Beijing Doubles Down on Natural Gas

When I visited Alaska this spring to give a talk, questions were raised about the potential for the Arctic state to export natural gas to China. This wasn’t surprising, coming on the heels of Xi Jinping’s unexpected “pit stop” in Anchorage, during which the Chinese president and the governor of Alaska discussed gas exports, as well as Chinese investment in pipelines.

A few months later, the United States and China reportedly struck a deal to do just that—increasing liquefied natural gas (LNG) exports, among other commodities, to China, as part of the Trump administration’s 100-day bilateral trade plan. Details of the agreement are scant, but it has certainly raised hopes in states like Alaska and Louisiana, where LNG exporters have been eyeing the Asian market, including Japan, for some time.

While it remains unclear whether supplier contracts will be signed and US LNG will actually flow to Asia, the timing for exporting gas is certainly good. Above all, that is because of Chinese natural gas market dynamics and the policy environment in Beijing.

Not only did China’s 13th Five-Year Plan on Natural Gas in 2016 seek to dramatically raise the proportion of gas in its primary energy mix to 8.3%-10% by 2020, Beijing also recently doubled down on boosting domestic gas consumption. The latest policy, jointly backed by 13 agencies, now calls for natural gas to hit the higher end of the range of 10% by 2020.

This upward revision of the gas target is aggressive. Even BP’s renowned Energy Outlook 2017 has a more conservative estimate for Chinese natural gas consumption. According to BP, “China’s consumption of natural gas [will] also increas[e] sharply, with its share almost doubling over the Outlook to 11% in 2035.” With its new goal, that means Beijing now intends to achieve that same level 15 years ahead of BP’s expectation.

Although projections differ on the extent and timing of increasing natural gas in China’s energy mix, BP and Beijing are on the same page when it comes to underscoring the key factor behind this shift: structural change in China’s energy profile. The main difference between the two, then, seems to be that BP has a more bullish case for China’s renewables sector, which has experienced ups and downs (see Figure 1).

Figure 1. Projection of China’s Energy Composition
nat gas 4 01 - Beijing Doubles Down on Natural Gas
Source: BP Energy Outlook 2017.

Ultimately, BP’s Outlook arrives at a similar conclusion to what I and others have suggested—that is, coal in China has essentially peaked and will likely plateau over the next decade. A competition to offset the decline of coal in China seems to be brewing between gas and renewables—similar to the scenario that is playing out in other markets as well.

Natural gas boosters in China tout the environmental benefits of the cleaner fuel to align with the current political mandate of tackling air pollution. But the fact that so many agencies signed on to bolster natural gas also suggests that the Chinese national oil companies (NOCs) wanted to make a statement against the recent wave of support for renewables, which has led to the rapid growth of that sector.

Like their Western oil major counterparts, Chinese NOCs want to diversify their portfolios much more significantly into gas. And judging by the raft of government agencies that signed on to the new policy, such as the housing and finance ministries, it is clear that they would also benefit from more natural gas development in various ways, including getting more taxes. The NOCs clearly aren’t willing to cede too much ground to renewables.

Boosting the use of natural gas will have regional variation of course, and the region that could well see a considerable rise in natural gas is China’s northeast, specifically the “Jing-Jin-Ji (JJJ),” a mega-region that includes Beijing, Tianjin, and Hebei. That region is ground zero for China’s post-industrial transition away from coal and also happens to be the most afflicted by severe air pollution.

Higher penetration of natural gas in the JJJ makes sense: it is expected to encompass a population of 130 million people (the size of Russia); it lies within close proximity to the Russia-China gas pipeline that should be completed soon; and it encompasses a major port in Tianjin where CNOOC already operates an LNG terminal, which could be expanded to receive more imports.

More broadly, China’s natural gas consumption is well below the global average of 24%, at just about 6% of the country’s total energy mix. According to Chinese energy expert Zhou Dadi, China’s per capita natural gas consumption was only 135 m3 in 2014, compared to the OECD average of 1,242 m3.

So, while both political and economic conditions are conducive to raising natural gas consumption, China’s 10% target is nonetheless quite a stretch. And it appears especially so in light of the fact that consumption growth has slowed in recent years (see Figure 2).

Figure 2. Natural Gas Consumption Growth Waxes and Wanes
Source: National Bureau of Statistics and National Development and Reform Commission.

How, then, does China achieve its aggressive gas target? The current target implies that China needs to consume about 360 bcm of gas by 2020, or roughly 154 bcm more than it did in 2016. This translates into an average consumption growth of 15%, essentially the same average rate China saw between 2009 and 2013 before the dip in growth.

In the context of an economic structural shift, Chinese industry’s demand for gas will likely remain flat or decline. The key, then, rests with sectors that are all connected in one way or another to China’s urbanization push—residential, electricity, transport—which will have to step up as the new demand drivers (see Figure 3).

Each of these sectors will likely need to see a doubling or near-doubling of gas consumption over the next few years for China to hit its 10% target. For instance, one projection suggests that China will need to have 10 million gas-powered vehicles and 60,000 LNG-powered cargo ships to lift the transportation sector to 13% of total gas consumption by 2020.

Figure 3. Natural Gas Consumption Drivers as of 2014
Source: NBS.

Policy incentives to create a more competitive operating environment will also play a significant role if China hopes to sustain robust growth in gas consumption. Already, Beijing has taken some concrete steps to liberalize the midstream and downstream sectors to allow more market entrants. Expect another round of liberalization in the natural gas sector, including on pricing, to entice private sector involvement as part of the effort to drive toward the ambitious goal.

Whether China ultimately hits the 10% target certainly depends on a host of factors. Even so, Beijing clearly wants to prolong the golden era of gas as it unambiguously aims to refashion a post-coal energy landscape. These new dynamics could yield interesting developments in an enormous energy market that has long been dominated by the Chinese state.