China Pins Hopes on Gas

China's oil industry is promoting natural gas as a solution to the country's pollution problems despite concerns that the government has set some production targets too high.

In an interview during China's annual political meetings, a top executive of China National Petroleum Corp. (CNPC) called for new policies to raise the share of gas in the nation's energy supply to help cut coal-fired smog.

"The issue of air pollution has aroused heated discussion this year," CNPC's newly-named interim chairman Zhou Jiping told the official English-language China Daily.

"Similar problems occurred in developed countries in the past, and raising natural gas's share of the energy mix, in some cases making it the primary part of it, was a key solution," said Zhou, formerly president of CNPC's PetroChina unit and a National Committee member of the Chinese People's Political Consultative Conference (CPPCC).

According to Zhou, gas accounts for about a quarter of consumption in developed countries but only some 5 percent in China, where 68.8 percent of energy comes from coal.

Zhou's arguments for new policies were well-timed as a coal-dark curtain of smog fell over Beijing again, while delegates wrapped up their 12th National People's Congress (NPC) meetings with the transition to new government leaders and officials on March 17.

At a closing press conference, China's new Premier Li Keqiang acknowledged he had been "depressed" by the air pollution, The New York Times reported. The official Xinhua news agency translated the word as "upset."

Expectations of new energy policies are rising as the new government calls for shifting China's economic growth model to bring emissions under control.

"We shouldn't pursue economic growth at the expense of the environment—such growth won't satisfy the people," Bloomberg News quoted Li as saying.

Shale gas

Using more gas to cut coal use could help ease pollution, although high costs have kept power producers from making the switch.

Even so, CNPC plans to increase gas production to the equivalent of half its petroleum output in 10 years, China Daily reported.

But both production and consumption may depend on the government for policy support.

Before the leadership change, government planners set ambitious targets for unconventional gas, hoping to duplicate the explosive growth of shale gas production in the United States.

Last March, the National Energy Administration (NEA) unveiled a plan calling for China to produce 6.5 billion cubic meters (229 billion cubic feet) of shale gas in 2015 and as much as 100 billion cubic meters (3.5 trillion cubic feet) annually by 2020.

Initial enthusiasm over the targets soon gave way to doubt, since China had yet to produce any shale gas or acquire the technology for capturing the gas trapped in pockets of shale rock.

Over the past year, China has made progress in gaining technology through partnerships, auctions and foreign acquisitions, but the outlook for the targets still appears dim.

Speaking on the sidelines of the CPPCC meeting, the chairman of second-ranked oil producer Sinopec, Fu Chengyu, offered a glum assessment of the prospects.

"The shale gas sector will remain in its infancy in China in the coming decade," Fu told Xinhua, citing high costs and geological differences with shale formations in the United States.

China's producers have to drill up to twice as deep to reach shale gas and their wells yield only half the gas needed to cover their costs, Fu said.

More investment in pipeline infrastructure is also needed to bring isolated resources to market.

"China has broad prospects for shale gas mining, but it takes time to commercialize because we need to bring down the cost first and then raise the output," said Fu, estimating it will take "at least 10 more years" to realize commercial production.

Last year, the Ministry of Land and Resources estimated that China had over 25 trillion cubic meters (883 trillion cubic feet) of shale gas reserves and that 200 billion cubic meters (7 trillion cubic feet) could be classified as recoverable by the end of 2015.

Coalbed methane

Some of the same issues were raised by a separate Xinhua report on targets for coalbed methane production, citing Caijing Magazine, also published during the annual meetings.

The report quoted industry experts as saying it will be "extremely difficult" to meet the government's five-year goal of producing 30 billion cubic meters (1 trillion cubic feet) of the gas by 2015.

Coalbed methane, extracted from coal seams in mines, has been seen as more promising for China than shale because of its huge existing coal production, where escaping methane has usually been treated as a hazard rather than a resource.

But Caijing noted that China produced just 12.5 billion cubic meters (441.4 billion cubic feet) of the gas last year, failing to meet the government's goal of 15.5 billion cubic meters (547.4 billion cubic feet).

The NEA's five-year plan calls for 30 billion cubic meters in 2015, and in order to meet the State Council's goals for commercial development, China would have to produce 50 billion cubic meters (1.8 trillion cubic feet), the report said.

Caijing cited a series of reasons for the shortfall, including huge investment requirements, insufficient incentives, low government subsidies and technological bottlenecks.

Subsidy levels came in for special criticism. According to Caijing, the government subsidy for coalbed methane is equal to about 20 percent of production cost, making it far less profitable than other fuels.

The government should raise subsidies and prices to make its targets achievable, the magazine said.

Energy policies

The critical reports appear to be part of a campaign to influence the energy policies of the incoming government, said Philip Andrews-Speed, principal fellow in the East Asia program at the National University of Singapore's Energy Studies Institute.

The campaign may already be working. Andrews-Speed cited industry expectations that state-controlled producer prices for gas will be raised soon.

The lobbying seems calculated to place the blame for poor policy planning on the outgoing government.

"The industry is asking for more support, which is needed, and is belatedly lowering expectations," Andrews-Speed said.

China's overall gas consumption rose 13 percent last year to 147.1 billion cubic meters (5.2 trillion cubic feet), according to Xinhua.

The total includes imports of 42.5 billion cubic meters (1.5 trillion cubic feet), climbing 31.1 percent. Domestic gas production of 107.7 billion cubic meters (3.8 trillion cubic feet) increased 6.5 percent from a year earlier, according to figures from the National Development and Reform Commission (NDRC).