The Outlook for a Chinese Pivot to Gas

Balancing the needs of energy security, economic growth, and environmental sustainability is a challenging task that is central to future prosperity in the Asia-Pacific. The 2014 Pacific Energy Summit on “Charting the Course to a Secure and Cleaner Energy Future” held in Seoul, South Korea, on June 30–July 1 explored how to best harness market trends, geopolitical developments, policy decisions, and technological innovations to optimize the region’s energy and environmental outlook. On the sidelines of the Summit, Chen Weidong (Chief Energy Researcher at the CNOOC Energy Economics Institute) offered insights on China’s ambitious targets for increasing gas consumption and reducing coal’s role in its energy mix, how energy pricing plays a key role, and the impact of environmental concerns on Chinese energy policy.

When one talks about China’s energy sector, so often one thinks about the country’s growing demand for energy and the dominant role played by coal. But natural gas has the potential to play a bigger role in China’s energy future. What can you tell us about the role of gas in China’s energy mix and the outlook for natural gas in China?

Gas still plays a small role in China’s energy mix. As a percentage of energy consumption, China has one of the lowest gas usage rates in the world. China’s energy mix does need to change and become cleaner. Gas is a clean fuel. In the last five years, China’s gas consumption, production, and imports have grown dramatically, with two digit percentage growth. In 2015, gas may make up 8% of China’s gas mix, and the government plan aims for 12% by 2020. This is not easy because China is the number one energy consuming country in the world, and consumption is highly dependent on coal, which makes up 68% of its energy mix. Reducing coal’s role is very difficult, but if we don’t reduce coal’s share in our energy mix, the environment cannot be sustained, so it’s really a difficult situation.

Currently, China’s oil import dependency is at 60%, and its gas import dependency is only 30%. It is not that China does not want to import more gas, but the price difference matters. Gas is relatively cheaper in the United States compared with other fuels, but in China it is more expensive than many other energy sources. So energy price reform is key to helping increase gas consumption in China. Consumers are very clever about how much they take out of their own pocket. For example, I use gas heating in the winter, but if the gas price were to increase one or two yuan per cubic meter, I may change from gas to electricity. Thus, China needs to increase gas consumption, but the energy pricing system needs to be changed as well, and that will take time.

Would changing the energy pricing system be a move toward market pricing or would the government change its pricing structure?

Both. China’s gas price is not market-driven yet, and the pricing mechanism needs to be reformed.

China’s recent gas deal with Russia has been in the headlines around the world. What can you tell us about this deal? Will this be a game changer comparable to the shale gas revolution in the United States?

First of all, China’s gas deal with Russia is not a game changer, but the United States’ shale gas revolution did have some impact in shortening the deal’s negotiations. The American shale gas revolution and recent events in Ukraine put pressure on the Russian side to complete negotiations, which helped the Chinese side gain a little more power on the price negotiation.

It is good for China to work toward multisource supply. China is a big country, and Chinese consumers want energy security just like American consumers. China’s domestic resources are not enough to match China’s consumption; the country already imports one-third of its gas from foreign countries, including from Central Asian nations, Australia, Indonesia, Malaysia, and recently from Qatar. And we are willing to import from the United States as well. When you talk about China’s gas supply security strategy, it includes the gas pipeline from Myanmar, as well as liquefied natural gas (LNG) imports from the Middle East and perhaps Africa, and then other sources, as you mentioned. So, is there a big focus on diversification for China’s gas security strategy?

Yes, diversification is often discussed among scholars and enterprise; China really wants to diversify. Because Russia shares a border with China, it is easy to import from Russia by pipeline. Additionally, the southwest pipeline across Myanmar is in development, and ten days ago CNOOC (China National Offshore Oil Corporation) announced a big long-term LNG contract with BP. China is a big country and a big consumer of energy, so we need to diversify the sources and decrease dependence on any one supply. China has its own domestic production potential, including a considerable resource base for shale gas. What can you tell us about conventional gas production, shale gas production, and coalbed methane production in China?

China’s domestic conventional gas production has grown very quickly over the last ten years, with percentage growth at almost two digits. There have also been new discoveries of possible conventional gas fields. But in China, almost half the so-called conventional gas actually comes from tight gas, which is categorized as unconventional in the United States, but in China it is still considered “conventional.” So the conventional gas resources in China are not that rich, as we have discovered. Consequently, we pay quite a lot of attention to coalbed methane production, but this has fallen below expectations, which has been bad for everybody—the government, companies, and consumers. There have been technological and systematic difficulties.

Regarding shale gas, do you think China, with its vast estimated resource base, can replicate the boom that happened in North America?

For the last two years, especially this year, shale gas has become a very exciting energy program for China because the first shale gas field, operated by Sinopec, is under commercial production. The production per well is very high, almost ten times that of U.S. average shale gas production. This development is significant for three reasons. First of all, this proved China does have shale gas resources. Second, we learned that technologies from the United States, such as horizontal drilling and hydrofracturing, work in China. Third, the Chinese producers have learned to apply the technologies to our own resources. However, because we are still on a learning curve, the costs are still high. We have drilled almost 300 wells so far for shale gas. Next to the United States, China is the second-largest shale gas investor country and drills the second-most wells. However, the gap is still very big, as the United States has drilled 100,000 wells. But China hopes to increase this year’s production up to 1.2 billion cubic meters, up from 200 million cubic meters last year.

How will these tremendous gas resources compete with coal in China’s energy economy?

This marks a key difference between China’s and the United States’ energy economies. I understand that American gas is the cheapest in the world, but in China gas cannot compete with coal on price. Chinese coal is still cheap; though Chinese coal is more expensive than U.S. coal. Chinese gas is as much as four times as expensive as American gas.

What about the environmental benefits of moving away from coal? How do they factor into the cost comparison?

Many scholars in China have discussed this question because they used to only count the internal cost of coal. The external cost is not yet linked to the price structure; for example, the emission charges are not yet included. All countries are sensitive to the cost of energy, which is why last year Europe increased its coal use, and Japan increased coal use to replace nuclear power because gas is more expensive. In China, it is even more difficult to give up cheap resources and make the switch to more expensive gas, even though everyone knows gas is cleaner.

Do you have any final points you would like to make?

Currently, there is a big debate in China on whether coal can be used in a clean way. Personally, I do not believe so. Coal, no matter which technology you apply to utilize it more cleanly, still will yield carbon dioxide emissions. But with respect to coal usage in China, the main problem is not with the coal-electricity power stations. Half of China’s coal use comes from directly burning coal. In small towns in the winter, people heat their homes or boil their water by burning coal directly, and the emissions, the pollution from this, is terrible. Reducing coal use means we have to reduce that kind of direct coal burning first. But everyone needs to cook and heat their homes in the winter. We need to supply other fuel for them, like electricity or gas, but that will require a systematic change.

In China, different provinces are in various stages of development, and there are differences from city to countryside, and between large and small cities. China’s growth over the last 30 years has been very fast, and we have become the world’s second-largest economic power. Therefore, we are trying our best to increase consumption of clean energy, like gas and renewables, and we are trying very hard to reduce our coal usage, but it will take time and cooperation worldwide.

Chen Weidong is Chief Energy Researcher at the CNOOC Energy Economics Institute.

This interview was conducted by Tom Cutler, President of Cutler International, LLC, and Laura Schwartz, an Intern for the Trade, Economic, and Energy Affairs group at NBR.