The Coronavirus pandemic is devastating global demand for commodities such as oil and gas. China's GDP fell by 6.8 percent during the first quarter, which is the first contraction since the cultural revolution. However, the Asian country's economy has proven surprisingly resilient as the service sector expanded strongly in May despite exporting less for a fourth consecutive month. The consumption of oil and gas in mainland China is a rare bright spot in the global energy markets because demand has remained relatively high.
In its effort to contain the novel Coronavirus, Beijing took draconian measures. Gas demand has been 8 to 10 bcm lower in Q1 while consumption stabilized in Q2. According to a think-tank connected to China National Petroleum Corporation, growth will be 8.6 percent higher this year bringing total consumption to 330 bcm. Although the market is expanding, it is at a far slower pace than the double-digit figures we've seen in the last couple of years. The impressive growth of the Chinese gas market can partly be explained by the relatively low share of gas in the overall energy mix.
Due to abundant domestic coal reserves, natural gas has been of less importance. However, environmental concerns and a population that is becoming increasingly vocal concerning rampant air pollution, has led to a policy shift where cleaner gas is to replace coal over the years.
Market reforms and policy preferences strengthen the medium to long-term outlook for the Chinese gas market. During the past six months, gas pricing rules have been liberalized, infrastructure ownership has been reorganized, and upstream exploration has been opened for third parties including foreign firms. Beijing is increasingly considering energy security due to import dependence and a growing sourcing problem. Related: Will Canadian Oil See Any Federal Help?
Last year China Oil and Gas National Pipeline Corporation (COGNPC) was formed taking over all mid-stream assets from the three big national oil and gas companies: PetroChina, Sinopec, and Cnooc. These reforms ensure non-discriminatory access to smaller firms operating up- or downstream, which increases efficiency.
Despite Beijing's efforts to boost domestic production, the market share of imports will grow steadily. Several large infrastructure projects are in different stages of development. The massive Power of Siberia pipeline, for example, was finished last year and will satisfy the market in northeast China. According to Michael Mao, a senior analyst with Sublime China Information, "fearing a supply shortage like the one in the 2017-2018 winter, China has implemented an ambitious expansion of import terminals. That capacity, after two years of construction, will enter use from 2020."
According to Mao the cost of Russian gas has turned out to be lower than analysts were expecting with around $6/mn Btu. The competitiveness of Siberian gas and the growing political relations between Moscow and Beijing have led to renewed interest for a second pipeline. Despite the rumors, gas won't flow through another China-Russia pipeline until the end of this decade or the start of the next one. In the meantime, the existing Central Asian pipeline (CACGP) and the one from Myanmar (MCGP), will fill the import gap together with the recently finished Power of Siberia.
Source: www.petroleum-economist.com
Despite the relatively low costs of piped natural gas, the fixed nature of the infrastructure means Beijing won't bet solely on a limited number of exporters. Therefore, the share of LNG in the overall mix will grow even stronger. In November and December last year, China overtook Japan as the world's largest importer of the supercooled fuel on a monthly basis.
Source: www.petroleum-economist.com
It is becoming clear that Beijing's next five-year plan running until 2025 will strengthen the role of natural gas in the Chinese economy. The main topics are energy efficiency, energy security, and self-sufficiency. Therefore, China is the biggest contributor to growth in the gas market so expect exporters to court Beijing for investments and long-term contracts.
By Vanand Meliksetian for Oilprice.com
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Comments
China is the world’s top natural gas importer and in November last year it overtook Japan as the world's largest importer of 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 in 2017 to 93 bcm in 2023.
Russia will be the clear winner in China’s plans to import more gas not only because it is already 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 same logic applies to gas imports. Moreover, piped gas is much cheaper than LNG.
Furthermore, Russia is the largest recipient of Chinese investments under the Belt and Road Initiative (BRI) particularly the Russian gas company Novatek LNG plants at Yamal in the Russian Arctic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London