China Fights Smog As Gas Supplies Shrink – Analysis


By Michael Lelyveld

China’s government has warned of natural gas shortages this winter after ordering northern cities to end reliance on heating from coal.

On Oct. 16, the nation’s top planning agency issued a notice to local authorities and state petroleum producers, warning that gas supplies “will be insufficient” during the peak demand periods of the heating season, which runs from mid-November to mid-March.

With this year’s strong economic growth, gas consumption has “significantly accelerated,” the National Development and Reform Commission (NDRC) said. The strains of a cold winter will make the “supply and demand situation … more severe.”

In a lengthy statement, the NDRC told local governments and enterprises to “strengthen the political consciousness, the overall consciousness, the core consciousness and the conscientious consciousness” to “protect the people’s livelihood.”

State petroleum companies were directed to increase gas production and speed work on pipelines, as well as gas storage projects and infrastructure for imports of liquefied natural gas (LNG).

The NDRC urged improvement of emergency planning, particularly in the Beijing-Tianjin-Hebei region for “extreme conditions with (the) gas peak forecast.”

Press reports drew links between the warning and the government’s accelerated drive to replace coal for heating in smog-bound cities.

“This winter, more homes in China will be heated by natural gas amid Beijing’s push for local governments in the north to use the cleaner-burning fuel,” the South China Morning Post said.

“The irony, however, is there may not be enough to go around,” it said.

The paper said that shortage concerns had already led to price spikes on the Shanghai Petroleum and Gas Exchange and LNG spot markets.

The increases are likely to be reflected in annual contracts being negotiated for next year, the paper said.

The PetroChina subsidiary of state-owned China National Petroleum Corp. (CNPC) raised distribution prices for gas supplies to commercial users by 10 to 15 percent, the South China Morning Post reported separately last week.

“The alert shows Beijing is trying to head off supply disruptions during the peak demand period,” Reuters reported.

“Residential users with their radiators will have supply priority over industrial users, increasing the possibility of power losses during gas shortages,” it said.

China’s LNG imports in September were the second-highest on record, the news agency reported.

“We are all quite concerned with supply shortages this winter … as we may not have the infrastructure capacity to catch up with the demand growth,” Li Wei, a vice president of LNG terminal operator Kunlun Energy, was quoted as saying.

End of coal-fired heating

Analysts said the threatened shortage is not only the result of the government’s fuel-switching initiative but also the way it is being implemented.

To avoid a repeat of last winter’s smog crisis, the central government has ordered an end to all coal-fired heating in 28 northern cities for this year’s winter season.

The plan has led to a crash program to scrap coal-fired boilers and build new distribution networks for gas.

“In the Beijing-Tianjin-Hebei region and nearby areas, 28 cities will now use only natural gas, electricity and renewable energy,” the official Xinhua news agency said on Sept. 16.

The report did not say what would happen if the mid-November deadline was not met.

Philip Andrews-Speed, a China energy expert at National University of Singapore, said the shortage warning and price spike were results of an arbitrary and abrupt application of the fuel-switching policy.

“Yet another example of the interaction between sudden government command and market forces, combined with the time needed to construct the infrastructure to deliver gas to the users,” Andrews-Speed said by email.

“The companies are struggling to raise gas production as well as building the pipelines and connecting the consumers to offset the enforced decline of coal burning,” he said.

The sudden gas crunch is a sign of how seriously the government has taken the air quality problem this year.

Despite all previous efforts, air pollution worsened in the Beijing-Tianjin-Hebei region in the first nine months as concentrations of fine smog-forming particles known as PM2.5 rose about 10 percent from a year before, the Ministry of Environmental Protection (MEP) said.

In Beijing, levels of larger PM10 particles soared 53.8 percent in September, the official English-language China Daily said.

Last week, as a fresh shroud of smog rolled over Beijing and other northern cities, official media reported a series of annual comparisons covering narrower geographical areas and time frames to argue that pollutant readings had improved.

The weather has not cooperated with the smog reduction campaign.

On Oct. 30, municipal officials in Tianjin announced that central heating would be turned on 15 days earlier than usual due to cold temperatures, Xinhua reported.

So far this year, China’s gas production has fallen behind demand growth.

In the first nine months of the year, gas consumption climbed 15.7 percent from a year earlier, the National Energy Administration (NEA) said. Production in the first three quarters rose 9.1 percent, Bloomberg News said, citing figures from the National Bureau of Statistics (NBS).

Total gas imports by pipeline and LNG tanker rose 5.2 percent in the first nine months from a year earlier, Dow Jones Newswires said.

Unprepared for the consequences

Government authorities appear unprepared for the consequences of their crackdown on coal-fired heating.

Last year, China consumed 205 billion cubic meters (7.2 trillion cubic feet) of gas. International energy consulting firm Wood Mackenzie expects demand will rise to 230 billion cubic meters (bcm) this year, with 10 bcm of the increase due to heating needs, Reuters reported.

But China has only 8 bcm of storage capacity, about 4 percent of demand, which is a fraction of the proportion in the United States and Europe, Wood Mackenzie said. The slim reserves may leave little margin for emergencies this winter.

As recently as last November, an expert from the CNPC Research Institute of Economics and Technology estimated that China could have a 50-bcm surplus of gas supplies by 2020 as the result of long-term LNG contracts and pipeline projects.

But that forecast may have no bearing on the short-term problem that China is facing this winter as a result of the government’s drive to end heating with coal.

The unintended effects are reminiscent of last year’s push to cut production overcapacity in the coal and steel industries.

While the government claimed success in meeting and exceeding reduction targets, the threat of short supplies led to steep price increases, spurring mines and mills to boost output — just the opposite of what the policy was supposed to achieve.

In a previous episode of rigid regulation in late 2010, the NDRC ordered a series of arbitrary power cuts in an effort to meet its five-year energy efficiency targets. After an outcry over service disruptions, NDRC officials apologized and promised they would never happen again.

It is unclear how far the NDRC will take the enforcement of its regulatory authority this time.

Bloomberg News quoted one analyst as urging regulators to raise gas prices in order to spur more production. Higher prices would also reduce “unnecessary consumption from low-margin industrial users,” the analyst said.

But Andrews-Speed doubts that price hikes would provide a solution.

“Raising prices in the short-term probably would not make much difference, and if it did, … some end-users might switch back to coal,” he said.


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