China’s dramatic growth in gas demand in 2017 and 2018, surpassing all expectations, may be coming to an end, with widespread implications for the global gas market and a number of energy companies around the world developing gas export projects with an eye to the Chinese market.
Air pollution is one area where Beijing has been particularly responsive to political pressure. In an effort to improve air quality, particularly in northern China, the government has pushed for a switch from coal to gas. Gas demand rose by 15% in 2017 and almost 18% in 2018 – total growth of 74 bcm over two years, almost the size of the entire gas demand of the UK. That demand increase itself sent LG prices higher globally as China sought additional gas supplies to meet its import needs, with those needs exacerbated by a particularly cold winter in 2017.
The same dramatic rise in the demand for gas has been unexpectedly absent in 2019. Premier Li Keqiang in late October explained why there has been a sudden drop-off in Chinese demand. He confirmed that the coal-to-gas switching programme has been suspended, particularly for heating in the north of China. That will come as a disappointment to many potential gas suppliers around the world looking at LNG and pipeline projects targeted at China.
Instead, Beijing now says that the focus should be on clean coal and the use of biomass in the residential sector as well as gas, rather than on replacing coal exclusively with gas. Coal was 29% of energy supplies in 2018 (against 8% for gas) and China is the world’s largest coal producer. Non-hydrocarbon fuels made up just 14% but this is expected to grow in future years as the country installs increasing amounts of renewable capacity. One reason for optimism is that the energy industry is installing wind and solar capacity at a faster rate than coal, gas, nuclear and hydro combined. As China shifts back to coal and domestic renewables, the prospect for continued global expansion of demand for natural gas has dimmed
Winter heating in northern China is an important societal issue for the country and one the Beijing government is acutely aware of – rural northern households are not only price sensitive but also politically sensitive. The winter of 2017/18 was unexpectedly harsh and came at a time when the coal-to-gas switching programme was being pursued with a singular determination. Local authorities forcibly removed coal boilers, replaced them with gas-fired alternatives, but many localities failed to supply the gas needed to heat people’s homes through the harsh winter. The result was images circulating on Chinese social media of schoolchildren being taught outside in the snow, warmer than their unheated school buildings.
Nor can we ignore the impact of the slowing economy on demand. With growth slowing, industrial demand for gas as well as the overall demand for power have also been growing at slower rates than expected in the past. That said, the government seems to be prioritizing economic growth over environmental improvement at the moment – witness Beijing’s factories continuing to operate during the country’s recent 70th anniversary celebrations and providing a suitably overcast backdrop to the parades in contrast to the previous years’ blue skies helped by factory closures during the celebrations.
In line with an overall political drive to increase Chinese “self-sufficiency” in the face of trade tensions with the US, President Xi Jinping and Premier Li have instructed the Chinese NOCs to increase their own gas production to reduce import dependency. But that has hit a stumbling block, even as local production has increased, consumption rose even faster. Authorities have been considering options to open the upstream sector up to greater competition to boost production with the country’s growing gas import dependency emerging as a serious issue this year. Last year this reached 43% and is likely to climb higher this year with the absolute increase in demand outstripping the increase in supply. In the context of global trade tensions, senior energy industry figures are concerned that China’s access to energy imports may be restricted. This has added a geopolitical element to the push for energy independence, with those senior figures suggesting that China should target 80% of its energy needs being supplied from domestic sources.
Going forward we may well hear more talk about energy security as the country grapples with the seemingly inexorable rise in energy imports. Slowing demand growth by easing up on the coal-to-gas switching programme is probably a step in the right direction for China’s energy sector. On the global stage of course the switch from coal to gas may now work in reverse, with China reverting to using coal – albeit clean coal – in the face of a slowing domestic economy and a drive to lessen dependence on foreign energy supplies.
Global Energy Comment 