Gas still key to China’s energy transition despite 2022 demand drop

China’s gas demand is set to rebound in 2023 on the back of moderating gas prices and a long-awaited economic reopening, after consumption dipped slightly due to tight pandemic controls and surging global energy costs.

SHI WEIJUN

The unprecedented expansion of China’s gas market over the past two decades took a pause in 2022, but the faster-than-expected reopening of the world’s secondlargest economy will support a consumption uptick while the energy transition remains a long-term growth driver.

The now-defunct COVID-zero strategy, coupled with high global energy prices, led to substantial weakness in the Chinese gas market last year as economic disruptions sapped industrial and commercial demand for the fuel. The pandemic-related challenges for gas in China peaked in the fourth quarter of 2022 – traditionally the period with the biggest consumption – as COVID-19 swept across the country after policymakers in Beijing loosened tight pandemic controls.

China’s apparent gas consumption in 2022 edged down by 1.7% year on year to 366.3 bcm, according to official figures. The contraction marked a departure from the Chinese gas market’s previous growth trajectory. At the same time, softer Chinese demand last year offered relief to Europe as governments from Berlin to London scrambled to secure LNG supplies as an alternative to Russian pipeline gas.

Last year’s modest decline was the first in at least a generation and came amid an overall increase in energy demand. This led the share of gas in China’s primary energy mix to decline from 8.9% in 2021 to 8.4% in 2022, according to official data.

Coal meanwhile grew its share from 56% to 56.2% over the same period, but non-fossil sources scored the biggest gain from 16.6% to 17.4%. The Economics and Technology Research Institute of CNPC, China’s biggest national oil company (NOC), expects coal’s share to drop to 44.3% by 2030, while gas’s share will rise to as high as 29% by 2035.

City gas is likely to have been the only segment to have grown in China last year – mainly driven by residential usage and heating from coal-to-gas conversion – as commercial, industrial and power generation demand weakened in tandem with meagre economic growth. The share of city gas in overall consumption expanded from 35.5% in 2021 to 37.5% in 2022, while the shares of industry, power generation and chemicals all declined.

While last year’s spike in global gas prices depressed Chinese demand overall, it also led paradoxically to recent shortages of the fuel in parts of northern China –making this winter the third out of the past six in which China has suffered an energy crunch.

Europe’s dash for LNG shortly after the start of the ongoing Russia-Ukraine conflict in February 2022 drove up wholesale gas prices in China as city gas distributors were forced to cover the higher cost of imported supply.

But China tightly regulates the residential price that gas distributors can charge – as wholesale prices soared far above retail prices, the distributors stopped reselling wholesale gas to households in December and January.

“This has exposed the failure of some local governments and enterprises in implementing measures to ensure energy supply and stabilise prices for people’s livelihoods,” said Lian Weiliang, vice chairman of the National Development and Reform Commission, China’s top economic planning agency, in mid-January. “No local governments or enterprises should limit the purchase of gas for people’ livelihoods.”

Choppy growth

Last year’s modest decrease in Chinese gas demand looks to be a blip though as the Chinese government is working hard to revive the economy. Analysts expect consumption to rebound in 2023, underpinned by easing prices and economic recovery on the back of the end of the COVID-zero strategy, which will support demand recovery for industrial use and power generation as well as commercial consumption. But demand growth may not pick up speed until spring as the economic recovery remains nascent in China, amid lingering weakness in some key indicators such as crossborder flights and new home sales growth. Reinfections from waning herd immunity over time present a persistent downside risk for China’s reopening this year, potentially weighing on already-subdued consumer consumption. There are other headwinds too. Global gas supply is projected to remain tight this year from a combination of China’s reopening, robust European demand, limited supply additions and a shortage of LNG carriers to ship the fuel. Even if China’s economy bounces back strongly this year, the domestic gas market could be supplyconstrained.

China’s property slump remains a drag. Home sales remain soft despite a policy U-turn by Beijing, in a reflection of persistently weak demand. The reopening will help spur property construction, but the slowdown in completion of new homes means fewer gas connections completed by domestic utilities like China Gas Holdings and China Resources Gas. Taken altogether, these factors mean Chinese consumption growth could be choppy as the year goes on.

Imports tipped for comeback

Domestic production represented 59.5% of China’s apparent gas consumption last year, the highest share since 2017 when it topped 62%. The five-year high reflected a 9.9% drop in total gas imports that was entirely driven by LNG – shipments plunged by 19.5% to 63.4 MT as surging costs made imported LNG less economically viable. But this decline is also likely to be a one-off as the expected recovery in consumption and fall in international gas prices make LNG attractive to Chinese importers once again.

Piped imports expanded by 7.8% to 45.81 MT, and look set to maintain growth momentum as Gazprom ramps up volumes through the Power of Siberia pipeline to a contracted 22 bcm this year. This would remain less than two-thirds of the pipeline’s capacity of 38 bcma, so there is scope for Gazprom to deliver more than the contractual requirement if there is enough Chinese demand.

Total contracted pipeline imports into China once Power of Siberia ramps up to its contracted capacity will exceed 110 bcma, the majority of which will be contributed by Russia. Following an agreement between Gazprom and CNPC in February 2022, Russian gas deliveries to China could reach 48 bcma in the latter half of this decade, which would see Russia replace Turkmenistan as the top pipeline supplier to the Chinese market. At the same time, the start of development of the fourth West-East Pipeline from China’s western border to its hinterland provinces in September 2022 could bring renewed impetus for completion of the long-delayed 30 bcma Line D of the Central Asia-China Pipeline network. There will be new long-term LNG offtake contracts of at least 45 MTPA commencing over the next few years based on recently announced deals, which corresponds to 71% of last year’s LNG import volume. The looming increase will coincide with new regasification terminals that will start operations in the next few years.

CNPC and the other two NOCs, Sinopec and CNOOC, have continued to enter into new long-term LNG contracts to safeguard China’s long-term energy security and optimise the national gas import mix. LNG also offers the NOCs greater price flexibility than imported piped gas, as the pool of suppliers are more diversified by region and there are more LNG pricing benchmarks.

In the past three years more non-NOCs in China, such as local energy companies and larger city gas distributors, have been entering into long-term LNG contracts directly with overseas producers to secure supply in anticipation of consumption growth over the long term.

Long-term transition role still assured

The Chinese energy system is continuing to undergo dramatic shifts, with a top-down mandate to transition from a carbon-intensive economy toward a peaking of emissions by 2030 and carbon neutrality by 2060. While energy security remains at the top of the agenda, China is expected to uphold these ‘dual carbon’ commitments, announced by President Xi Jinping in September 2020. China’s energy regulator issued a key report in January that clarified the timetable for constructing a so-called “new-type power system” and the key tasks step by step. While renewable energy such as wind and solar is expected to be the mainstay of the new-type power system, the implication is that gas will be a fuel source that bridges the gap between more polluting fossil fuels and renewables. The gas industry will be developed alongside renewables, given its important baseload role in the power system. Gas will continue to play a role in China’s energy mix due to a variety of supportive government policies. Unlike coal and oil, whose consumption is projected to peak before the end of this decade, demand for gas is set to continue expanding with support both at the policymaking level of the Chinese government and the corporate level, with a strong emphasis on gas development at the three NOCs. China approved more coal-fired power generation capacity last year, but the sense is that this was more of a response to anticipated higher demand for peak load shaving as a result of rising imbalances in the power system from increased renewable energy generation. There is a large pipeline of 30 GW of gas-fired power plants under construction or approved by domestic power generation companies alone, which will boost power generation demand for gas once the units are commissioned.

And while a short-term setback for gas prospects like last year’s may occur again, the overall picture for the fuel remains strong in the long term as China doubles down on efforts to transform its coal-dominated economy into a cleaner system.