What lies ahead for natural gas in China

Natural gas will play an increasingly important role in reducing China’s emissions and guaranteeing its energy security, but to fully enable this benefit, there must be enhanced planning of the gas and energy systems, further reforms and greater market integration.

time, however, as a result of the COVID-19 pandemic.

The supply outlook

China has an abundance of various types of natural gas resources, meaning there is great potential to further increase reserves and production. The outlook for long-term production is determined by the Natural Gas Production & Supply Prediction System, an analysis tool developed by CNPC, which considers different types of resources and multiple scenarios. This provides a basis for national energy and natural gas industry development planning.

According to this analysis, conventional natural gas production will peak around 2030, at 200-220 bcm. Global upstream practices put the share of proven gas reserves in well-developed basins at 30-60%. Chinese coal-bed methane (CBM) production continues to grow slowly and is on track to reach 10-15 bcm by the end of the decade. If there is a debottlenecking of development technologies, it could reach 15-20 bcm. Shale gas production should reach 40-50 bcm in 2030 and 60-80 bcm in the longer term. All told, Chinese natural gas production is forecast to reach 270 bcm in 2030 and be maintained at around 300 bcm in the long term.

and it is expected to take 30 years to reach peak the CO2 emissions before 2030 and another 30 years to reach carbon neutrality. As one of the most important green and low-carbon energy sources, natural gas will be positioned as the country’s main energy source, and the sector’s development under China’s 13th Five-Year Plan has been a remarkable achievement. Growth in natural gas consumption has been rapid with significantly increasing gasification rates. Natural gas market reform, increased and more diversified imports and greater storage capacity all lay a solid foundation for the further development of gas as the main energy source during the current 14th Five-Year Plan period.

LNG: the key contributor to gas in China

NATIONAL PETROLEUM CORPORATION

China’s natural gas reserves have continued to grow at a peak rate over the past decade, with proven reserves increasing each year on average by 960 bcm. Domestic natural gas production too is increasing fast, rising on average by 10 bcm each year, over the last six years. In 2022, it reached 220 bcm. At present, the natural gas reserves to production ratio is above 30, meaning there is a firm foundation for further acceleration in production growth. Unconventional gas reserves will play a central role in future production increases.

The urgent demand for cleaner energy has driven the rapid growth in Chinese natural gas consumption, primarily to replace coal, which has been the backbone of the economy for decades. Between 2008 and 2021, demand increased from 81.3 bcm to 372.6 bcm, growing at an average annual rate of 12.4%. Growth stagnated in 2015 and 2016 as a result of a weaker global economy and lower oil prices, but in 2017, Chinese gas demand once more returned to rapid growth, ushering in a second golden era for gas in the country amid stronger economic performance and a series of favourable national policies. Rising coal and crude oil prices were also a contributing factor. Between 2017 and 2021, annual absolute growth exceeded 30 bcm. In 2022, consumption fell for the first

The critical role of gas in China

Accelerating the development of natural gas is a realistic way of ensuring that CO2 emissions peak before 2030 – a goal that has been set as part of China’s carbon neutral roadmap. At the top of the decarbonisation agenda will be restricting coal consumption and achieving a peak in coal emissions as quickly as possible. Gas-fired power generation is expected to play a key role in achieving this, in light of its significantly lower CO2 emissions per unit of 798 g per kWh. China is expected to install 400 GW of gas-fired power generation by 2060, and the emissions of these plants can be further lowered through the deployment of carbon capture and storage (CCS).

Coal-to-gas switching began in China in the year 2000,

As a result of soaring spot prices, huge market fluctuations and sluggish economic growth, China’s LNG imports in 2022 decreased by about 15.5 MT year/year – a sharp decline of nearly 20%. In March 2023, LNG imports rose 16% yr/yr, breaking the 14-month declining streak. However, due to weak market fundamentals and the still relatively high spot price, a double-digit growth for the full year is still highly uncertain. Most of this growth will come from new long-term contracted volumes. The tight market environment of high spot LNG prices is likely to lead to buyers seeking a greater share of term supply in their portfolios. According to S&P Global, China’s LNG demand is projected to grow to 85 MT in 2025 and 120 MT in 2030.

The way forward

1. Strengthening top-level design and advancing the natural gas chain

China’s natural gas industry is still in the early stage, albeit of very rapid development, which is characterised by fast-growing production, import volumes, consumption, pipeline transmission capacity, storage and other industrial chain elements, as well as the gradual expansion of applications. The corresponding pricing mechanisms, laws and regulations are being determined, implemented and piloted in regions. The future gas industry is expected to be built as highly flexible and prosperous.

In light of the above, China’s natural gas industry planning should be a matter of national energy security strategy, with a greater focus on its top-level design. An overall and systematic plan will be formed to guide production, imports, supply, storage, price mechanisms and consumption, to ensure a rational market economy.

2. Reforming the pricing mechanism and balancing profits across the natural gas chain

The natural gas price is affected by the transmission cost and the discount value in different regions. Particularly in recent years, during the season of peak gas consumption, the current market discount mechanism has exacerbated market disorder during the “gas shortage” period. Upstream producers, on the one hand, have faced the pressure of ensuring secure supply, and on the other hand, have struggled with lower profits. Meanwhile, the pipeline and sales sectors in the midstream and downstream have enjoyed a larger proportion of profits due to the low degree of market opening and insufficient competition, while earning dividends from rapidly growing consumption. Moreover, regional monopolies and the bundling operation mode of urban distribution networks and government pricing mechanisms has led to decoupling of upstream and downstream prices. Due to the current mismatch between upstream supply cost and the downstream sale price, plus different subsidy mechanisms for various users, the downstream regional operating enterprises have hindered the upstream operators from developing supply rationally.

The effective solution is to deepen the reforms for the whole industrial value chain by streamlining administration, delegating more powers to upstream and downstream enterprises, and improving regulations and optimising services relying on the national pipeline network company PipeChina. Upstream operators should be encouraged to produce more and replenish their reserves by optimising profit distribution and giving them stronger bargaining power, and the downstream market should be improved by opening it up to competition.

3. Expanding the natural gas system

At present, natural gas supply in China is characterised by near-source consumption. Domestic natural gas mainly flows in western production areas, while imported pipeline gas is distributed along those pipelines, with priority of supply given to areas such as Beijing, Tianjin, the Yangtze River Delta and the Pearl River Delta. In coastal areas far away from gas production areas, consumption growth mainly depends on the expansion of LNG imports. There are insufficient gas interconnections, and so regional market separation is still prominent. From a macro industrial development view, energy strategy should focus on fully integrating systems for domestic gas, imported pipeline gas and imported LNG supply with other midstream and downstream infrastructure. This can enable the development of more natural gas hubs and trading centers throughout the country, to create a more dynamic system linking production and supply sources to end-users. A national gas network should be developed that is similar in scope to the smart state power grid, where gas is supported by other energy sources and new technologies such as big data and artificial intelligence are deployed.