Sector Roundup: China's Natural Gas Industry
Sector Roundup: China’s Natural Gas Industry
Industry Report
January 2015
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Sector Roundup: China’s Natural Gas Industry In 2013, China’s reliance on overseas gas exceeded 30 percent of the nation’s total natural gas consumption, and it won’t be
Tarim Gas Area Daqing Gas Area Erdos Gas Area
much different by 2015. The 2011 National Development and
Tangshan LNG
Reform Commission (NDRC) energy plan in states that the
Dalian LNG
country’s annual domestic natural gas production will increase
Qingdao LNG Jiangsu LNG
from 94.8bn m3 in 2010 to 156.5bn m3 by 2015, which means that
Shanghai LNG
China will still be required to import at least 32% of its annual consumption to meet domestic demand that year. Furthermore, the NDRC predicted that China will import 40% of its estimated
Zhejiang LNG Fujian LNG Quidam Gas Area Guangdong LNG Sichuan Gas Area
annual consumption of natural gas by 2015 for the sake of energy security. The recent NDRC energy development strategic action plan (2014-2020) (能源发展战略行动计划 (2014~2020年)) sets the natural gas consumption goal of natural gas accounting for more than
Guangxi LNG Hainan LNG
Source: ICORP research team
Yinggehai Gas Area
China’s Natural Gas Market LNG Facility Major Pipeline Natural Gas Areas
10% of the country’s total primary energy consumption by 2020; natural gas accounted for 5.9% of primary energy consumption in 2013. To reach the 2020 goal, China will adopt the following January 2015
2
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
strategies: subsidize natural gas residential consumers, build more natural gas charging stations, construct gasgenerated electricity power plants, accelerate the supply of gas pipelines by constructing new pipelines, and increase the scale of imported gas. The fact is that over the last century, China has been in chronic shortage of domestic gas production. This situation can be attributed to market monopoly, inefficient pricing scheme, and lack of technological breakthrough. China’s domestic gas supply is largely sourced from the following: On and off shore conventional production, shale gas, shale oil drilling, tight gas, coalbed methane (CBM), and coal-to-gas (SNG). This shortfall in domestic gas supply along with the increasing demand will urge the Chinese government to increase the import scale of liquefied natural gas (LNG), and also explore domestic gas production. According to EIA’s report, China has 1,115 tm3 of technically recoverable shale gas. However, because of the particular geological and technical difficulties in China’s shale gas reserve, China will take more time and money to research and explore its options for future shale gas extraction.
January 2015
3
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Recent Developments Recent developments are identified along the supply chain of the natural gas market:
Upstream Market Chinese National Petroleum Corporation (CNPC) finalized a gas deal with Gazprom, Russia’s largest natural gas company in May of 2014. Under the 30-year contract, Russia could supply China with 2.1 tm3 per year through pipelines to meet the demand in China’s northern and eastern provinces. In a recent natural gas plan, the NDRC confirms the government support for unconventional gas exploration, especially shale gas. As part of its natural gas reform, the government will regulate the “coal-to-gas” projects, strengthen the pilot program of oil and gas exploration, research and develop plans to manage natural gas pipeline network, LNG terminal infrastructure, and gas storage facility. However, most of the technologies in unconventional gas exploration are still in the research phase, and are in need of technological support, which may come as positive news to foreign companies with expertise in this field and an interest in opportunities for profit in the Chinese market. China is making breakthroughs in conventional natural gas exploration. A newly discovered natural gas reservoir in Sichuan province has proven geological reserves of 440.38bn m3 of natural gas, with technically recoverable reserves of 308.2bn m3. The field’s output can satisfy one-third of the nation’s natural gas demand.
January 2015
4
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Based on ICORP’s report, China currently has 17 gas storage facilities with a total capacity of 4.2bn cm3, accounting for just 2.3% of the nation’s total gas consumption, which is far below international standards which range from 12% to 15%. Gas storage facility is another untapped Chinese market.
Middle stream and Downstream Market Current regulation encourages private capital to invest in the middle stream natural gas pipeline transmission industry. Compared to the upstream industry, the pipeline transmission industry is more attractive in its stable revenue and robust cash flow. CNPC has announced to form another pipeline firm to possess its entire East to West pipeline assets and debt. At the same time, eight private energy companies have been involved in the LNG terminal infrastructure construction, among them are ENN Group and Guanghui Energy, which have started a major construction phase. China has raised the city gate price of natural gas for non-residential users by 20.5% starting from September 1, which is one of China’s strategies to use price leverage to stimulate the supply of natural gas import and domestic production. Producers’ profits are expected to benefit from this price raise, which is expected to lead to help stimulate exploration and recovery. Meanwhile, the NDRC would give up its control over the wholesale price of LNG, shale gas and coalbed methane from September 1, letting suppliers sign independent contracts with downstream users.
January 2015
5
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Challenges and Opportunities Challenges and opportunities are identified to examine their impacts along the supply chain of the natural gas market:
Upstream market There are a number of controversies regarding the future outlook of the shale gas industry in China. Some predict that China will experience a “shale gas revolution” as America did. Others argue that China will cut down its shale gas output in the 13th FYP, which is a direct sign of its future production constraint. Meanwhile, current domestic technology and equipment will not suffice the large-scale development of shale gas. Until China is able to meet the technical demands of the sector, China’s shale gas activity will be of interest to foreign companies possessing this expertise and interested in profiting from the Chinese market.
Middle stream and Downstream Market As the price of natural gas experiences a gradual rise and the oil prices continues to drop, the conflict between market consumption and gas price becomes more stringent, the advantage of natural gas has been minimized. Many small-scale gas-fueled power plants are negatively affected by the increasing cost of natural gas. Many large-scale LNG utilities that have put into operation, which includes LNG fueled vessels and heavy machineries, are struggling around the break-even point.
January 2015
6
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Regulatory Summary The regulatory environment is summarized to highlight its influence on the natural gas market: • The NDRC suggestions on establishing natural gas supply security mechanism (关于建立保障天然气稳定供应长效机制的若干意见) (2014): improve the supply of natural gas. By 2020, the capacity of natural gas supply would reach 400bn m3, or ideally 420bn m3. Support “coal-to-gas” project. By 2020, the accumulated gas consumption from “coal-to-gas” projects should reach 112bn m3. • The NDRC energy development strategic action plan (2014-2020) (能源发展战略行动计 (2014~2020年)): diversify the supply of natural gas, accelerate the reserve and output of natural gas. By 2020, the output of conventional natural gas and coalbed methane would reach 185bn m3 and 30bn m3, respectively. Shale gas output would exceed 30bn m3. • The NDRC management measure on natural gas infrastructure construction and operation (天然气基础设施建设与运营管理办法) (2014): encourage private capital participate in natural gas infrastructure investment. This will directly benefit gas equipment providers. • State Administration of Taxation and Finance notice of adjustment of import tax on natural gas (关于调整进口天然气税收优惠政策有关问题的通知) (2013): From July 2013, the retail price of liquefied natural gas set at CNY 31.45 per GJ, the retail price of pipeline natural gas is CNY 1.11 per m3.
January 2015
7
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
• The Minister of Transportation suggestions on the utilization of liquefied natural gas in water transportation (交通运输部关于推进水运行业应用液化天然气的指导意见) (2013): encourage LNG-fueled transportation industry development. Initiate LNG demon-station projects to develop experience in LNG powered vessel and LNG fueling station (onshore/offshore).
January 2015
8
1505, Cross Tower, No.318 Fuzhou Road Huangpu District, Shanghai, China, 200001 上海市黄浦区福州路 318 号浦汇大厦 1505, 200001
747 Third Avenue 2nd Floor, New York, NY 10017 Office: 646 722 2690 [email protected]
Industry Report
January 2015
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Sector Roundup: China’s Natural Gas Industry In 2013, China’s reliance on overseas gas exceeded 30 percent of the nation’s total natural gas consumption, and it won’t be
Tarim Gas Area Daqing Gas Area Erdos Gas Area
much different by 2015. The 2011 National Development and
Tangshan LNG
Reform Commission (NDRC) energy plan in states that the
Dalian LNG
country’s annual domestic natural gas production will increase
Qingdao LNG Jiangsu LNG
from 94.8bn m3 in 2010 to 156.5bn m3 by 2015, which means that
Shanghai LNG
China will still be required to import at least 32% of its annual consumption to meet domestic demand that year. Furthermore, the NDRC predicted that China will import 40% of its estimated
Zhejiang LNG Fujian LNG Quidam Gas Area Guangdong LNG Sichuan Gas Area
annual consumption of natural gas by 2015 for the sake of energy security. The recent NDRC energy development strategic action plan (2014-2020) (能源发展战略行动计划 (2014~2020年)) sets the natural gas consumption goal of natural gas accounting for more than
Guangxi LNG Hainan LNG
Source: ICORP research team
Yinggehai Gas Area
China’s Natural Gas Market LNG Facility Major Pipeline Natural Gas Areas
10% of the country’s total primary energy consumption by 2020; natural gas accounted for 5.9% of primary energy consumption in 2013. To reach the 2020 goal, China will adopt the following January 2015
2
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
strategies: subsidize natural gas residential consumers, build more natural gas charging stations, construct gasgenerated electricity power plants, accelerate the supply of gas pipelines by constructing new pipelines, and increase the scale of imported gas. The fact is that over the last century, China has been in chronic shortage of domestic gas production. This situation can be attributed to market monopoly, inefficient pricing scheme, and lack of technological breakthrough. China’s domestic gas supply is largely sourced from the following: On and off shore conventional production, shale gas, shale oil drilling, tight gas, coalbed methane (CBM), and coal-to-gas (SNG). This shortfall in domestic gas supply along with the increasing demand will urge the Chinese government to increase the import scale of liquefied natural gas (LNG), and also explore domestic gas production. According to EIA’s report, China has 1,115 tm3 of technically recoverable shale gas. However, because of the particular geological and technical difficulties in China’s shale gas reserve, China will take more time and money to research and explore its options for future shale gas extraction.
January 2015
3
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Recent Developments Recent developments are identified along the supply chain of the natural gas market:
Upstream Market Chinese National Petroleum Corporation (CNPC) finalized a gas deal with Gazprom, Russia’s largest natural gas company in May of 2014. Under the 30-year contract, Russia could supply China with 2.1 tm3 per year through pipelines to meet the demand in China’s northern and eastern provinces. In a recent natural gas plan, the NDRC confirms the government support for unconventional gas exploration, especially shale gas. As part of its natural gas reform, the government will regulate the “coal-to-gas” projects, strengthen the pilot program of oil and gas exploration, research and develop plans to manage natural gas pipeline network, LNG terminal infrastructure, and gas storage facility. However, most of the technologies in unconventional gas exploration are still in the research phase, and are in need of technological support, which may come as positive news to foreign companies with expertise in this field and an interest in opportunities for profit in the Chinese market. China is making breakthroughs in conventional natural gas exploration. A newly discovered natural gas reservoir in Sichuan province has proven geological reserves of 440.38bn m3 of natural gas, with technically recoverable reserves of 308.2bn m3. The field’s output can satisfy one-third of the nation’s natural gas demand.
January 2015
4
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Based on ICORP’s report, China currently has 17 gas storage facilities with a total capacity of 4.2bn cm3, accounting for just 2.3% of the nation’s total gas consumption, which is far below international standards which range from 12% to 15%. Gas storage facility is another untapped Chinese market.
Middle stream and Downstream Market Current regulation encourages private capital to invest in the middle stream natural gas pipeline transmission industry. Compared to the upstream industry, the pipeline transmission industry is more attractive in its stable revenue and robust cash flow. CNPC has announced to form another pipeline firm to possess its entire East to West pipeline assets and debt. At the same time, eight private energy companies have been involved in the LNG terminal infrastructure construction, among them are ENN Group and Guanghui Energy, which have started a major construction phase. China has raised the city gate price of natural gas for non-residential users by 20.5% starting from September 1, which is one of China’s strategies to use price leverage to stimulate the supply of natural gas import and domestic production. Producers’ profits are expected to benefit from this price raise, which is expected to lead to help stimulate exploration and recovery. Meanwhile, the NDRC would give up its control over the wholesale price of LNG, shale gas and coalbed methane from September 1, letting suppliers sign independent contracts with downstream users.
January 2015
5
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Challenges and Opportunities Challenges and opportunities are identified to examine their impacts along the supply chain of the natural gas market:
Upstream market There are a number of controversies regarding the future outlook of the shale gas industry in China. Some predict that China will experience a “shale gas revolution” as America did. Others argue that China will cut down its shale gas output in the 13th FYP, which is a direct sign of its future production constraint. Meanwhile, current domestic technology and equipment will not suffice the large-scale development of shale gas. Until China is able to meet the technical demands of the sector, China’s shale gas activity will be of interest to foreign companies possessing this expertise and interested in profiting from the Chinese market.
Middle stream and Downstream Market As the price of natural gas experiences a gradual rise and the oil prices continues to drop, the conflict between market consumption and gas price becomes more stringent, the advantage of natural gas has been minimized. Many small-scale gas-fueled power plants are negatively affected by the increasing cost of natural gas. Many large-scale LNG utilities that have put into operation, which includes LNG fueled vessels and heavy machineries, are struggling around the break-even point.
January 2015
6
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
Regulatory Summary The regulatory environment is summarized to highlight its influence on the natural gas market: • The NDRC suggestions on establishing natural gas supply security mechanism (关于建立保障天然气稳定供应长效机制的若干意见) (2014): improve the supply of natural gas. By 2020, the capacity of natural gas supply would reach 400bn m3, or ideally 420bn m3. Support “coal-to-gas” project. By 2020, the accumulated gas consumption from “coal-to-gas” projects should reach 112bn m3. • The NDRC energy development strategic action plan (2014-2020) (能源发展战略行动计 (2014~2020年)): diversify the supply of natural gas, accelerate the reserve and output of natural gas. By 2020, the output of conventional natural gas and coalbed methane would reach 185bn m3 and 30bn m3, respectively. Shale gas output would exceed 30bn m3. • The NDRC management measure on natural gas infrastructure construction and operation (天然气基础设施建设与运营管理办法) (2014): encourage private capital participate in natural gas infrastructure investment. This will directly benefit gas equipment providers. • State Administration of Taxation and Finance notice of adjustment of import tax on natural gas (关于调整进口天然气税收优惠政策有关问题的通知) (2013): From July 2013, the retail price of liquefied natural gas set at CNY 31.45 per GJ, the retail price of pipeline natural gas is CNY 1.11 per m3.
January 2015
7
I-CORP REPORT
Sector Roundup: China’s Natural Gas Industry
• The Minister of Transportation suggestions on the utilization of liquefied natural gas in water transportation (交通运输部关于推进水运行业应用液化天然气的指导意见) (2013): encourage LNG-fueled transportation industry development. Initiate LNG demon-station projects to develop experience in LNG powered vessel and LNG fueling station (onshore/offshore).
January 2015
8
1505, Cross Tower, No.318 Fuzhou Road Huangpu District, Shanghai, China, 200001 上海市黄浦区福州路 318 号浦汇大厦 1505, 200001
747 Third Avenue 2nd Floor, New York, NY 10017 Office: 646 722 2690 [email protected]
