ISSN 2330-717X

China’s Climate Goals Drive Down Gas Forecasts – Analysis

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By Michael Lelyveld

As China’s planners prepare to meet President Xi Jinping’s climate change goals, there are signs that the targets will require deep cuts in forecasts for natural gas.

The government has spent much of the past decade promoting gas as a cleaner replacement for coal, converting home heating systems to reduce smog and switching power plants to gas in megacities like Beijing.

Years of double-digit growth in gas consumption have led to big investments in new resources, import infrastructure and pipelines by China’s national oil companies and suppliers like Russia’s Gazprom abroad.

In 2010, Russia’s then-deputy prime minister, Igor Sechin, said that “the growth of gas consumption in China may be unlimited.”

A slower pace of heating conversions in 2019 and the COVID-19 pandemic in 2020 did little to derail investment as seasonal pressures and long-term plans spurred spending on liquefied natural gas (LNG) terminals, ships and storage facilities.

But now, Xi’s pledge in September to peak China’s carbon emissions by 2030 and achieve “net-zero” neutrality before 2060 has driven state energy forecasters to recalculate how much fuel China will consume in the decades to come.

At an industry conference on June 24, Zhu Xingshan, senior director of planning at China National Petroleum Corp. (CNPC), said that the climate goals will force the country to slash coal’s share of primary energy from 56.8 percent last year to 44 percent in 2030 and just 8 percent by 2060.

The share of gas would rise from 8.7 percent last year to 12 percent in 2030 before dropping back to 11 percent by 2060, Zhu said, according to Reuters.

The biggest shift would be in non-fossil fuels, which would account for 26 percent of China’s energy in 2030 and 75 percent by the net-zero deadline.

The share numbers underscore the role of gas as a bridge fuel that will limit China’s carbon emissions until reliance on renewables rises, rather than a source of unlimited growth.

Adjusting forecast

As a result of Xi’s targets, planners have lowered their estimates of peak gas consumption, Newsbase Daily News reported.

While gas demand was previously expected to reach 700 billion cubic meters (24.7 trillion cubic feet) by 2050, estimates of the growth pace have now been revised down to 535-605 billion cubic meters (bcm) by 2030 with peak demand in 2035, said Hou Chuangye, vice president of gas sales at CNPC’s PetroChina subsidiary.

An official of the oil and gas pipeline monopoly known as PipeChina presented slightly different numbers, but the message was much the same.

Tang Shanhua, PipeChina’s deputy general manager of business operations, said gas demand will rise from 326.2 bcm last year to 526 bcm by 2030 and 650 bcm by 2035 before dropping back to 550 bcm by 2050.

If the new projections pan out, China’s volumes in 2050 would drop by 150 bcm from previous expectations, or 21.5 percent.

While the estimates differ in detail, they all appear to be moving in the same direction with earlier peaks and significantly lower consumption as the goal of carbon neutrality nears.

So far this year, China’s gas demand has been strong with consumption through May up 17.1 percent from a year earlier to 153.3 bcm, the National Development and Reform Commission said.

The latest short-term forecast released by the Paris-based International Energy Agency (IEA) on July 5 calls for a 10- percent increase in China’s gas demand this year, driven largely by economic recovery and the industrial sector.

In the medium term, the IEA estimated that gas demand will grow at a slower average annual rate of nearly 7 percent through 2024, rising from 2020 levels by 95 bcm during the forecast period.

In its long-term forecast last October, China’s gas demand continued to grow through 2040, roughly doubling from 2019 levels under the IEA’s main “stated policies scenario.” Under its tighter “sustainable development scenario” for recommended policies, demand also kept climbing through 2040, but at a slower average annual rate of 2.3 percent.

In its 2019 pre-pandemic forecast, gas demand in 2040 was projected to reach 655 bcm under stated policies, although the sustainable scenario called for a peak after 2030 with demand subsiding slightly from 508 bcm to 497 bcm.

With the possible exception of the 2019 sustainable development track, none of the forecasts would have prepared China and the world energy market for the steep revisions that the CNPC and PipeChina estimates imply.

While forecasts are only estimates with uncertainties that increase over time, the latest projections highlight the fact that the gas share of China’s energy mix has yet to reach the government’s 2020 goal of 10 percent under its three-year air pollution action plan released in 2018, due in part to economic decisions and increased volumes of coal.

Under the CNPC projections, the gas share would also fall short of the government’s previous target of 15 percent by 2030.

Further foot-dragging this year on halting the construction of new coal-fired power plants may serve as a reminder that the biggest reductions in the coal share of consumption have been left to the later years of the new 40- year plans.

The announcement of the new forecasts, nine months after Xi’s climate pledges, may raise questions about the process of China’s decision-making on energy and environmental affairs.

The sequence suggests that Xi’s announcement of new climate targets was the result of a political decision that left energy planners to explain how the goals could be achieved.

The earlier peak for gas demand that is now estimated may raise concerns for investments in resource development, power projects and pipelines that are expected to last for at least 40 years.

Climate advocates and reports have been warning for years that investments in new coal-fired power plants will become stranded assets, unable to pay a return, as the cost of renewables continues to come down.

Increased risk

The new forecasts may be raising the same risk for investments in gas, which faces an eventual sunset as another fossil fuel.

Philip Andrews-Speed, a senior principal fellow at the National University of Singapore’s Energy Studies Institute, suggests that the stranded asset argument is not a threat for gas in the near term, but the concern may pose a future risk for investments over time.

“The reduction in some of the more ambitious forecasts of gas demand is not unexpected in the light of Xi’s carbon neutrality pledge. But increase in demand over the next 15 years is still substantial and will require sustained growth of imports of both LNG and pipeline gas,” said Andrews-Speed.

“The risk of stranding does not face assets that are already operating or that will be commissioned in the next five years or so,” he said.

“The real risk is that enterprises just may not invest in new assets after that if they see that demand is set to decline, and yet the country may still require new assets,” Andrews-Speed said.

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