By Michael Lelyveld
With the problems of the past winter barely under its belt, China is working to avoid another natural gas shortage during the next heating season this year.
Analysts are expecting another year of strong gas demand after China’s consumption climbed 15.3 percent to 237.3 billion cubic meters (8.3 trillion cubic feet) in 2017, according to the National Development and Reform Commission (NDRC), the top planning agency.
The surge was spurred by the government’s ban on coal-fired heating in 28 northern cities last winter to avoid a smog crisis, like the one that darkened the air in Beijing during the winter of 2016-17.
The government’s bid to replace coal with gas and electricity was only partly successful as distribution projects stalled, supplies ran short and domestic liquefied natural gas (LNG) prices reached record highs.
The problems forced the NDRC to curb gas supplies for industry in favor of home heating and lift coal restrictions where gas was unavailable.
While the troubles have eased with the end of winter, the lingering effects are seen as driving demand, Hong Kong’s South China Morning Post reported.
“China’s high gas demand growth is sustainable this year, because much of the supply to the industrial sector was curtailed last year for the sake of ensuring winter residential heating demand was met,” Stephen Zou Xiangdong, chairman of AAG Energy Holdings Ltd., told the paper.
“But this suppressed consumption will come back, once the seasonal demand peak is over,” he said.
So far, the forecast seems to be proving true. Apparent gas consumption rose 9.8 percent in the first quarter from a year earlier, the National Energy Administration (NEA) reported last month.
The problems that surfaced last winter also appear likely to be repeated when heating resumes next November.
Lack of adequate gas storage has suddenly become a focus as the surge in seasonal demand strains the stability of supplies.
Last October, an analyst at energy consultancy Wood Mackenzie told Reuters that the country had only 8 billion cubic meters (bcm) of storage capacity, or one-fourth to one-sixth the amount available in the United States and Europe in relation to demand.
According to figures from the PetroChina subsidiary of China National Petroleum Corp. (CNPC) cited by the South China Morning Post, China’s gas storage is equal to 3.3 percent of consumption, compared with a global average of 11.7 percent.
‘All the pieces of the puzzle’
In dealing with last winter’s crisis, the NDRC seems to have neglected the effect of the storage shortage on the ability to meet peak demand.
“This is a case where the government is pushing one part of the supply chain and the demand chain … and then just doesn’t get all of the pieces of the puzzle,” said Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research.
“They just haven’t thought about this problem,” Herberg said.
But the outcry over last winter’s botched gas plan is forcing the government to think about the storage problem now.
The government plans to increase storage capacity to 14.8 bcm by 2020 and over 35 bcm by 2030, Bloomberg News reported.
But at the upper end, that would still meet only 5.8 percent of demand, according to a Sanford C. Bernstein & Co. forecast.
On April 27, the NDRC told state petroleum companies to sign annual supply contracts with major gas customers by the end of the month. The companies will be required to have storage capacity equal to at least 10 percent of contracted sales by 2020, Reuters said.
Progress may be slow because new storage will largely rely on injection into depleted gas fields.
China is trying to turn hundreds of fully and partially depleted wells into storage. But testing, designing and building the facilities may take five to eight years, Reuters said in another report.
New pipelines and infrastructure will also be needed to connect with networks, Herberg said.
China plans to spend more than U.S. $10 billion (63.5 billion yuan) on new storage in the five-to-eight year period in an effort led by PetroChina, according to Reuters.
But a presentation by CNPC Economics & Technology Research Institute in November hinted at a lack of enthusiasm among state oil companies for low-margin investments in gas projects.
“Price regulation confines gas supply capacity,” the presentation said in a bullet point on a page of the presentation covering the storage issue.
“They really have been dragged along on gas because it’s not a very profitable business,” Herberg said.
Subsidies and tax breaks
The state-owned oil companies are seeking government subsidies and tax breaks to offset the costs of creating new storage, Reuters reported separately.
Slow progress on increasing production and infrastructure means that China may face many of the same conditions next winter.
“They’re very much at risk of another winter or two just like this one,” Herberg said.
The prospect of repeating last winter’s experience has spurred efforts to increase both domestic production and imports.
Last year, China’s gas output of 148.7 bcm rose 8.5 percent while imports of 92 bcm climbed 27.6 percent from a year earlier.
In January, the forecast from CNPC’s research institute called for domestic production of 160.6 bcm this year, up 8 percent from the 2017 NDRC figures. Imports of 105 bcm will rise 14.1 percent, while consumption of 258.7 bcm would gain 9 percent over the agency’s estimates, CNPC said.
Much of the domestic supply growth is expected to come from increases in “unconventional” gas, a category that includes shale gas development and coalbed methane.
Both resources promise high growth rates from relatively small volumes so far.
In 2015, the Ministry of Land and Resources estimated China’s technically recoverable reserves of shale gas at 21.8 trillion cubic meters, sparking high hopes for production of the gas trapped in shale rock formations.
But after years of costly development, annual output has risen to only about 9 bcm, an increase of some 14 percent over the annual output in 2016. China Petroleum & Chemical Corp. (Sinopec) produced more than 6 bcm at its Fuling field near Chongqing, while CNPC’s shale output reached 3 bcm in the Sichuan Basin.
In 2012, the NEA set an ambitious target for shale gas production of 60-100 bcm in 2020 before the realities of high costs and technical challenges forced it to cut back the goal to 30 bcm.
Herberg believes the lower target is achievable, but a Sinopec official recently issued another warning on costs.
“Without government subsidy, our shale gas business is on the verge of loss making,” said Ma Yongsheng, a Sinopec vice president, according to a Reuters report in February.
Beijing-based SIA Energy estimates that shale gas production in 2020 will rise to only 15 bcm, the report said.
The government has reduced shale gas subsidies in stages since 2016 but recently lowered its resources tax by 30 percent.
Similar hopes and volumes have been seen in production of coalbed methane, which is captured from seams when released in coal mines. Output of the gas rose 8.2 percent last year to 7 bcm, the National Bureau of Statistics reported.
CNPC has forecast 24 bcm of coalbed methane production by 2020.
Even if the targets are met, China will rely heavily on LNG imports.
Last year, the country’s LNG consumption soared 47 percent to 37.8 million tons, exceeding pipeline imports by more than 25 percent. The increase pushed China into second place among the world’s LNG importers, surpassing South Korea.
‘The relief valve’
China’s imports of LNG are expected to rise by another 14.2 percent this year, S&P Global Platts energy news said.
In the absence of adequate storage, China’s ability to meet peak winter demand will depend largely on incoming LNG tankers from abroad.
“The relief valve is going to be on the LNG side,” Herberg said. “That’s where they’re going to have to go for all their incremental supply.”
First-quarter figures show a sharp rise in LNG. Imports of 12.38 million tons soared 59.1 percent from a year earlier during the period, Xinhua reported, citing customs data. Deliveries in March jumped 64.2 percent.
Sinopec is planning to double its LNG handling capacity by 2020, LNG World News reported.
“The challenge for them with LNG is getting from the coast to the interior where they can arrest shortages,” Herberg said.
While the forecasts and numbers may add up on paper, China could face a similar set of infrastructure and supply problems by the time the next heating season comes around.