The Chinese economy has been the single largest contributor to global growth over the past several decades. Fossil fuel producers around the world closely watch Beijing, as the goals set by the Chinese government are usually met. With that in mind, Several recent policies have strengthened expectations of an increase in natural gas consumption. PetroChina, China’s largest natural gas supplier, has predicted that demand will double over the next 15 years to 620 bcm despite the effects of the pandemic and the rising importance of renewables. Two aspects of this prediction are remarkable. First, the timing of the publication in the middle of the COVID-19 pandemic which has decimated global energy markets. Second, China’s recent announcement that it will become carbon neutral by 2060, which would suggest less, not more, fossil fuel consumption. However, several key characteristics of natural gas make it indispensable in a future where renewables dominate the energy mix.
Government policies
The Chinese political system is highly centralized, meaning that the government frequently succeeds in meeting the goals it sets. Impressive economic growth, over the years, has caused significant environmental damage and pollution. Now, the Chinese population is becoming increasingly vocal in its demand for improved living conditions.
Beijing, therefore, introduced the coal-to-gas policy to transform consumption habits. The switch to cleaner natural gas is already bearing fruit in large cities where air quality has improved significantly - especially during the winter heating season.
Related: Venezuela’s Oil Major Sees Oil At $35 Through 2021 Furthermore, China’s natural gas sector has been shaken up by reforms concerning the energy infrastructure. Companies are forced to relinquish pipelines to newly created PipeChina. According to experts, this could stimulate exploration and production activities and therefore domestic production. Also, by having an independent pipeline operator, the threshold is lowered for smaller parties to enter the market.
Technical challenges of the energy transition
President Xi's commitment to achieving carbon neutrality by 2060 was a breakthrough for the fight against climate change as China is the world's largest emitter of greenhouse gasses. Therefore, PetroChina's expectation that natural gas consumption will grow significantly, sounds counter-intuitive. However, when taking into account the limitations of renewables and the amount of CO2 emitted by fossil fuels, the prediction makes more sense.
First, natural gas is by far the cleanest fossil fuel. Especially for power generation, where gas competes with coal and the difference is obvious. The average weight of CO2 emitted for producing a million Btu (British thermal units) is 215 pounds for coal and ‘just’ 117 for natural gas.
China is by far the largest investor in renewables in the world. Investment is motivated not only by environmental concerns but also by economic considerations. China's goal is to dominate the industries of the future such as renewables. Domestic installations have, therefore, skyrocketed. From a technical point of view, the intermittent nature of renewables requires an alternative to balance the grid when the sun is not shining and the wind not blowing.
The favorable characteristic of natural gas when it comes to CO2 emissions and the unfavorable characteristic of renewables concerning intermittency makes gas an important part of the energy system.
Pipeline politics
China’s fossil fuel companies have not been able to match the country’s economic growth, meaning dependency on foreign producers has become a reality. Decades earlier, China was able to maintain relative self-sufficiency, but modest domestic reserves and cheaper imports have created a new reality. Energy security is a growing headache for the leadership in Beijing as the world's oceans are still dominated by the U.S.
Related: Two-Thirds Of Gulf Oil Production Remains Shut In ahead Of Hurricane Zeta
In the case of natural gas, several important pipelines have been built over the years connecting it with friendlier nations. Imports from Central Asia are facilitated through three major pipes that can transport 55 bcm annually, from Myanmar 12 bcm, and from Russia 38 bcm. Beijing and Moscow are currently also negotiating the Power of Siberia-2 pipeline, which would strengthen the countries’ economic and political relations even further.
LNG, the new game in town
Gas consumption in China has taken a hit due to COVID-19. Consumption grew ‘just’ 1.5 percent in the first six months of this year. However, growth during the summer has picked up again with a 3.9 percent expansion. With the winter insight, growth will most likely maintain momentum.
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Chinese consumers, furthermore, can make use of favorable energy prices for shipped fuels such as LNG. While pipeline imports are slightly down for 2020, LNG is projected to grow by nearly 7 percent. Although transportation costs of the former are higher compared to those of the latter, long-term contracts have proven unfavorable compared with the spot market conditions of liquefied gas.
Regardless of future price developments, Chinese companies will increase the use of natural gas in their energy portfolios. Therefore, expect China to remain the focus of energy companies due to its economic potential in a post-COVID world where decarbonization key.
By Vanand Meliksetian for Oilprice.com
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Despite the destruction that the COVID-19 pandemic has so far inflicted on the global economy and oil demand, China’s economy has rebounded in a spectacular way with crude oil imports breaking all previous records and averaging 11.58 million barrels a day (mbd) in the first ten months of 2020 or 12.7% higher than the same period in 2019.
The same rebound is already happening with China’s demand for natural gas and LNG. China’s gas demand is projected to grow by 33% in the next six years from 283 bcm in 2018 to 376 bcm by 2023 with LNG imports rising by 26.5% from 73.5 bcm in 2018 bcm to 93 bcm in 2023.
China became the world’s top natural gas importer - including LNG and pipeline - in October 2018. It is set to overtake Japan as the top global LNG importer by 2022.
Furthermore, PetroChina, China’s largest natural gas supplier, is projecting that China’s demand will double over the next 15 years to 620 bcm despite the effects of the pandemic.
Natural gas and LNG are becoming the pivots for China energy transition. China is motivated by its coal-to-gas policy and the desire to become carbon neutral by 2060.
Because China’s political system is centralized, it will be able to accelerate its transition from coal to gas fairly quickly. The transition will be enhanced by the fact that it is the world’s largest investor in solar energy and also by its aim to dominate the world’s electric vehicles’ (EVs) industry.
As for becoming carbon neutral by 2060, this is far beyond even China and its centralized political system for two reasons. The first is the importance of coal to China’s economy and the huge coal reserves the country has. The second reason is that oil will continue to be the driver of the global economy and China’s well into the future.
When it comes to natural gas supplies, Russia will play a dominant role in satisfying China’s needs. Russia is of great interest to China not only because it is a major supplier of crude oil, gas and LNG to it but also because it is a quintessential partner under the China-Russia strategic alliance.
Russia owns and runs oil and gas pipelines to China providing vast quantities of crude oil, natural gas as well as LNG. This helps China overcome issues of energy security related to crude oil shipments from the Gulf having to pass through the very critical chokepoints of the Straits of Hormuz and Malacca.
The Spirit of Siberia-1 gas pipeline will be supplying 38 bcm annually of Russian gas to China for the next 30 years while Beijing and Moscow are currently negotiating the construction of the Power of Siberia-2 pipeline for more future supplies.
Furthermore, Russia’s gas company Novatek will be supplying increasing volumes of LNG to China from its LNG plants at Yamal in the Russian Arctic in which the Chinese government has invested significantly.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London