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China - Natural Gas

China is estimated to hold the largest technically recoverable shale gas reserves globally, yet extracting it is too complicated and costly to replicate the US shale gas revolution. The United States, once dependent on energy imports, has been transformed into a major energy superpower following the shale gas revolution. China, the largest energy consumer in the world, hopes to become less dependent on energy imports. However, Beijing needs to increase its domestic volumes of energy resources in order to sustain its growing economy. Concomitantly, China has to address the environmental implications of using coal. Shale gas extraction is seen as a viable substitute to alleviate such problems as evident from the US experience.

In 2013, the US Energy Information Administration issued a report stating China has 1,115 trillion cubic feet of shale gas, twice as much as the US. It singled out seven prospective basins with abundant shale gas and shale oil reserves the country could develop. But despite enormous resource potential, China so far has not managed to replicate the US success. The Chinese shale industry has not been developing as fast as Beijing hoped. China is working diligently to provide an investment environment conducive to shale development, but given rising domestic demand and a challenging exploration environment, it is unlikely to become a shale exporter.

The primary reason for that is geology. In China, the formations holding shale gas are located in challenging mountainous terrain. Moreover, those areas, primarily in the north of the country, lack the needed water resources, meaning the reserves are difficult and expensive to extract. By comparison, in the US shale gas is mainly extracted in the flatlands of Texas, North Dakota, and Pennsylvania, where there is abundant supplies of water required for hydraulic fracturing.

Natural gas use in China has increased rapidly in recent years, and China has sought to raise natural gas imports via pipeline and liquefied natural gas (LNG). Although natural gas production and use is rapidly increasing in China, the fuel comprised only 4% of the country's total primary energy consumption in 2011. Heavy investments in upstream development and greater import opportunities are likely to underpin significant growth in China's natural gas sector.

According to OGJ, China held 155 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2014, 14 Tcf higher than reserves estimated in 2013 and the largest in the Asia-Pacific region. China's natural gas production and demand have risen substantially in the past decade. China more than tripled natural gas production to 3.8 Tcf between 2002 and 2012. The government is planning to produce about 5.5 Tcf of natural gas by the end of 2015 in line with its desire to use more natural gas to replace other hydrocarbons in the country's energy portfolio. EIA projects long-term natural gas production to climb to 4.2 Tcf by 2020 and more than double from current levels to reach 10.1 Tcf by 2040.

The Chinese government anticipates boosting the share of natural gas as part of total energy consumption to around 8% by the end of 2015 and 10% by 2020 to alleviate high pollution resulting from the country's heavy coal use. Consumption in 2012 rose to nearly 5.2 Tcf, 11% greater than the 4.6 Tcf in 2011, and the country imported nearly 1.5 Tcf of liquefied natural gas (LNG) and pipeline gas to fill the gap. Although the majority of gas consumption stems from industrial users, (48% in 2011, according to PFC Energy) the shares of gas consumption in the power, residential, and transportation sectors have been rising over the past decade.

EIA projects gas demand to rise to 7.8 Tcf in 2020 and to more than triple to about 17 Tcf by 2040, growing by an annual average rate above 4%. To meet this demand, China is expected to continue importing natural gas in the form of LNG and from a number of new and proposed import pipelines from neighboring countries. It will also have to tap into its expanding domestic reserves and establish a wider domestic natural gas network and storage capacity.

China was traditionally a net gas exporter until 2007, when it became a net natural gas importer for the first time. Since then, gas imports have increased dramatically in tandem with rapidly developing pipeline and gas processing infrastructure. Natural gas imports, which met 29% of demand in 2012, have become an increasingly significant part of China's gas supply portfolio.

China and Russia signed a long-awaited, 30-year agreement for natural gas worth an estimated $400 billion on May 21, 2014, securing the world's top energy user a major new source of the clean-burning fuel. The deal between Russian state-controlled company Gazprom and China National Petroleum Corp (CNPC) would see Russia supply 38 billion cubic meters (bcm) of gas to China each year for 30 years under a contract valued in excess of $400 billion. The gas will be transported along a new Power of Siberia pipeline linking Siberian gas fields to China's main consumption centers near its coastline. Construction of the pipeline began on Sept. 1 and exportation is scheduled to commence between 2018 and 2020.

Gazprom and the China National Petroleum Corporation signed a second agreement for Russia to supply China with natural gas for 30 years via the new Altai pipeline. The route could be used to supply up to 100 billion cubic meters of gas annually, though there are questions about the financial viability of such a long pipeline for Russia. Gazprom's CEO Alexei Miller and Chairman of the China National Petroleum Corporation (CNPC) Zhou Jiping have signed a framework agreement on the supply of natural gas from Russia to China via a "western" route. The document was signed by the two parties at the APEC summit in Beijing on Nov 8-10, 2014.

Since the country built its first regasification terminal, Dapeng LNG, in 2006, natural gas imports have risen dramatically, making China one of the largest LNG consumers in the world. Roughly half of China's total natural gas imports were in the form of LNG in 2012. In 2012, China imported 706 Bcf, a 20% increase from 581 Bcf in 2011. Data estimates for 2013 show LNG imports climbing even higher to 749 Bcf for the first 11 months of the year. China, consuming over 6% of the global LNG trade, quickly became the world's third-highest LNG importer, exceeding Spain for the first time in 2012.

Import regasification capacity was 1.5 Tcf/y (4.1 Bcf/d) by the end of 2013, and another 2 Bcf/d is being constructed by 2016. LNG now enters the country through nine major terminals, with another five under construction and more in various stages of construction and planning. China's LNG imports are expected to increase as more terminal capacity comes online, although higher market-based LNG prices compared to lower prices from domestic gas sources and the increasing pipeline gas supplied by Central Asia could lead to more competition for LNG imports.

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Page last modified: 14-11-2014 19:33:11 ZULU