After years of underdevelopment, the Chinese government is prioritising gas sector development, with the current five-year plan (2001-05) including a number of major natural gas projects. With investment opportunities in such projects now emerging, the Chinese gas market is firmly in the sights of major international energy companies.
Natural gas production in the first half of 2002 increased 10.5 percent year-on-year to 16.2bn cubic metres. However, despite the attention focused on the gas market, China's current regulatory and fiscal structure means that it will struggle to attract the necessary levels of investment in the sector. As a result, it is unlikely that forecast levels of gas demand will materialise.
Virtually every major international energy company involved in China has stated that, with the downstream gas market being the driving force behind future demand, investment will be restricted until the perceived level of risk is mitigated through a workable gas policy. Regulation is required to make each part of the value chain viable and sustainable. It is imperative that China seeks to actively incentivise gas within the domestic energy economy.
Low levels of consumption
At present, China's per capita levels of consumption of natural gas are among the lowest in Asia, with total gas demand in 2001 estimated at around 28.5bn cubic metres, equal to just 24 cubic metres per capita. As the chart illustrates, China's per capita consumption is similar to that of India, despite its per capita income being twice as large. Also of note is the fact that Chinese gas consumption falls well below that of markets such as Japan and South Korea, which remain nearly wholly dependent on imported gas supplies.
Incorporated within the current five-year plan is the official target of increasing 2005 domestic gas production, including coal-bed methane, by 76 percent over the 2001 figure.
While projections of future gas demand vary, China's gas market will certainly develop rapidly over the next two decades, creating major investment opportunities. From the current low base, a base-case analysis by Wood Mackenzie shows Chinese domestic gas demand growing at an annualised average rate of 10 percent over the next 18 years. At this rate, total gas demand will reach almost 175bn cubic metres by 2020, representing a six-fold increase over the 2001 figure.
With several major infrastructure projects on the drawing board, the geographic location of China's regional gas markets over the next two decades will differ significantly from existing centres of demand. The fundamental shift in energy planning towards the greater use of natural gas and the economic dynamism of the energy-deficient coastal provinces are combining to drive gas demand, from both indigenous and imported sources.
Implementing a gas policy
This forecast of growing demand is predicated on the assumption that gas will be able to penetrate these markets. For this to be achieved, and for the necessary levels of investment to be secured, the government must develop and implement an internationally recognisable gas policy. This means putting in place regulatory and legal measures across the country to allow the development of robust, economically sound end-user markets.
With anticipated levels of investment of US$120bn-150bn over the next 20 years, the Chinese gas sector offers considerable opportunity. The increasingly energy-deficient coastal provinces are among the most economically prosperous regions in Asia. The government has identified gas as a target fuel into these markets, approving plans for both liquefied natural gas imports and domestic pipeline schemes. Increasing wealth and growing concerns over the environmental impact of burning coal have combined to promote gas use, while the rapid increase in electricity demand is encouraging these provinces to exploit the higher efficiency and improved generation economics of combined-cycle gas turbine technology.
Need for state intervention
As the development of gas markets around the world has shown, the direct intervention of governments and regulators in order to facilitate greater gas use is an essential component in attracting the required level of investment. Undoubtedly, the enormous potential market size and forecast growth of demand within China are major lures for international energy companies. However, without new regulation and direct government intervention to incentivise gas use, the Chinese gas sector will not realise its full potential.
This article was written by Gavin Thompson, senior consultant with Wood Mackenzie's Asia Pacific energy markets team. Wood Mackenzie provides commercial analysis and strategic advice to the world's leading energy companies, covering upstream oil and gas, refining and marketing, downstream gas and power generation.