The Chinese economy has grown by an average of 10 percent a year over the past two decades, crossing the milestone to become the second-largest economy and energy user in 2010 after the U.S., as well as the world's largest emitter of greenhouse gases. Stable energy supplies being at the core of China’s rise, they remain pivotal to its continued economic growth, especially coal, oil and gas. While coal still constitutes around 68 percent of China’s energy use, Chinese policymakers and energy executives lean more and more towards cleaner fuel sources, particularly natural gas. According to International Energy Agency’s June 2012 report, the share of natural gas is set to rise in China’s energy mix, which is expected to have strong implications on the country’s energy usage in the years to come. Given the increased importance of gas, what is China’s natural gas policy? Who are the main players in the Chinese gas market? What kind of problems does Beijing face as the share of natural gas grows in the country’s energy market?
Energy supply security based on reliance on primarily domestic production and energy diversification coupled with control of greenhouse gas emission and environmental protection constitute the core of China’s energy policy and appear frequently in statements of Chinese policymakers and leaders of energy companies. As part of its 12th Five-Year Plan (2011-2015), China has put a particular emphasis on cutting carbon emissions by reducing its use of coal and oil. Natural gas is the preferred energy source to achieve this goal. The Chinese government has set an ambitious goal of increasing the share of natural gas in the energy mix from its current 4 percent to 10 percent by 2020 and cutting carbon emissions by 17 percent between 2011 and 2015 through closure of energy-intensive enterprises.
Although the industrial sector is the major consumer of natural gas (45 percent in 2007), residential and utilities sectors have also upped their gas consumption and imports in recent years. As illustrated in Figure 1, gas consumption in China went up from 25 billion cubic meters (bcm) in 2000 to over 100 bcm in 2010, overtaking domestic production since 2007. The volume of gas imports has also steadily increased since 2006, going up sharply in 2010, as shown in Figure 2. To meet an expected increase in gas demand, China hopes to nearly double domestic gas production from its 102 bcm in 2011 to 180 bcm a year by 2020. The country is also expected to increase natural gas imports from 28.1 bcm in 2011 to estimated 77 bcm a year by 2020.
The central government is boosting investment in developing unconventional energy resources, such as coal-bed methane (CBM) and shale gas, and expects that unconventional natural gas will improve the country’s energy supply security in the years to come by providing affordable and ample gas. Aiming to increase the production of shale gas from 6.5 billion cubic meters (bcm) by 2015 to more than 60 bcm by 2020, Beijing envisions that shale gas will account for 8-12 percent of total natural gas by 2020, while CBM is to be 14 percent of China’s total domestic gas supply by then.
But conditions that existed in the U.S. to revolutionize the shale gas industry may not exist in China until it overcomes key hurdles for shale gas to become a commercially reliable and a competitive energy source. China faces a more complex geology, high capital and operational costs, inadequate or lack of access to equipment, water, manpower, and infrastructure as well as complex land ownership compared to the U.S. The key difference between the two is the U.S. shale gas sector flourished thanks to small independent firms, while the Chinese energy sector is heavily dominated by large state-run companies. At the moment, incentives to invest in developing China’s shale gas remain weak because of low domestic natural gas prices. Given these factors, it appears that setting a timeframe for commercial-scale success of shale gas in China is still highly uncertain.