China in "great leap forward" for gas

By Chen Aizhu – Analysis

BEIJING (BestGrowthStock) – China’s burgeoning gas demand has been a key driver for a swathe of projects to supply the clean-burning fuel — but the speed at which it will shift away from coal and oil could still catch markets by surprise.

From Guangzhou’s small eateries to porcelain mills on the city’s outskirts, from its bus fleet to its shiny high-rise apartments in Beijing, gas is taking over from dirtier alternatives as the fuel of choice to cook, heat and transport.

Aluminum smelters in Inner Mongolia are shifting to gas from crude, and power generators in east China have dumped oil for gas.

After a tripling in consumption in the past decade, gas is set for a similar jump by 2020 to make up nearly 10 percent of total energy use, from the present 4 percent.

State energy giant CNPC earlier this year revised up its China gas demand forecast in 2020 by half to 300 billion cubic meters (bcm), equivalent to three quarters of the amount of oil it now consumes.

“It’s the double accelerator that’s behind our revision: China’s urbanization and industrialization, as well as the national policy to strive for sustainable growth,” said Jiang Xuefeng, a senior researcher of CNPC.

Gas offers the world’s No.3 economy the most realistic way to achieve its emission targets — a 40-45 percent cut in carbon dioxide per dollar of national income by 2020 from the 2005 level — compared to the more costly and time-consuming investments in alternative energy like hydro and nuclear.

The boost in gas will cheer firms like PetroChina, CNPC’s listed unit that controls over 60 percent of China’s gas output, and CNOOC Ltd, which has its largest gas deposit to tap in the South China Sea operated by Canada’s Husky.

It will force traders like Pan Liangwei to look further beyond his coal business, after having to quit fuel oil trading as his clients in Guangdong — power plants, porcelain mills — moved to cheaper coal after oil’s rally in 2008, resulting in dwindling demand for imported fuel oil.

“Once there are pipelines to pipe gas over, and the price is reasonable, then all will shift to gas,” said Pan from Guangdong, China’s manufacturing hub, where local authorities have embarked on a $7-billion project to link 21 cities with gas lines.

While oil dealers said power plants — which used to take a third of China’s imported fuel oil — had all but vanished from the oil import scene, longer term, gas will mostly hit coal.

Coal, which last year supplied 69 percent of China’s total energy use, will probably drop 10 percentage points in the following decade, while the share of oil will hold at 19 percent, sustaining China’s support for global oil demand, analysts said.


While China is widely expected to revamp its gas prices — long kept below market levels to support fertilizer makers — it is the recurring shortage that has prompted industry players to raise their gas forecasts.

In December, central and southern China were rationing gas to taxis and factories as a cold spell led to a surge in heating demand in a country that also is severely short of gas storage.

“There remains enormous pent-up demand for gas across China…current demand is artificially limited by access to supply, as highlighted by the gas shortage this winter,” Bernstein Research wrote in its January note.

Similar to CNPC, Bernstein upped its China gas demand forecast by 55 percent from its previous estimates, pegging 2015 demand at 200 bcm and 280 bcm in 2020, doubling and tripling, respectively, the 2009 level.

“Once resource is secured and infrastructure in place, the huge demand potential will be released,” said CNPC’s Jiang.

A number of major gas pipelines will be laid over the next three years, including Sichuan-Shanghai, Ordos-Beijing, the second West-East line, doubling the networks’ current capacity.

PetroChina and rival Sinopec Corp are developing new, big fields such as Dina and Tazhong in northwest Xinjiang; Sulige in Inner Mongolia; Longgang and Puguang in southwest Sichuan, while fast-tracking explorations by adding each year 200 bcm of incremental recoverable reserve, said Jiang.

The start of long-term gas deliveries from Qatar, Indonesia and Malaysia will double imports of liquefied natural gas by 2011. These will surge even further in coming years, after firms like Qatargas, Shell, BP and Exxon Mobil sealed supply pacts with Chinese firms worth over $100 billion.

Piped gas from Turkmenistan and Myanmar will together amount to 20 percent of China’s demand, or 40 bcm, by 2015.


Much as China’s blistering car sales spur gasoline demand, its frenzied property boom bolsters demand for gas.

China added nearly 2 million square meters of new apartment space every day in 2009, 20 percent more than 2008, official data showed, and most would have gas links.

“The residential use has often been under-estimated,” said Yan Kefeng of Cambridge Energy Research Associates (CERA), adding that the potential is huge to replace the more pricey and dirty “city gas” — gas made from coal or heavy oil that millions of houses are connected to.

Industries will be the next key driver, as China, the world’s No.1 aluminum consumer and producer, designed its new smelters in the last few years to burn gas instead of crude in making carbon anodes — half a tonne of which makes every tonne of aluminum.

“Many of the new power plants in Guangdong are designed to take gas. Problem is there is not enough gas,” said the former fuel oil dealer Pan.

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(Editing by Michael Urquhart)

(Additional reporting by Polly Yam in Hong Kong)

China in “great leap forward” for gas