China has identified gas as a “pillar industry” to receive government support in the form of tax breaks and subsidies as its State Council has elevated environmental protection on its national agenda.
ANZ Research noted that China’s “purposeful shift away from coal” had pushed the commodity’s share of new generating capacity to 40% over the past 12 month – down from 75% between 2010 and 2012.
“While renewables [hydro and wind] have been the main beneficiaries so far, gas has also been highlighted as an energy source that will be integral to reducing emissions and environmental impact,” ANZ said.
“One of the main policy recommendations to emerge from the NDRC [National Development and Reform Commission] was that China, and in particular the southeast costal region, should give preference to natural gas. It’s expected that the natural gas share of the energy mix will increase from the current level of 4% to about 8% by the end of 2015, and to 10% by 2020.”
China’s domestic gas supply is struggling to keep pace, and while pipeline imports will meet some of the gap, LNG imports are notably responding, with China importing 18 million tonnes of gas last year compared to 3.3Mt in 2008. The surge has continued apace this year already, with LNG volumes in H1 2014 rising to 10.8Mt, up 29% year on year.
This makes China the third-largest LNG market in the world, currently operating 10 LNG receiving stations with a combined capacity of 34Mtpa; with 17 in the construction or planning stage which couldl lift the country’s LNG receiving capacity to 74.8Mtpa.
ANZ noted that while proposed LNG receiving stations have to date been under the guise of Chinese NOCs, two private companies received approval earlier this month and signed letters of intent to develop two terminals in Fujian and Zhuhai with a combined capacity of 15Mtpa.
The recent Russia gas deal also sets a precedent for gas deals over the next decade, ANZ said.
“Wood Mackenzie estimates that the delivered cost of Russian pipe gas into coastal eastern Chinese provinces will be about $US13-14 per British thermal unit,” ANZ said.
“This is slightly below where the oil-linked LNG prices in Japan have been trading over the past couple of years (between USD14-16/MMbtu).
“If the government can limit the impact of any possible price rises, then LNG is destined to be a major winner in China’s shifting energy mix.”
While China’s domestic shale gas potential makes for eye-watering reading, domestic supply growth has been weak due to a combination of constraints in pipeline capacity and lack of investment in domestic exploration.
However, this could all change.
It is true that the 1,115 trillion cubic feet of technically recoverable shale gas resources that the US Energy Information Administration says China has are being pulled back as the industry encounters technological challenges.
“China recently halved its target for the shale gas it expects to produce by 2020 to 1060bcf after early exploration efforts to unlock the unconventional fuel proved challenging,” ANZ said.
However, the bank added that incremental supply above 2012 contract volumes being priced in a range from $13-15/MMbtu should reduce the losses on oil-indexed imports and encourage the flow of capital into domestic unconventional gas exploration and development.
