Beijing’s plans to cut coal’s share of total primary energy use to less than 62% by 2020 initially seemed overambitious given the country’s historical reliance on the fossil fuel. But figures from the National Bureau of Statistics show that China reduced overall coal output by 2.5% and consumption by 2.9% in 2014. Between this and official data showing that the country’s coal production fell by 6% in the first four months of 2015, Chinese citizens and environmentalists around the world can start breathing a bit easier as coal use is slowly reined in.
Filling the gap left behind by coal’s inevitable retreat is no small feat, but the Energy Development Strategy Action Plan released by the State Council in November exemplifies the central government’s ambitions for China’s energy mix. The plan sets 2020 targets for all primary energy sources and reiterates Beijing’s commitment to rebalancing its economy away from heavy industrial production towards service sector growth. All energy resources will have to play a larger role in powering China, but it is natural gas that could prove crucial to reducing severe pollution and haze without compromising too much economic growth
“Chinese gas demand has been increasing because China has gas that it can exploit and use domestically, from domestic sources and from offshore sources,” said Michal Meidan, director of energy analysis firm China Matters. “Since 2012, when environmental issues came to the fore politically, socially, and economically, gas has grown in importance as a transition fuel from coal and towards renewables.”
Both the United States and the United Kingdom have successfully transitioned to natural gas to reduce air pollution in their densest cities, and Beijing is seeking to emulate their efforts, albeit at a much faster pace. Policy analyst Damien Ma points out in Rebalancing China’s Energy Strategy that natural gas is a cleaner energy source than oil or gas and could become a useful “bridge fuel” as China recognizes the importance of dealing with severe environmental issues.
Looking back to last year, the strategy appeared to be off to a solid start: China used 8.6% more natural gas in 2014 according to data from the National Bureau of Statistics. While this is a considerable increase, it is not enough to support continued expansion and development in a natural gas industry that enjoyed double digit growth between 2003 and 2013. China’s slowing economic growth is partially to blame for this slowdown, but prices as well as the balance between supply and demand threaten to undermine the central government’s efforts to transition away from imported oil and dirty coal.
“The Chinese government has been grappling with the pricing mechanism for some time,” Meidan said. “They need to keep gas prices low to encourage demand. At the same time, they need to make sure that prices aren’t too low, because the Chinese companies that import [liquefied natural gas] and pipeline gas need higher prices for that to remain cost-effective.” This is a tough balance to strike under normal circumstances, but it has become even more difficult thanks to recent fluctuations in the global oil and gas markets.
The issue here stems partly from the leadership’s desire to match imported prices to domestic prices. Last year, the central government took the significant step of raising consumer and end-user prices for the first time since July 2013. What Beijing hadn’t counted on was the precipitous drop in international oil and coal prices: Higher gas prices, slower economic growth, and a drop in international oil and gas prices hindered demand and became the primary causes of weakened gas demand in 2014 and early 2015. “With oil prices being so low, consumers are sticking with oil even though the government is trying to provide incentives,” said Meidan.
The other key challenge to China’s natural gas growth lies in finding an appropriate balance between supply and demand. The United States has a relative abundance of natural gas supplies, and horizontal drilling and hydraulic fracturing technology have allowed the U.S. to tap unconventional reserves to further boost supply to its domestic market that increasingly demands gas. China, meanwhile, lacks the conventional reserves, technology, and infrastructure to supply its own markets with natural gas.
These shortcomings are the driving force behind China’s recent headline-grabbing pipeline deals with Myanmar, Russia and various Central Asian countries. The construction of liquefied natural gas terminals along China’s coastline will also facilitate imports and encourage further investment in expensive LNG technology.
Long and short of it
Some analysts have pointed out that there is a risk of natural gas oversupply in the face of slackening demand. Even so, there are two reasons to be positive about positive natural gas demand growth in the coming months.
First, demand is seasonal. Typically, Chinese demand for natural gas peaks in cold winter months and hot summer months. However, China’s Meteorological Administration revealed in a March announcement that last winter was just over 1 degree warmer than usual, making it the fourth-warmest winter since 1961. This reduced demand for heating, causing actual natural gas demand to fall short of projections. As the country heads into high summer, demand is expected to rise again as residents switch on fans and AC units.
Second, short-term demand is lagging—yet longer-term energy goals may end up demanding more than industry can deliver. China will need its natural gas industry importing and producing at full capacity if natural gas is going to reach 10% of China’s total energy mix by 2020. That would add up to about 400-420 billion cubic meters of natural gas supplied to residential and industrial users for the period. Meidan said that goal currently seemed unrealistic, but that China would need to ensure that all of its pipelines, LNG terminals, and conventional sources were operating at full capacity to reach that target.
Given the variables influencing industry growth, supply, demand and pricing of natural gas, Beijing will be forced to choose which measures to prioritize as it seeks to ensure that natural gas is a viable energy source for its cities, industries, and citizens. For Nelson Wang, a research associate at brokerage CLSA, the choice is clear: Affordability. “With gas demand slowing, the Chinese government announced a price cut on February 15, 2015, the first cut in many years,” Wang said. To ensure reliable demand for gas, Beijing must carefully monitor natural gas prices to ensure that they remain affordable for residential users and industry.
That balance – as with others in which natural gas serves as fulcrum – will be tricky to strike, but Beijing’s concerted effort to transition toward greater dependence on the resource shows little sign of letting up. As public pressure grows to clean up China’s urban airspace, Beijing is demonstrating that it is willing to expend the political capital and exert the neces
sary will to wean provincial governments and heavy industry off of high-polluting coal. ♦
Author: Matthew Nitkoski (@MNitkoski)
Editor: Hudson Lockett (@KangHexin)