China’s rapidly growing economy has put the nation’s political leaders under pressure to secure energy resources for stable development. The country’s urbanization and economic rebalancing will have substantial consequences for the world’s energy markets. According to British Petroleum (BP), China will account for 25 percent of growth in total energy demand through 2030 while accumulating an energy production-consumption deficit greater than that of the U.S. or Europe. China’s 2012 energy mix comprised 68 percent coal, 18 percent oil and only 5 percent natural gas, compared to 20 percent coal, compared to 37 percent oil and 30 percent natural gas for the United States.
Many countries have mapped energy policies tied to the year 2020, a key inflection point for countries to benchmark and evaluate their policies. In November 2010, the EU outlined an ambitious plan to reform its energy markets and integrate its internal market by 2020, in addition to placing several environmental and efficiency targets. In November 2000, Russia approved the Main Provisions of the Russian Energy Strategy to 2020, providing key export and production targets for its hydrocarbons. Similarly, China’s main state planning agency body, the National Development and Reform Commission (NDRC), wants natural gas to make up 10 percent of China’s overall energy consumption mix by 2020, up from 4 percent in 2012.
China’s aggressive pursuit of natural gas is being driven by increased supply availability from shale and larger LNG markets, while Beijing is intensifying efforts to displace coal in favor of natural gas for greater environmental sustainability. Natural gas emits less carbon dioxide and zero sulfides compared to coal. One study has estimated that economic losses caused by pollution in 2010 came in at 1.1 trillion yuan, more than double the total from 2004. General Electric stated in a white paper that China could save $820 billion in environmental costs by 2025 by doubling its current natural gas consumption at the expense of coal. The more apparent the economic losses from poor environmental management become, the more pressure there will be for China to increase natural gas consumption and switch from coal. Still, aggressive natural gas expansion will require China to think about how it fits into its energy security scheme.
Energy security and natural gas are linked because of the way natural gas has traditionally been transported. Natural gas can be shipped to markets in two ways: via pipelines or as liquefied natural gas (LNG) in large shipping tankers. Natural gas agreements have detailed supply, timing and price arrangements between importers and exporters. An uninterruptible supply of natural gas is essential for consumers; if natural gas arrangements can be interrupted, countries must have alternative supply arrangements or maintain storage to meet domestic demand. As China rebalances its energy mix to meet environmental targets, it will have to deal with more complex energy security challenges.
Current Chinese Natural Gas Market
China became a net importer of natural gas in 2007, and as of 2012, Beijing imported 29 percent of its natural gas consumption with an import dependency projected to rise sharply. Shale production in China may help limit dependency but China is far from achieving the unconventional production levels of the U.S. or Canada. Regulatory hurdles, transportation problems and competition with other fuels and conventional natural gas have contributed to the lack of shale gas development. Chinese state-owned firms have limited experience in shale extraction methods and many of the large shale reserve areas are near population centers, making extraction costly and challenging.
Anticipating large growth in natural gas consumption, China has invested heavily in its pipeline infrastructure and LNG capacity. China had nearly 27,000 miles of main natural gas pipelines at the end of 2011, with the government planning to construct 24,000 new miles of pipeline by 2015. The country has already built its first international natural gas pipeline through the Central Asian Gas Pipeline (CAGP), bringing gas from Turkmenistan, Uzbekistan and Kazakhstan. There are currently five LNG regasification terminals, four under construction and several waiting for government approval with a total initial, expansion capacity of 106 billion cubic meters (bcm) a year.