than half the rate of expansion in 2019.
The projection for 2020 would be the slowest pace in five years, Reuters said.
Last January, the PetroChina unit of state-owned China National Petroleum Corp. (CNPC), the country’s leading gas producer, predicted consumption growth of 8.6 percent.
Similarly, gas imports are slated to increase by a slight 3.6 percent, down from 6.9-percent growth in 2019, said the report by agencies including the National Energy Administration (NEA) and the Development Research Center (DRC) of the cabinet-level State Council.
Imports of 140 billion cubic meters (bcm) are expected to include 50 bcm of pipeline gas and 90 bcm of LNG, the report said.
The overall slowdown in gas growth has favored LNG imports over pipeline deliveries, straining the economies of Central Asia, which depend on China as their major export market.
The estimated volumes for 2020 would be an increase of 6.7 percent from a year earlier for LNG imports and a 1.5-percent decrease for pipeline gas, Argus Media said.
The outlook could be altered by an 11th-hour proposal from the Ministry of Ecology and Environment to convert over 7 million home heating systems in northern provinces from coal to gas or electricity by the end of October.
Last month, a ministry official warned that the region surrounding Beijing could suffer “heavy air pollution” with the start of the winter heating season this year.
The outcome of the draft plan for fuel-switching posted on the ministry’s website this week remained unclear. But the last time the government ordered a sudden coal ban before the winter of 2017-2018, gas prices spiked and factories were closed, S&P Global Platts noted.
Low spot market prices have tipped the balance of consumption toward LNG so far this year. In the first eight months, LNG imports climbed 10.3 percent while piped gas fell 7.4 percent, according to customs data cited by Reuters in a separate report.
While demand has been recovering, the COVID-19 crisis has gotten much of the blame for this year’s slowdown as consumption rose only 1.5 percent in the first half, according to the NEA.
“The coronavirus outbreak has had a major impact on China’s economic, societal and energy development,” the report said. “Consequently, the growth rate of the demand for natural gas has been suppressed significantly.”
Pipeline suppliers in Turkmenistan, Uzbekistan and Kazakhstan suffered cutbacks in March after PetroChina discouraged gas imports by declaring force majeure, an internationally recognized exemption from contract commitments due to unforeseen circumstances.
Russia’s gas exports from its newly-opened Power of Siberia pipeline were also affected but have since recovered following a two-week shutdown for maintenance. An additional one-week maintenance closure took place starting Sept. 15, Interfax said.
But pre-pandemic trends that emerged over the past two years suggest that other major factors behind China’s import slowdown have also been in play.
Even before the effects of COVID-19 became evident in January, China’s economy struggled to support sagging growth, which slipped to 6.1 percent in 2019, the lowest rate in 29 years.
The government’s reaction to economic pressures brought an end to double-digit increases in gas growth during 2017 and 2018 as regulators eased their push for replacing cheaper domestic coal with gas and electricity for winter heating. Apparent consumption growth of gas dropped to 9.4 percent in 2019.
This year, imported gas prices have fallen sharply following the COVID-19 standstill.
In June, spot prices for LNG in northeast Asia dipped to the lowest monthly average since the start of record keeping in 2009, Platts said.
China was lured by low prices to boost imports by 12.3 percent from a year earlier in August, but the lower NEA forecast for the full year suggests that gas buyers will be unable to take full advantage of cheap LNG supplies.
The country has built up storage facilities for oil and a strategic petroleum reserve (SPR) for over a decade to guard against import disruptions, but similar efforts for gas are relatively new.
“There was a surge in oil imports to take advantage of low prices. So, the fact that this is not happening with LNG purchases with equally low prices may reflect the lack of storage capacity,” said Edward Chow, senior associate in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington.
“Gas is more difficult and expensive to store than oil,” Chow said.
According to energy consultants at Wood Mackenzie Ltd., China’s storage capacity for gas is only about 6 percent of annual demand compared to a quarter or a third for Germany and Italy, Bloomberg News said.
The NEA report indicated that actual available storage capacity may be even less.
In 2019, China had 27 underground storage facilities with total working capacity of 10.2 bcm, said Argus Media. China’s 13th Five-Year Plan called for capacity to reach 14.8 bcm by the end of 2020, the government report said.
“There is a big question about whether demand will recover enough in September and October to digest the almost full gas storage while pipeline imports resume,” Wood Mackenzie analyst Miaoru Huang told Bloomberg in late August.
“There will be no room for more injections to underground storage by early September,” Huang said.
China’s ability to stock up on low-priced LNG will also be limited by import commitments for more costly supplies under longer-term contracts, Bloomberg reported.
Shipments deferred during the COVID-19 crisis will come due this winter, further curbing spot imports, said SIA Energy analyst Liu Yue.
Despite the push for more domestic production to reduce reliance on high-polluting coal and gas imports, output is likely to fall short of targets this year, according to the government report.
The DRC anticipates gas production will reach 189 bcm, 8.7 percent below the production goal set by the 13th Five-Year Plan.
Most of the shortfall can be traced to the slow growth of shale gas, which has met only a fraction of the government’s reduced goal of 30 bcm after years of costly development. Shale production was just 9.1 bcm in the first half, Argus said.
The government report appears to acknowledge that China’s complicated gas plans are failing to fulfill the country’s environmental goals, economic demands and energy security needs.
Economic policy conflicts are part of the problem.
In a separate report, Wood Mackenzie highlighted the example of China’s gas-fired power plants, which are said to be “struggling to stay afloat.”
As part of its stimulus efforts, the government has been cutting electricity rates for businesses during the past three years, passing the costs onto various segments of the production and distribution system including coal-fired power plants and the State Grid.
This year, gas plants have been taking the hit. Since June, the government has lowered regulated gas-fired power tariffs by 16 percent and 28 percent, Wood Mackenzie said.
At some plants, rates have dropped to a range nearly equal to coal-fired power, despite the higher cost of generating with gas.
“The new regulations will cause at least a 5 to 6 percentage point decline in the already poor margins of gas power plants,” said Wood Mackenzie principal consultant Frank Yu.
“Most projects are now loss making or barely breaking even,” he said.
The higher costs and lower tariffs make gas power increasingly less attractive than coal-fired power, Yu said, achieving just the opposite of the government’s goals for the fuel.
China has also grown wary of the energy security risks of increasing import dependence at a time of rising political tensions with the United States, dashing prospects that seemed promising before the effects of trade conflicts and the pandemic spread.
“The trade war with the United States has damaged Chinese purchasers’ willingness to sign long-term supply contracts with U.S. LNG exporters, whose projects require such financial guarantees to become viable,” said Chow.
“The United States is no longer seen as a reliable trading partner, which used to be our comparative advantage over other new sources of LNG,” he said.