china‘s gas choices beijing, tianjin, hebei burgeoning demand faces midstream bottlenecks april...
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8/12/2019 Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning Demand Faces Midstream Bottlenecks April 2014
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Please refer to the important disclosures and analyst certification on inside back cover of this document, or on ourwebsite www.macquarie.com/disclosures.
ASIA EX JAPAN
Chinas Gas Choices is our thematicresearch series on Chinese gas mark ets,
featur ing granular bot tom-up wo rk on:
- Demand by province and by end-customer,inc luding associated impl icat ions on coal
demand and carbon emiss ions
- Supply by f ie ld (convent ional onsho re,offsh ore, t ight gas, shale gas, coal bed
methane), pipe impo rts, LNG
- Infrastructure trunkl ines, storage,d is t r ibut ion, impor t terminals
Beijing, Tianjin, Hebei gas growth plays
Source: Bloomberg, Macquarie Research, March 2014
Related Research
Chinas Gas Choices - Light My FireThe Chinese NGV (R)Evolution
Analyst(s)Aditya Suresh, CFA+852 3922 1265 [email protected] Hubbard, CFA+852 3922 1226 [email protected] Chiu, CFA+852 3922 1435 [email protected] Dai+852 3922 1295 [email protected] Zhao+852 3922 1293 [email protected] Lewis, CFA+852 3922 5417 [email protected] Chen+86 21 2412 9087 [email protected]
13 March 2014Macquarie Capital Securities Limited
Chinas Gas ChoicesBeijing, Tianjin, Hebei: Burgeoningdemand faces midstream bottlenecksWe take a detailed look at the gas supply-demand outlook for Beijing, Tianjin
and Hebeiprovinces with the worst air quality problems in China, and that we
expect to account for one-fourth of incremental Chinese gas demand growth
over the next decade. We foresee an implied gas shortage of c.30bcm or one-
third of the provincial gas demand targets by 2020e, with lack of midstream
infrastructure the key bottleneck (pipelines, LNG regas, and gas storage). We
conclude that if these provinces want to improve air quality, via increased gas
usage, then a wave of new midstream projects is urgently required.
An insatiable thirst for gas in Beijing, Tianjin and Hebeidemand to quadruple by 2020e
The major structural tailwind for gas demand growth in these provinces is the
growing resolve to enforce a switch from coal/oil to gas for industrial boilers,
powergen, vehicles and residential. Based on our bottom-up work, we forecast
gas demand in these provinces to grow 21% pa (almost double the national
average) to reach 70bcm by 2020e - at which point these provinces would
account for 18% of China gas demand, and would have contributed to a 70mt or
2% cut in national coal consumption.
Gas supply rising fast butmidstream capacity has to morethan double to realize government demand targets
During the same period, based on existing and confirmed new capacity, we
expect total gas supply to these provinces to grow an impressive 17% pa, but
this still falls 37% short of the provincial demand targets due to midstream
constraints. In our view, this implied shortage provides impetus to commission
Kunluns Shaanjing line-5(15bcm; on top of line-4 under construction), LNG
regas expansion projects, and/or formalize the agreement with Russia.
Structurally long the mid/downstream players
Our forecast gas shortage structurally underpins gas volume growth for Kunluns
Shaanjing pipelines at least until the end of this decade. We raise our Kunlunprice target by 10% to HK$22on higher transmission volumes and a higher
implied target PE. China Suntienbenefits from its leveraged downstream gas
exposure in Hebei and we raise our price target by 36% to HK$4.75.
A wave of new midstream projects needs to be commissioned soon
Source: WMAC, CEIC, Macquarie Research, March 2014
Company Ticker MacQ
Rating
NEW PT
(HK$)PT upside
Current
2015E
PER
Direct Benefic iar ies
Kunlun 135 HK OP 22.00 60% 9.9x
Suntien 956 HK OP 4.75 39% 12.4x
CR Gas 1193 HK OP 30.00 17% 14.8x
Beijing Enterprises 392 HK NR 14.8x
Beijing Jingneng 579 HK NR 10.1x
Indirect Benefic iar ies
Petro-King 2178 HK OP 6.90 92% 10.3x
Anton 3337 HK OP 7.50 35% 14.4x
More social obligations?
PetroChina 857 HK N 8.00 2% 7.9x
Sinopec 386 HK UP 5.00 -26% 7.6x
-30.0
-20.0
-10.0
0.0
10.0
2014 2015 2016 2017 2018 2019 2020
(bcm) Implied Gas Excess/(Shortfall) vs. Govt Targets
Base case (Existing + Confirmed Capacity) Base + Shaanjing Line-5 Base + Shaanjing Line-5 + LNG expansion
Shaanjing Line-5 + LNGregas projects have to be built
if the provincial demandtargets are to be met
https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7172710&file_name=HuntingStocks220512e117474.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7172710&file_name=HuntingStocks220512e117474.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf -
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Beijing, Tianjin, Hebei: Burgeoningdemand faces midstream bottlenecksIn this edition of Chinas Gas Choiceswe take a detailed look at the gas supply-
demand outlook for Beijing, Tianjin andHebeiprovinces with the worst air
quality problems in China and provinces that we forecast will account for one-fourth
of incremental Chinese gas demand growth over the next decade. This note
complements our detailed work inLight My Fire,which looked at overall China gas
supply-demand dynamics.
An insatiable thirst for gas in Beijing, Tianjin and Hebei demand to
quadruple by 2020e
As an extreme example of the air quality issues facing these provinces, PM2.5
emissions in Beijing reached 35x the WHO-recommended daily health safety
limit during peak smog last year.
These provinces target cutting annual coal consumption by 63mt or 16% by
2017 (vs. 2012), to help cut PM2.5 emissions by 25% over the same period.
The major structural tailwind for gas demand in these provinces is the growing
resolve to enforce a switch from coal/oil to gasindustrial boilers, powergen,
vehicles and residential.
We forecast gas demand from these provinces to grow 21% pa over the next
seven years (almost double the national average) to 70bcm by 2020e, at which
point these provinces would account for 18% of overall Chinese gas demand
(vs 11% today).
Gas supply rising fast but faces midstream constraints
The Kunlun Energy/Beijing Enterprises operated Shaanjing or Shaanxi-Beijing
pipelines cater to c.90% of gas demand in Beijing, Tianjin and Hebei, and will
remain the major conduit of supply (70%+) until the end of this decade.
Based only on existing and confirmed new capacity we expect total available
gas supply to these provinces to rise an impressive 17% pa, but this still falls
37% short of the provincial demand targets due to midstream constraints.
Our preferred Beijing-Tianjin-Hebei gas growth plays
If Beijing, Tianjin and Hebei want to improve air quality, via increased gas
usage, then Shaanjing line-5(on top of line-4 under construction), and the
Tangshan and Tianjin LNG regas expansion projectsmust break ground.
We raise our Kunlun price target by 10% to HK$22on higher transmission
volumes and a higher implied target PE. China Suntienbenefits from its
leveraged downstream gas exposure in Hebei, and we raise our price target by36% to HK$4.75.
Fig 1 Order of preference for Beijing, Tianjin, Hebei gas growth plays
Source: Bloomberg, Macquarie Research, March 2014. 2015E for non-rated stocks based on Bloomberg consensus
Company Ticker Mkt Cap
(US$, bn)
MacQ
Rating
Price
Local
(HK$)
NEW PT
(HK$)
PT %
changePT upside
NEW
2015E EPS
(LC)
2015 EPS
% change
2015e EPS
MacQ vs
Cons
Current
2015E
PER
Target
2015E
PER
Direct Beneficiaries
Kunlun 135 HK 14.4 OP 13.7 22.00 10% 60% 1.38 4% 19% 9.9x 15.8x
Suntien 956 HK 1.5 OP 3.4 4.75 36% 39% 0.23 3% 4% 12.4x 16.1x
CR Gas 1193 HK 7.3 OP 25.7 30.00 0% 17% 1.71 0% 19% 14.8x 17.3x
Beijing Enterprises 392 HK 11.8 NR 71.9 14.8x
Beijing Jingneng 579 HK 3.9 NR 4.7 10.1x
Indirect Beneficiaries
Petro-King 2178 HK 0.5 OP 3.6 6.90 0% 92% 0.35 0% 3% 10.3x 20.0x
Anton 3337 HK 1.6 OP 5.6 7.50 0% 35% 0.31 0% 7% 14.4x 20.0x
More soc ial obl igat ions?
PetroChina 857 HK 183.4 N 7.8 8.00 0% 2% 0.78 0% 3% 7.9x 8.0x
Sinopec 386 HK 98.5 UP 6.7 5.00 0% -26% 0.69 0% 0% 7.6x 6.0x
Inside
Beijing, Tianjin, Hebei: Burgeoning
demand faces midstream bottlenecks 2Gas demand to rise four-fold by 2020e 7Gas supply rising fast but faces
midstream constraints 20The choices to achieve government
targets 27Kunlun Energy 34
China Suntien 40
PetroChina 47
China coal sector 50
Great Wall Motor Company 52
Whats New?
Granular work on the gas demandoutlook by end-customer for Beijing,Tianjin, Hebei.
Feasibility of provincial coal demanddestruction targets.
Analysis of the gas supply options -Ordos, Tarim, West-East pipelines, coal-to-gas, LNG regas, local gasfields
Associated work looking at midstreaminfrastructure to get the gas to marketShaanjing pipelines, gas storage etc.
https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2& -
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Fig 2 Beijing, Tianjin and Hebei have the worst airquality problems in China
Fig 3 providing these provinces the impetus toaccelerate the switch from coal to gas
Source: Macquarie Research, March 2014 Source: NDRC, Macquarie Research, March 2014
Fig 4 ...translating to four-fold rise in gas demandfrom these provinces by 2020e
Fig 5 However, rising demand meeting constrainedsupply due to infrastructure bottlenecks
Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014 Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014
Fig 6 resulting in an implied gas shortage of nearlyone-third of the provincial demand target by 2020
Fig 7 Shaanjing line-5, LNG regas expansionprojects all need to be commissioned
Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, WMAC, Macquarie Research, March 2014
-60%
-50%
-40%
-30%
-20%
-10%
0%
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
Beijing Tianjin Hebei
(mt) Coal demand destruction targets
Absolute cut (2012-17) % cut vs 2012 levels (RHS)
0%
3%
6%
9%
12%
15%
18%
21%
0.0
10.020.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
bcm Beijing, Tianjin, Hebei gas dmd outlook
Beijing Tianjin
Hebei NDRC estimates
% of overall China dmd (RHS)
0.0
10.0
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50.0
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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm) Beijing, Tianjin, Hebei Demand-Supply Summary
Supply: existing + confirmed MQe DmdGovt Dmd Targets
A widening gap due to midstreaminfrastructure bottlenecks, rather
than lack of supply...
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.010.0
2014 2015 2016 2017 2018 2019 2020
(bcm) Implied Gas Excess/(Shortfall) vs. Govt Targets
Base case (Existing + C onfirmed Capacity)
Base + Shaanjing Line-5
Base + Shaanjing Line-5 + LNG expansion
Shaanjing Line-5 + LNGregas projects have to be built
if the provincial dmd targetsare to be met, in our view
0
10
20
30
40
50
60
70
80
90
2013 2014 2015 2016 2017 2018 2019 2020
(bcm) Beijing, Tianjin, Hebei midstream capacity required
Exist ing available capacity Confirmed addit ions
New capacit y needed Prov inc ial Dm d Target
New capacityneeded: Shaanjing 5
+ LNG expansions
Confirmed:Shaanjing 4, Keqi,
Tangshan LNG,Tianjin LNG
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Stock ImplicationsWe see multiple stock/sector implications as a result of the burgeoning gas demand growth
outlook for Beijing, Tianjin and Hebei.
Structurally long the mid/downstream players: We raise our Kunlun price target by
10% to HK$22, on higher transmission volumes and a higher implied target PE. We nowmodel 24%/17% y/y gas transmission volume growth for Kunlun's Shaanjing pipeline
over 2014/15, above consensus at ~10-15% y/y growth.We continue to think the risk-
reward for Kunlun is compelling, with potential 60-95% base-bull fair value upside
potential versus 20% downside in a low probability bear scenario. China Suntien
(covered by Patrick Dai)benefits from its leveraged downstream gas exposure in Hebei
and we raise our price target by 36% to HK$4.75. Also China Resources Gas (covered
by Gary Chiu)will benefit from downstream gas volume growth in Tianjin.
Play upstream growth via oilfield services, rather than PetroChina or Sinopec. We
believe it is likely that PetroChina will continue to be responsible for the majority of the
new upstream gas required to satisfy Chinas rapidly growing gas demand. This role has
unambiguously destroyed shareholder value thus far and we continue to see such work
as more social duty than value creation. Our preferred upstream gas volume relatedplays remain the independent oilfield service provides Petroking (Outperform, HK$6.9
PT 92% upside) and Anton(Outperform, HK$7.5 PT 35% upside), rather than
PetroChina (Neutral rating)or Sinopec (Underperform rating). Separately,while
Datang International Power (Neutral rating)will benefit from coal-to-gas volume
growth in Beijing, the impact on group EPS is minimal.
Fig 8 Whos most exposed to Beijing, Tianjin, Hebeis insatiable gas demand?
Source: Company data, Bloomberg, Macquarie Research, March 2014. Estimated gas volume and group EPS impact for 2014e.
Company Gas volume mix (MQe) Impact of gas vols on EPS (MQe)Key assets impacted by Beijing,
Tianjin, Hebei gas growthGrowth drivers
Kunlun Energy(135 HK, Outperform, TP: HK$22)
Shaanjing pipelines 60% (line 1-3, 35bcm)
Shaanjing line 4 (15bcm) in 2015 Taangshan LNG regas (4.7bcm) - potential
asset injection
Strong anti-pollution inspired thirst for gas in
Beijing, Tianjin, Hebei... & Shaanjing pipelines is the only major
conduit of gas supply to the entire region
Suntien Green Energy(956 HK, Outperform, TP: HK$4.75)
~30% mkt share for gas & wind in Hebei Anti-pollution inspired switch away from coal
to gas/wind
China Resources Gas(1193 HK, Outperform, TP: HK$30)
159 city gas projects in 20 provinces
JV with Tianjin gas group
176 CNG/LNG gas refueling statio; ~300 by
2015
Tianjin coal/oil to gas growth
Turnaround of 50 currently loss-making
projects, to drive group earnings growth
PetroChina(857 HK, Neutral, TP: HK$8.0)
Chaangqing Gas Fields in Ordos Basin
supplies a bulk of Shaanjing vols
West-East Pipelines (Tarim, Turkmen imports)
also feeds the Shaanjing pipelines
Offtake agreement with Datang CTG for
supply to Beijing
Taangshan LNG regas terminal (4.7bcm)
While P'China would benefit from higher
upstream vols...
this is offset by losses in its gas imports and
refining businesses; and mature oil production
declines in Daqing
Sinopec(386HK, Underperform, TP: HK$5.0)
Daniudi gas field in Ordos supplies small vols
to Beijing, Tianjin, Hebei
8bcm pipeline under const to serve Hebei
(2015e)
Tianjin LNG under construction, startup in
2017e
Limited near-term impact from gas growth in
these provinces
Near-term refining remains a headwind, while
medium-term we continue to see a poor FCF
outlook
Beijing Enterprises(392 HK, Not Rated)
Shaanjing pipelines 40% (1-3, 35bcm)
Shaanjing line 4 (15bcm) in 2015
Keqi coal-to-gas (33% stake)
50 CNG retail stations
Strong government support driven by growing
environmental concern
LNG/CNG volume growth
Beijing Jingneng(579 HK, Not Rated) Largest gas-fired power supplier in Beijing 56% gas powergen mkt share
Beijing plans to become coal free by 2017
BJ Jingneng to add 2.4 GW capacity by 2017and maintain its leading gas powergen mkt
share
BTHOthers
BTHOthers
BTH BTH
Wind
BTH
BTH
Others
BTH BTHOthers
BTH
Others
BTH
Others
BTH BTH
BTH
Others
BTH
Others
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Remain cautious on thermal coal sector. We estimate annual coal consumption in
Beijing, Tianjin and Hebei will decline 70mt or 20% by 2020e, due to the expected coal-
to-gas switch. While the absolute impact on coal demand is not large from a national
perspective (~2%), this trend supports our expectation for a slowdown in Chinas coal
demand growth to 2-3% in the next few years, and we maintain our Underperform
ratings onYanzhou Coal, Fushan and Hidili.
Further we highlight three non-rated stocks that could benefit from this forecast gas
growth in Beijing, Tianjin, Hebei: Beijing Enterprises (not rated)could directly benefit
from higher gas transmission volumes (as it controls 40% of Shaanjing pipeline) and
downstream gas volumes in Beijing; Beijing Jingneng (not rated) could benefit from
gas-fired powergen growth in Beijing; CIMC Enric (not rated) could benefit in the
medium term from LNG equipment growth.
Risk-reward outlook for our key stock picks
Fig 9 Kunlun still offers a compelling risk-reward valuation skew
Base: HK$22.0/sh @ 15.8x base HK$1.40/sh 2015e EPS, 60% TSRupside
Gas transmission:24%/17% y/y gas transmission vol growth in2014/15e, and flat EBITDA margins
Natural gas sales (incl LNG):38%/20% y/y gas sales volumegrowth, and a rebound in EBITDA margins to Rmb0.42/cu.m in2014/15 (from Rmb0.34/cu.m)
E&P:$106/109/bbl realized oil prices in 2014/15e
LNG regas:95% utilization rates, backed by take-or-pay contracts
Target 15.8x 2015 PE, 10% disc to HK/China gas sector, backed byDCF.
Bull: HK$26.8/sh @ 18x bull target PE, 95% upside
Assuming no valuation gap to the HK/China gas sector.
Bear: HK$10.9/sh @ 7.8x bear target PE, 20% TSR downside
Pipelines sold at acquisition cost; further PE suppression related tosenior exec investigations.
Risks to our base case thesis
Pipeline tariff cuts; inability to pass on rising upstream gas costs;higher than forecast capex would imply higher DD&A and a delay inachieving +ve FCFs.
Source: Datastream, Macquarie Research, March 2014
Fig 10 Suntien (covered by Patrick Dai) risk-reward shows limited downside for material potential upside
Base: HK$4.75/sh, 39% TSR upside, gas market share in Hebei fallso 15% in 2020 from 27% in 2012
Natural gas sales:16%/17% y/y gas sales volume growth in2014/15e, average ASP increase by 3% pa, and gross margins
rebound to Rmb0.48-0.49/cu.m in 2014/15 (from Rmb0.47/cu.m),gas sales vol CAGR 15% in 2014-2020.
Wind power sales:21%/26% y/y wind power revenue growth, newcapacity addition 400MW pa in 2014/15 (up from 150MW-250MWpa) , and 85%/86% EBITDA margins in 2014/15
TP from DCF implies 16.1x 2015 PE, 10% disc to HK/China gassector (from 30% disc), 17% prem to valuation derived from sum-of-the-parts.
Bull: HK$6.15/sh, 70% upside, gas market share falls to 20% in 2020
Implies 20.9x 2015PE, 20% gas sales vol CAGR in 2014-2020.
Bear: HK$3.00/sh, 20% TSR downside, gas gross margin falls toRmb0.4/cu.m by 2020
Implies 10.6x 2014PE, assuming 70% cost hike pass-through.
Risks to our base case thesis
Inability to pass on rising upstream gas costs; lower than forecastreceivable turnover imply a delay in achieving +ve FCFs.
Source: Datastream, Macquarie Research, March 2014
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Fig 11 Beijing, Tianjin, Hebeis Gas Supply Options
Source: WMAC, CEIC, Macquarie Research, March 2014
010203040506070
2 01 3e 2 01 5e 2 02 0e
Local fields
010203040506070
2013e 2015e 2020 e
Tangshan, TianjinLNG
010203040506070
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Keqi CTG
010203040506070
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Note: All figures in bcm. Scale for all charts 0-70bcm
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Gas demand to rise four-fold by 2020e
We expect Beijing, Tianjin and Hebei to account for one-fourth of incremental Chinese
gas demand growth over the next decade.
Beijing, Tianjin and Hebei have the worst air quality problemsin China. As an
extreme example, PM2.5 emissions in Beijing reached nearly 35x the WHO-
recommended daily health safety limit in Jan-13.
These provinces target cutting annual coal consumption by 16%by 2017 versus 2012,
in turn to help cut PM2.5 emissions by 25%during the same period.
The major structural tailwind for gas demand in these provinces is the growing resolve to
enforce the switch from coal/oil to gasindustrial boilers, powergen, vehicles,
residential.
Over the next seven years, we forecast gas demand from these provinces to grow 21%
pa, or an average increase of 7.5bcm pa, to 70bcm by 2020e, at which point these
provinces would account for 18% of overall Chinese gas demand.
Our bottom-up demand forecasts are lower than the provincial target of 84bcm by 2020e,due to more conservative assumptions.
Beijing, Tianjin and Hebei together consumed 18.2bcm of gas in 2013, representing 11% of
overall Chinese gas demand. Till the end of this decade, we forecast demand from these
regions to grow 21% cagr (well above the industry trend of 13% cagr) and reach 70bcm or
18% of overall Chinese demand by 2020e. These provinces have the highest concentration of
PM2.5 emissions in China (fig 16), and the growing resolve to improve air quality by
accelerating the switch from coal to gas is a major tailwind supporting gas demand in these
provinces.
Fig 12 Beijing, Tianjin, Hebei account for 11% ofoverall China gas demand today
Fig 13 but these provinces would be responsible
for ~25% incremental Chinese gas demand growth(2013-20e)
Source: WMAC, CEIC, Macquarie Research, March 2014 Source: WMAC, CEIC, Macquarie Research, March 2014
The Airborne Pollution Prevention and Control Action Planintroduced by Chinas
Ministry of Environment Protection in Sept-13 calls for a 10% reduction in nationwide PM2.5
emissions by 2017, from 2012 levels. The plan outlines 35 broad action points, including
cutting coal consumption in several regions, banning heavy polluting motor vehicles, and
accelerating the process of monitoring and disclosing PM2.5 readings. Over the same time
frame, Beijing-Tianjin-Hebei target cutting PM2.5 emissions by at least 25%. Towardsachieving these PM2.5 emissions cut goals these provinces target cutting coal consumption
by 63mt or 16% of 2012 coal consumption (fig 18).
Beijing6%
Tianjin2%
Hebei3%
Others89%
2013 China Gas Demand (162bcm)
0%
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50
100
150
200
250
300
350
400
2010 2013 2015 2020
(bcm) China Gas Demand Outlook
Others BeijingTianjin HebeiBTH as % of overall dmd
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Fig 14 Beijings air quality today is as poor as it was in London and Tokyo in the 1950s
Source: Greater London Authority, Bureau of Environment of Tokyo Metropolitan Government, Macquarie Research, March 2014
Beaut i ful China The Proven Path Tow ards Cleaner Air
Macquarie Analysts: Jiong Shao, Jing Yang
Beautiful China (II) - The proven paths towards cleaner air
In The Proven Path Towards Cleaner Air, our strategy team reviews the history of air pollution controls in the United Kingdom,
United States, and Japan, to shed some light on how China may proceed to combat air pollution. They outline the necessary
changes in Chinas anti-pollution legislations and regulatory regimes for sustainable environmental protection in the coming
decades identifies, and also highlight three near-term priorities for China;
Coal Control Areasto cut emiss ions from c oal combus t ion (refer ring to the smokeless zonesin th e UK)
The designation of Coal Control Areain London and other cities were widely recognized as the most effective airpollution control measures in response to the 1952 Great Smog. The measure directly led to the energy consumption
structure shift in the country towards cleaner fuels. In January 2013, immediately after several days of severe smog,
Beijingsmunicipal government introduced Coal Control Areascalling for a ban in coal consumption in the fourth ring
road by 2014, and in the sixth ring road by 2015.
Str icter emissio n limits for indu str ial plants (referr ing to th e 1968 UK Clean Air Act) :
In mid-February 2013 the Ministry of Environmental Protection of China announced that from March 2013, stricter
emission standards would be implemented for greenfield projects of coal-fired plants/boilers, steel mills, petrochemical,
non-ferrous and chemical plants, and also for retro-fit projects of coal-fired plants/boilers, steel mills and petrochemical
plants in over 47 cities and 19 provinces. In addition the Airborne Pollution Prevention and Control Action Plan
introduced in Sept-13 calls for a 10% reduction in nationwide PM2.5 emissions by 2017, from 2012 levels.
Gasoline & diesel quality upgrades to reduce emission s from autom obiles (referr ing to the US Ultra-Low Sulp hurGasoline/Ultra-Low Sulp hur Diesel stand ards).
Since 2006, refiners in the US are required to supply Ultra-Low Sulphur Gasoline and Ultra-Low Sulphur Diesel to
reduce sulphur levels in these fuels by 90% and 97%, respectively. In Feb-2013 the State Council of China announced
to accelerate refined oil quality upgrades, by 1) strictly implementing the existing gasoline and diesel standards (with
max sulphur content at 50ppm and 350ppm), and 2) accelerating publication and promotion of new National IV & V
diesel standards and National V gasoline standards.
All these measures highlighted are a clearly step in the right direction, and serve as major structural tailwind for gas demandgrowth in Beijing, Tianjin and Hebeiprovinces with some of the worst air quality problems in China.
Tokyo 1950s Beijing todayLondon 1950s
https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7197044&file_name=BeautifulChinaII_040313e142809.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7197044&file_name=BeautifulChinaII_040313e142809.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7197044&file_name=BeautifulChinaII_040313e142809.pdf -
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Fig 15 Beijing, Tianjin, HebeiGas, Coal, PM2.5 targets
Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014.Note: If an official provincial gas demand target is unavailable, we include estimates by local gas planning authorities, gas distribution companies etc.MacQ demand forecasts lower than provincial estimates due to more conservative assumptions.
Fig 16 Beijing, Tianjin and Hebei have the highestconcentration of PM2.5 emissions in China
Fig 17 recent PM2.5 emissions cut targets, whilst astep in the right direction, still leave emissions in theseprovinces well above the WHOs air quality guidelines
Source: Greenpeace, Macquarie Research, March 2014 Source: MEP, WHO, Greenpeace, Macquarie Research, March 2014
Fig 18 Beijing, Tianjin and Hebei advocate the coalto gas switch and target cutting annual coal
consumption by 16% versus 2012 levels...
Fig 19 translating to a potential four-fold rise to gas
demand growth from these provinces by 2020e
Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, WMAC, Macquarie Research, March 2014
PM2.5
emissions
reduction 2012-
17e
Coal dmd
destruction
target 2012-17e
(mt)
Gas Dmd 2013A
(bcm)
Gas Dmd
Target 2015
(bcm)
Gas Dmd
Target 2017
(bcm)
Gas Dmd
Target 2020
(bcm)
Gas Dmd
Growth (2013-
17 cagr)
Gas Dmd
Growth (2013-
20 cagr)
Beijing 25% 13.0 9.6 20.0 24.0 30.0 26% 18%
Tianjin 25% 10.0 3.4 16.0 20.0 23.6 56% 32%
Hebei 25% 40.0 5.2 4.0 15.0 30.0 30% 28%
Combined Target 25% 63.0 18.2 40.0 59.0 83.6 34% 24%
MacQe 45.3 18.2 33.7 47.0 70.5 27% 21%
Guangdong
Shandong
Jiangsu
Hebei
Henan
Beijing
PM2.5>40g/m3 PM2.5
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Beijing
Beijing is currently the fifth-largest consumer of gas in China, and demand has grown 13%
cagr over the past five years (2008-13), broadly in line with the industry growth trend. The
severe smogs in Beijing in January 2013, when PM2.5 emissions in Beijing touched 886/
cu.m or 35x the WHO- recommended health safety levels, raised concerns domestically and
internationally. Recent official rhetoric and policy suggest Beijing is getting more serious onsolving its pollution problems, and as things stand gas is the only viable substitute for coal in
Beijing. By 2017, the NDRC (National Development and Reform Commission) expects Beijing
to cut annual coal consumption by at least 13mt (56% versus the 2012 baseline), and projects
gasdemand to rise to 24bcm (2.5x 2013 levels) or 35% of the local energy mix (from 14% in2013). Based on our bottom-up work, we forecast Beijings gas demand to rise to 18.6bcm by
2017 (17% cagr 2013-17e) and 25.1bcm by 2020 (15% cagr 2013-20e), lower than the
provincial targets due to more conservative assumptions. Our work indicates the provincial
coal demand destruction targets are achievable; we forecast a 15.5mt cut to coal demand
versus the target of at least 13mt by 2017.
Fig 20 Beijing gas demand to grow 15% cagr 2013-
20e
Fig 21 Incremental gas demand growth to peak over
the next two years
Source: Beijing DRC, CEIC, Macquarie Research, March 2014 Source: CEIC, Macquarie Research, March 2014
PowergenBeijing currently has 4.2GW of gas-fired powergen capacity and targets
having 7.2GW capacity by end-2014, rising to 8.6GW by end-2017. Beijing Jingneng is
the main gas-fired IPP in Beijing and is set to add 2.5GW of capacity by 2017, followed
by Datang (1.4GW NW centre), and Guohua (0.7GW NE centre). By the end of 2015,
Beijing plans to have decommissioned all four existing coal-fired power plants with a
combined 2.7GW capacity. While the cost of gas-fired powergen in Beijing is more
expensive than coal, the on-grid tariff for gas is now ~65% more than that for coal.
Further, the Beijing government also provides subsidies (~Rmb0.05/KWh) to broadlyensure that the power plant operator makes an 8% IRR. Based on the gas-fired
powergen capacity additions, and assuming Beijing continues to generate one-third of its
electricity needs locally, we forecast gas demand from powergen to rise to 9.3/12.6bcm
by 2017/20e, from 4.4bcm in 2013a, and during the same time this results in a 11.9mt cut
in coal consumption.
0.0
4.0
8.0
12.0
16.0
20.0
24.0
28.0
(bcm) Beijing Gas Demand
Industrial Powergen Residential NGV Other
ProvincialTarget
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
(bcm) Beijing Incremental Gas Demand Growth
Beijing Downstream GasVolume Split
Source: Company data,Mac quarie Research, March 2014
Beijing
Enterprises
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Fig 22 Gas to play an increasingly important role inBeijings energy mix
Fig 23 and higher powergen costs offset by higheron-grid tariff and subsidies
Source: Beijing DRC, CEIC, Macquarie Research, March 2014 Source: Beijing Jingneng, Beijing DRC, Macquarie Research, March 2014
IndustrialBeijing targets banning coal consumption from industrial boilers in the 4th
ring road by end-2014, and the 6thring road by end-15. To date 93 boilers have been
retrofitted to use gas, and over the next couple of years another 44 boilers should be
converted (note that the typical size of an industrial boiler in Beijing is nearly three times
the nationwide average). In addition to the demand growth due to the coal-to-gas switch,
historically industrial gas demand has had an extremely strong correlation with GDP
growth (R298%). Consequently, if we assume 7% sustainable growth long-term GDP,
we forecast underlying industrial gas demand to grow at 10% pa. Put together, we
forecast industrial gas demand to rise to5.6/7.4bcm in 2017/20e, from 2.9bcm in 2013a.
ResidentialIn 2013, 66% of Beijings 21mn population had access to gasnearly 2x
the nationwide average. By 2017, Beijing targets to increase the residential gas
penetration rate to 80%. Further, with rising household incomes, gas demand per capitahas been growing at 2% pa over the past five years. Consequently as more households
get access to gas and with rising consumption per capita, we forecast residential gas
demand to rise to 1.7/2.2bcm by 2017/20e, from 1.1bcm in 2013a.
NGVsBeijing targets converting two-thirds of its 21k bus fleet to gas or EV by 2015;
and also targets 200k new energy vehicles by 2017e. Over the next seven years, we
assume a steady ramp-up in LNG/CNG truck/buses to 42k by 2020e or 20% of the
provincial commercial vehicle fleet (from 3.5k in 2013), and 50k CNG-based taxis in
2020e (from 6.5k today). Consequently, we model gas demand from NGVs to grow to
1.4/2.2 bcm in 2017/20e, from 0.4bcm in 2013a.
Fig 24 Beijing gas demand growth led by new gas-fired powergen capacity and conversion of industrial boilers
Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
(bcm)(TWh) Beijing powergen outlook
Coal Gas
Imported f rom other prov inces Powergen gas dmd (RHS)
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Rmb/KWh Beijing powergen tariffs
Coal-fired on-grid tariff Gas-fired on-grid tariff
Gas-fired total settlement tariff
Tariffpaid by
local grid
Subsidyfrom local
govt
6.89.6
3.6
1.40.8 0.3
15.3
4.6
3.1
1.30.8
25.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2010a 2013a Powergen Industrial NGV Residential 2015e Powergen Industrial NGV Residential 2020e
(bcm) Beijing Gas Demand Growth Outlook
3.4GW ofnew capacity
added
~30 largescale boilersconvt to gas
Ramp uptwds
200k"NewEnergy
Vehicles" by2017
Resipenetrationincreases t o73% in 2015,from 66% in
2013
5GW of newcapacity
added; gasramps to40% mkt
share
10% pa GDPdriven
industrialdmd growth
LNG reaches20% CV
penetrationby 2020e
Resipenetrationincreases to
90% by2020e
Provincialtarget
Provincialtarget
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Fig 25 Beijing gas demand growth summary outlook
Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
Tianjin
120km south of Beijing, the coastal province of Tianjin currently consumes one-third the gas
of Beijing. However, Tianjin is set to quickly close the gas consumption gap to Beijing and
local authorities have aggressive plans in place to quadruple gas demand over the next two
years to 12.3bcm by 2015. By 2020, Tianjin expects gas demand to rise to 23.6bcm and
account for 20% of its primary energy mix. We conservatively assume a more gradual ramp-
up in gas demand to 13.3/19.3bcm in 2017/20e, implying 28% cagr (2013-20e). We forecast
an 8.7mt cut to annual coal consumption by 2017, slightly lower than the 10mt provincial
target.
Fig 26 Tianjin gas demand to grow 6x by 2020e Fig 27 Tianjin Incremental Gas Demand Growth
Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, Macquarie Research, March 2014
PowergenTianjin commissioned the 250MW GreenGen plant in 2013; Chinas coal
gasification powerplant (integrated gasification combined cycle; coal is converted to
syngas and then combusted). GreenGen is funded by a group of power companies led by
Huaneng. By end-2015 Tianjin targets to have more than 5GW of gas-fired capacity with
Huaneng, Datang, Guodian, Huadian, and China Power New Energy all bringing on
stream new capacity. Beyond these known capacity addition projects, we assume
another 2GW of capacity to be added between 2017-20e. Consequently, we forecast gas
demand from powergen to rise to 6.3/9.0bcm by 2017/20e, from 0.7bcm in 2013a.
BEIJING 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20
CAGRComments
Industrial (bcm) 0.3 0.4 0.5 0.7 0.7 0.9 0.9 1.5 2.9 3.7 4.4 5.1 5.6 6.1 6.7 7.4 14% Ban coal boilers 4th ring road 2014; 6th ring road 2015Cumulative # of boilers converted 30 93 115 125 137 137 137 137 137
Powergen (bcm) 0.8 1.2 1.0 1.8 2.4 2.9 3.1 3.6 4.4 5.6 8.0 8.8 9.3 10.5 11.5 12.6 16% 40% gas mkt share by 2020, from 16% todayTotal electricity consumption TWh 57 62 68 71 76 83 85 87 90 92 94 97 99 102 104 107 3%
% locally produced 38% 32% 33% 33% 32% 32% 31% 33% 33% 33% 33% 33% 33% 33% 33% 33%
...Coal TWh 15.1 13.5 16.1 17.4 17.8 20.2 16.4 17.0 15.2 11.8 4.8 2.8 2.0 0.0 0.0 0.0
...Gas TWh 6.3 6.3 6.3 6.3 6.3 6.6 9.9 12.1 14.7 18.8 26.6 29.4 31.0 35.0 38.5 42.0
% Gas mkt share 11% 10% 9% 9% 8% 8% 12% 14% 16% 20% 28% 30% 31% 34% 37% 39% Target 35% of power consumption mix by 2017e
Gas-fired powergen capacity GW 1.8 1.8 1.8 1.8 1.8 1.9 2.8 3.4 4.2 5.4 7.6 8.4 8.9 10.0 11.0 12.0
Residential (bcm) 0.6 0.8 0.9 0.9 1.0 1.0 1.0 1.1 1.2 1.3 1.4 1.6 1.7 1.9 2.1 2.2 10% 90% resi penetration by 2020, from 66% in 2013Population w access to gas (mn) 9 10 10 11 11 13 13 14 14 15 16 17 18 19 21 22
% popln w access to gas 57% 60% 60% 60% 61% 66% 66% 66% 66% 69% 73% 76% 80% 83% 87% 90%
Gas dmd per capita w access 64 88 90 86 86 79 79 81 83 86 88 91 94 97 100 103 3% Grows with rising urbanization
NGVs (bcm) 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.6 0.9 1.2 1.4 1.7 1.9 2.2 28% Half of target 200K new energy vehicles gas-based# of LNG trucks, buses ('000) 4 9 15 20 26 31 37 42 Target 2/3rd of 21k bus fleet to be gas/EV by 2015
# of CNG taxis, light vehicles ('000) 2 7 12 17 23 28 34 39 50
Others (bcm) 1.4 1.3 1.3 1.6 1.7 1.8 1.7 1.9 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Beijing Gas Demand (bcm) 3.1 3.8 3.9 5.2 6.1 6.8 6.9 8.4 9.6 12.0 15.3 17.2 18.6 20.8 22.9 25.1 15%Incremental demand y/y (bcm) 0.8 0.1 1.3 0.9 0.8 0.1 1.5 1.1 2.4 3.3 1.9 1.4 2.2 2.1 2.2
Y/Y growth % 25% 2% 33% 16% 12% 1% 22% 14% 25% 28% 13% 8% 12% 10% 10%
Gas Dmd Targets/Research Institute Ests (bcm) 9.6 11.5 20.0 24.0 30.0
of which winter (Nov-Mar) gas dmd ests (bcm) 4.7 5.3 6.6 7.8 9.9 12.1 16.3 50%+ annual dmd in winter months mid-Nov to mid-Mar
Cumulative coal dmd destruction from gas (mt) 3.5 7.0 12.8 14.8 15.5 17.0 17.0 17.0
Overall coal dmd destruction target 2012-17 (mt) 13.0 Target 3mt cut in 2014; 13mt between 2012-17e
0.0
4.0
8.0
12.0
16.0
20.0
24.0
(bcm) Tianjin Gas Demand
Industrial Powergen Residential NGV Other
NDRCest
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
(bcm) Tianjin Incremental Gas Demand Growth
Tianjin Downstream GasVolume Split
Source: Company data,Macquarie Research, March 2014
CR
Gas/Tianjin
Gas JV
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IndustrialTianjin plans to retrofit 132 coal-fired boilers to gas by end-2015, and
expects gas demand from these boilers to reach 3.58bcm in 2015. Further, Tianjins Gas
Heat Planning Institute expects a steady increase in the use of gas for central heating/
cooling by commercial users to 1.74bcm in 2015. In addition, if we assume GDP-driven
10% pa underlying industrial gas demand growth (similar to that for Beijing), we forecast
gas demand from industrial to increase to 4.7/6.2bcm by 2017/20e, from 2.1bcm in
2013a.
ResidentialAs on end-2013, 48% of Tianjins 14mn population had access to gas.
Assuming the residential penetration rate rises gradually to 80% by 2020e (in line with
Beijings target but with a three-year lag), and assuming 3% pa increase in gas demand
per capita, in line with the trend over the past three years, we model residential gas
demand to rise to 0.9/1.3bcm in 2017/20e, from 0.5bcm in 2013a.
NGVsTianjin plans to have more than 20k NGVs by 2015. We model the number of
LNG trucks/buses in Tianjin to rise to 58k by 2020, implying a commercial vehicle NGV
penetration rate of 20% by 2020 (at the top end of NDRCs target of a 10 -20% nationwide
commercial vehicle penetration rate by 2020 for NGVs), from less than 1% today. In
addition we assume the number of CNG taxis increases to 25k by 2020, from c.3k today,
implying an 80% taxi penetration rate. Put together, we forecast NGV gas demand to riseto 1.4/2.5bcm in 2017/20e, from essentially zero today.
Fig 28 Tianjin gas growth also led by new powergen and industrial conversions
Source: Tianjin Gas Heat Planning Institute, C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
2.3 3.4
3.4
1.40.7 0.2
9.1
4.9
3.1
1.70.5
19.3
0.0
5.0
10.0
15.0
20.0
25.0
2010a 2013a Powergen Industrial NGV Residential 2015e Powergen Industrial NGV Residential 2020e
(bcm) Tianjin Gas Demand Growth Outlook
3GW of newcapacityadded
50 mediumscale boilersconvt to gas
LNG
reaches5% CVpenetration
Resipenetrationincreases t o
58% in 2015,from 48% in2013
5GW of newcapacity
added; gasramps to34% mkt
share
10% pa GDPdriven
industrialdmd growth
LNG reaches20% CV
penetrationby 2020e
Resipenetrationincreases t o
80% by2020e
Provincialtarget
Provincialtarget
TIANJIN 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20
CAGRComments
Industrial (bcm) 0.4 0.5 0.7 0.9 0.9 1.3 1.5 1.7 2.2 2.9 3.6 4.6 5.0 5.5 6.1 6.7 17% Conv of 163 boilers to gas & GDP led organic growth
Cumulative # of boilers converted 25 40 55 81 106 132 163 163 163 163 163
Powergen (bcm) 0.2 0.3 0.4 0.4 0.4 0.5 0.6 0.5 0.7 2.2 4.1 5.5 6.3 6.8 7.9 9.0 45% 35% gas mkt share by 2020, from 3% todayTotal electricity consumption TWh 40 45 51 54 58 68 73 72 74 76 78 80 82 84 86 88 3%
% locally produced 90% 80% 76% 73% 71% 86% 81% 82% 82% 82% 82% 82% 82% 82% 82% 82%
Coal TWh 34 34 37 37 39 56 57 57 58 55 50 47 46 46 44 42
Gas TWh 2 2 2 2 2 2 2 2 2 7 14 18 21 23 26 30
% Gas mkt share 4% 4% 3% 3% 3% 3% 2% 2% 3% 10% 17% 23% 26% 27% 31% 34%
Annualised powergen capacity (GW) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 2.1 3.9 5.3 6.0 6.5 7.5 8.5 Target >5GW gas-fired powergen by end-15e
Residential (bcm) 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.6 0.6 0.7 0.8 0.9 1.0 1.1 1.3 13% 80% resi penetration by 2020, from 49% in 2013Population w access to gas (mn) 4 5 6 6 6 6 6 6 7 8 9 10 10 11 12 13 9%
% popln w access to gas 39% 44% 53% 50% 46% 44% 44% 45% 49% 54% 58% 63% 67% 71% 76% 80% Assuming resi penetration similar to Beijing by 2020
Gas dmd per capita 76 66 58 64 68 72 73 75 78 80 82 85 87 90 93 96 3%
NGVs (bcm) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.7 1.1 1.4 1.8 2.1 2.5 80% 20% LNG penetration by 2020, from essentially zero# of LNG trucks, buses ('000) 0 1 9 17 25 34 42 50 58
# of CNG taxis, light vehicles ('000) 1 3 6 10 14 18 22 26 30
Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tianjin Gas Demand (bcm) 0.9 1.1 1.4 1.7 1.8 2.3 2.6 2.8 3.4 6.1 9.1 11.7 13.3 14.8 16.8 19.3 28%Incremental demand y/y (bcm) 0.2 0.3 0.3 0.1 0.5 0.3 0.2 0.6 2.7 3.0 2.6 1.7 1.5 2.0 2.5
Y/Y growth % 24% 27% 18% 8% 27% 11% 10% 21% 79% 50% 28% 14% 11% 14% 15%
Gas Dmd Targets/Research Institute Ests (bcm) 3.4 12.3 16.8 23.6
of which winter (Nov-Mar) gas dmd ests (bcm) 1.0 1.2 3.2 4.7 6.8
Cumulative coal dmd destruction from gas (mt) 0.0 2.5 5.6 8.1 9.3 10.2 11.9 13.8
Overall coal dmd destruction target 2012-17 (mt) 10.0 Target 10mt cut between 2012-17e
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Hebei
Hebei is the largest consumer of coal in China, and unsurprisingly its air quality problems are
worse than that in Beijing and Tianjin. In 2013, Hebei announced a multi-pronged strategy to
cut PM2.5 emissions by at least 25% and annual coal consumption by 40mt by 2017,
including: decommissioning cement and steel factories (seeEnvironmental restrictions curb
North China Output,6-Jan);retrofitting all coal-fired boilers in Shijiazhuang, Tangshan etc;and bringing on stream new gas and wind power plants. Hebei expects its gas demand to rise
to 15bcm by 2017, from 5.2bcm in 2013. Based on our bottom up work, we model 15.0/
26.1bcm in 2017/20e, implying 26% cagr between 2013-20e. We estimate the switch from
coal to gas alone would cut Hebeis annual coal consumption by 20mt by 2017, or half the
provincial target.
Fig 29 Hebei gas demand to grow 5x to 26bcm by2020e with industrial and powergen accounting for abulk of growth
Fig 30 Hebei incremental gas demand growth drivenby conversion of coal-fired boilers
Source: NDRC, Interfax, C1 Energy, Macquarie Research, March 2014 Source: NDRC, Interfax, C1 Energy, Macquarie Research, March 2014
PowergenShijiazhuang, the capital city of Hebei province, issued its own five-year
plan on gas in Oct-13, calling for the construction of three new gas-fired power plants (of
which two would be constructed by Huadian) with a combined capacity of 2.4GW and an
expected 2015 start-up. Further, we assume an additional 2.5GW of capacity gets
commissioned across Hebei between 2016-20e. Consequently, we forecast gas demand
from powergen to rise to 6.4bcm by 2020e, from 0.5bcm in 2013a, but this would still
imply that gas accounts for only 6% of Hebeis powergen mix by 2020e.
IndustrialOverall Hebei plans to retrofit all 1765 coal-fired boilers in the province to
gas by 2017. By 2013, nearly 700 boilers had been converted, with 329 conversions
coming in 2013 alone. For instance, Shijiazhuang has already converted its ~600 coal-fired boilers to gas by end-2013, and targets all petchem plants to use gas for its local
electricity needs by 2017; Tangshan plans to convert all its coal-fired boilers to gas by
end-2015 and targets the penetration rate for gas among industrial customers to rise to
30%/80% by 2015/20e; and Handan, Xintai, Baoding etc. have similar conversion targets
in place. We conservatively assume another 800 boilers are converted by 2020e; taking
the total conversions to 1500, below the 1765 target by 2017. This then equates to 21%
cagr industrial gas demand growth to 12.6bcm by 2020e.
ResidentialAs of end-2013, only 16% of Hebeis 74mn population had access to gas,
nearly half the nationwide average. We assume the residential penetration rate rises
gradually to 50% by 2020e, and gas demand per capita increases 2% pa (similar to that
in Beijing and Tianjin). Consequently we expect residential gas demand to rise to 2.0/
3.5bcm in 2017/20e, from 0.8bcm in 2013a.
0.0
4.0
8.0
12.0
16.0
20.0
24.0
28.0
(bcm) Hebei Gas Demand
Industrial Powergen Residential NGV Other
NDRCest
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
(bcm) Hebei Incremental Gas Demand Growth
Hebei Downstream GasVolume Split
Source: Company data,Macquarie Research, March 2014
China
Suntien
https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2& -
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NGVsWe havent come across any specific NGV targets for Hebei, apart from noting
that Shijiazhuang plans to add 30/105 LNG/CNG stations by end-2016. We assume 5%
of Hebeis 1.4mn truck fleet converts to LNG by 2020; note that the NDRCs nationwide
target is 10-20% NGV penetration rate for commercial vehicles by 2020. We model NGV
gas demand to grow to 2.1/3.5bcm in 2017/20e, from 0.6bcm in 2013a.
Fig 31 Hebei Gas Demand Growth Outlook
Source: C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
Beijing-Tianjin-Hebei summary demand outlook
Putting things together, we expect overall gas demand in Beijing, Tianjin and Hebei to
grow by an average increase of 7.5bcm pa to 47/70bcm in 2017/20e, implying 21% cagr
between 2013-20e. By 2020, we expect these provinces will account for 18% of overall
Chinese gas demand, from 11% today.
Our bottom-up demand forecasts are lower than the provincial target of 84bcm by 2020e,
due to more conservative assumptions.
2.95.2
2.30.6 0.5
0.6
9.3
7.1
5.3
2.4
2.1
26.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2010a 2013a Industrial Powergen NGV Residential 2015e Industrial Powergen NGV Residential 2020e
(bcm) Hebei Gas Demand Growth Outlook
0.5GW ofnew
capacityadded in
2015
250 smallscale
boilersconvt to
gas
LNGreaches2% CV
penetration
Resipenetrationincreases to25% in 2015,from 16% in
2013
LNG reaches5%CV
penetrationby 2020e
Resipenetrationincreases to
50% by2020eProvincial
target
Provincialtarget500 small
scaleboilersconvt +10% pa
GDP drivengrowth
5GW of newcapacity
added; gas
mkt shareincr to 6%
HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20
CAGRComments
Industrial (bcm) 0.8 1.0 1.1 1.5 1.7 2.1 2.5 2.8 3.2 4.4 5.5 6.6 7.9 9.3 10.9 12.6 22% Conv of ~1000 remaining boilers to gas by 2017eCumulative # of boilers converted 811 961 1061 1161 1261 1361 1461 1561
Powergen (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.5 0.5 0.5 1.1 2.3 2.8 4.3 5.3 6.4 43% 6% gas mkt share by 2020, from 1% todayTotal electricity consumption TWh 150 173 201 210 234 269 298 308 315 323 331 340 348 357 366 375 3%
% locally produced 87% 83% 77% 76% 73% 73% 76% 77% 75% 75% 75% 75% 75% 75% 75% 75%
Coal TWh 130 143 154 157 165 185 212 217 216 220 222 222 224 224 225 226
Wind TWh 0 0 0 2 6 10 15 17 20 22 24 26 28 31 33 35
Gas TWh 0 0 0 1 1 1 1 2 2 2 4 8 9 14 18 21
% Gas mkt share 0% 0% 0% 0% 0% 0% 0% 1% 1% 1% 1% 2% 3% 4% 5% 6%
Annualised powergen capacity (GW) 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.5 0.5 0.5 1.1 2.2 2.7 4.1 5.1 6.1 2.4GW additions in Shijiazhuang from 2015
Residential (bcm) 0.1 0.0 0.0 0.1 0.3 0.4 0.5 0.6 0.8 1.1 1.4 1.7 2.0 2.4 2.9 3.5 24% 50% resi penetration by 2020, from 16% in 2013Population w access to gas (mn) 1 2 3 6 7 8 9 10 12 15 19 23 27 32 36 43 20%
% popln w access to gas 2% 3% 5% 8% 10% 12% 13% 13% 16% 20% 25% 30% 34% 39% 43% 50%
Gas dmd per capita 56 18 11 11 42 49 53 64 66 68 70 72 74 77 79 81 3%
NGVs (bcm) 0.0 0.0 0.0 0.1 0.2 0.2 0.3 0.5 0.6 0.7 1.2 1.7 2.1 2.6 3.1 3.5 28% 5% LNG penetration by 2020, from essentially zero# of LNG trucks, buses ('000) 5 17 28 40 51 63 74 86 Assuming 5% LNG truck penetration in 2020
# of CNG taxis, light vehicles ('000) 5 9 13 16 20 24 28 30
Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Hebei Gas Demand (bcm) 0.9 1.1 1.2 1.7 2.3 2.9 3.5 4.6 5.2 6.8 9.3 12.4 15.0 18.7 22.2 26.1 26%Incremental demand y/y (bcm) 0.2 0.1 0.5 0.6 0.6 0.5 1.1 0.7 1.6 2.4 3.1 2.6 3.7 3.5 3.8
Y/Y growth % 20% 10% 42% 35% 28% 19% 30% 15% 30% 36% 34% 21% 25% 19% 17%
Gas Dmd Targets/Research Institute Ests (bcm) 5.2 15.0 30.0
of which winter (Nov-Mar) gas dmd ests (bcm) 2.1 2.5 7.5 13.0
Cumulative coal dmd destruction from gas (mt) 5.8 7.9 11.4 16.5 20.5 27.4 33.0 38.7
Overall coal dmd destruction target 2012-17 (mt) 40.0 Target 8mt reduction in 2014; 40mt between 2012-17e (incl wind)
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Fig 32 Gas demand from Beijing, Tianjin and Hebei to reach 70bcm+ by 2020, or 18% of overall Chinesedemand
Source: NDRC, C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
Demand seasonality and gas storage
Gas demand in Beijing, Tianjin and Hebei peaks in winter (mid-Nov to mid-Mar) due to higher
demand from residential and commercial users for space heating needs. To get a sense of
the scale of gas demand seasonality in Beijing, Tianjin, Hebei, in fig 33 we show the
estimated monthly average gas demand split between winter and non-winter months, and
highlight that typically demand for gas in winter months is ~2.5x that in summer months.
Further, since residential users receive top priority in terms of gas supply allocation, these
provinces are forced to rationalize supply to industrial customers, due to the under-
utilization/lack of gas storage facilities. For example, in 2013, gas supply to chemical fertilizerproducer Cangzhou Dahua and auto maker Great Wall Motor was curtailed due to the surge
in winter gas demand (see Great Wall Motor Company - Running low on gas).
4.912.0
18.233.7
70.5
5.7
5.74.0
9.8
10.2
16.8
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2005a 2010a 2013a Beijing Tianjin Hebei 2015e Beijing Tianjin Hebei 2020e
bcm Beijing, Tianjin, Hebei Gas Demand Outlook
BEIJING, TIANJIN, HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20
CAGRComments
Total Demand (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 24.8 33.7 41.3 47.0 54.3 62.0 70.5 21%
Incremental demand y/y (bcm) 1.2 0.5 2.0 1.6 1.9 0.9 2.8 2.4 6.7 8.8 7.6 5.7 7.3 7.6 8.6 Avg 7.5bcm pa incremental gas dmd growth
Y/Y growth % 24% 8% 31% 18% 18% 7% 22% 15% 37% 35% 23% 14% 16% 14% 14%
% of overall China gas demand 10% 11% 9% 11% 11% 11% 10% 11% 11% 13% 15% 17% 17% 17% 18% 18%
Gas Dmd Targets/Research Institute Ests (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 25.2 32.3 44.1 55.8 65.1 74.3 83.6 MQe lower due to conservative industry/power assumptions
of which winter (Nov-Mar) gas dmd ests (bcm) 8.4 10.3 24.3 36.2
Cumulative Coal Dmd Destruc tion (m t) 9.3 17.4 29.8 39.4 45.3 54.5 61.9 69.5
% of total Beijing-Tianjin-Hebei coal dmd 2% 5% 8% 11% 13% 16% 19% 22%
Overall coal dmd destruction target 2012-17 (mt) 63.0
Gas supply from existing sources (bcm) 12.0 12.9 15.8 18.2 25.0 31.8 33.1 34.5 35.9 37.3 38.7 11% Mainly vols from Shaanxi-Beijing
Risked incr vols via WEP 3.6 4.5 7.2 9.8 12.5 15.2 17.9 Higher allocation of WEP volumes
Total risked supply to Beij ing-Tianjin-Hebei (bcm) 12.0 12.9 15.8 18.2 28.5 36.2 40.3 44.4 48.4 52.5 56.6 18%
MacQ - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.7 2.6 -1.0 -2.6 -5.9 -9.4 -13.9 Excess implies gas diverted to other provinces
Govt Targets - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.3 3.9 -3.8 -11.4 -16.6 -21.8 -27.0
Gas to play a major role towards achieving coal dmd
destruction targets
https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdf -
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Fig 33 Beijing, Tianjin, Hebei gas demandseasonalityavg monthly gas demand in wintermonths typically ~2.5x than in other months
Fig 34 Gas storage capacity is set to double over thenext two years
Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, PetroChina, Macquarie Research, March 2014
Fig 35 better utilization of newly commissionedstorage facilities should help alleviate the winter gasshortages
Fig 36 and the recently commissioned LNG regasterminals (Tangshan, Tianjin FLNG) provide additionalflexibility to cater to swing demand
Source: NDRC, PetroChina, Macquarie Research, March 2014 Source: WMAC, Macquarie Research, March 2014
To cater to swing demand in Beijing, Tianjin and Hebei, currently there are two gas
storage facilities (Dagang and Huabei) with a combined 5bcm working storage capacityat end- 2013, or 28% of annual gas demand. For perspective, storage typically accounts
for 10-20% of demand in most developed gas markets. However in 2013, only 2.3bcm of
gas was supplied to these provinces from storage (mainly from Dagang), or 13% of
annual demand. In turn the main reason for the apparent underutilization of storage was
that Huabeis Suqiao expansion project was only commissioned towards the end of the
gas injection season. Further, over the next two years we expect another ~5bcm of
storage capacity to be added in Huabei (Suqiao phase-2, Daxingli phase 1-2) taking total
gas storage capacity to 10bcm by 2015e. Assuming an average 70% utilization rate
for these gas storage facilities, we estimate volumes supplied via storage to
Beijing, Tianjin and Hebei would account for ~20% of annual demand.
In addition we note that the Tangshan and Tianjin LNG regasterminals that started in
Nov-13 should also help cater to swing demand in these provinces.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2012 2013
(bcm) Beijing, Tianjin, Hebei avg monthly gas demand
Winter (mid-Nov to mid-Mar) Other Months
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
2
4
6
8
10
12
2012 2013 2014e 2015e
(bcm) Gas storage working capacity
Dagang Huabei Utilization (RHS)
Apparent fall in 2013, dueto commissioning of
Huabei twds end of thegas injection season
0%
5%
10%
15%
20%
25%
0
1
2
3
4
5
6
7
8
2012 2013 2014e 2015e
(bcm) Gas storage working capacity
Gas s upplied from s torage % of BTH g as dmd (R HS)
Gas supplied from storageshould increase to 20% ofannual dmd in 2014/15; in
line with the trend indeveloped gas markets.. .
0%
5%
10%
15%
20%
25%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2012 2013 2014e 2015e
(bcm) LNG regas volumes
Tangshan Tianjin % of BTH gas dmd
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Further, in Jan-14, the NEA published a circular calling for more active management and
increased supervision over local gas supply. In Feb-14, the NEA said that it would
monitor fair/open access to the oil and gas pipeline network and storage facilities
in order to ensure stable supply to the market . To this end the NEA has also set up
six regional supervisory bureaus in North China. In our view open access (if implemented
properly) would be a major positive, since it would provide further gas supply visibility.
Implications for coal demand
Based on the forecast switch from coal-fired boilers to gas, and simultaneous decline in
market share for coal-fired powergen, we forecast coal demand from Beijing, Tianjin and
Hebei to cumulatively decline by 70mt by 2020e (target 63mt by 2017), equivalent to 22% of
coal demand from these provinces. Our base case assumptions imply that Beijing and Tianjin
would largely meet annual coal consumption targets by 2017 solely from increasing the share
of gas in the energy mix, whilst gas would only partly help Hebei wean off its obsession with
coal.
Fig 37 Annual coal demand destruction of 70mt, or 2% of total China demand
Source: CEIC, NDRC, Macquarie Research, March 2014
We estimate that coal consumption in Beijing, Tianjin and Hebei were around 21.5mnt,
50mnt, and 250mnt respectively in 2013. Cutting 63mnt coal consumption by the end of 2017
implies 20% decline from current levels. However, given the fact that the Beijing-Tianjin-Hebei
region only accounted for 8.3% of Chinas total coal consumption in 2013, the impact on coal
demand is not large from a national perspective, and is in line with our forecast that Chinas
coal demand growth will slow down to 2-3% in the next few years.
Oversupply in 2014/15e and mid-term price fluctuation at cost curve: despite slower
demand growth, oversupply may remain in the mid-term due to high capacity growth in
Shanxi. According to Shanxi Coal Mine Safety Supervision, 524 mines are under construction
in the province. Including these, Shanxi has a capacity of 1.2bnt (vs. 910mnt output in 2012).
80 of the 524 mines may start to contribute by 2013 y/e (70-80mnt capacity), with the majority
being coking coal. Under the current weak prices/strict safety rules, there may be delays in
construction; yet these extra capacities should put a ceiling on coal prices, especially coking
coal prices. Mid-term price is likely to fluctuate around the cost curve at Rmb 550-600/t.
Cost curve to drop further in mid-term:Industry consultants CCTD and Fenwei believe
there is room for cost cuts, especially admin costs. Production costs may still be cut by
RMB30-50/t in 2014-15F. Railway bottlenecks are likely to be solved by end-2015, when
major new railways are due to be completed. Resources tax may have limited impact on
thermal coal but the impact may be big for coking coal, likely around 3-5% of mine-mouth
price. However, the government will probably clear up other fees and levies by the end of this
year, so the incremental burden might be limited to ~Rmb 5/t for thermal coal per CCTD and
China Coal. Again, the impact to coking coal may be much bigger.
0%
5%
10%
15%
20%
25%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2013 2014 2015 2016 2017 2018 2019 2020
(mt) Cumulative coal demand destruction
Beijing Tianjin Hebei Provincial Target (absolute cut) % of BTH coal dmd (RHS)
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Cautious on thermal coal and bearish on coking coal: Taking into account the oversupply
in 2014-15E with large capacity growth in Shanxi restructured mines, Indonesia output growth
and only 2-3% pa demand growth, we maintain our cautious view on the thermal coal sector
and are bearish on coking coal. We see thermal coal fluctuating at the cost curve at
RMB580/t in 2014 (relatively stable y-y) and RMB550/t in 2015, while we cut the China HCC
price by 10-15% for 14/15. We keep our Neutral rating for Shenhua (1088 HK, HK$19.30, TP:
HK$27.00) and China Coal (1898 HK, HK$3.78, TP: HK$4.20), and maintain Yanzhou (1171HK, HK$5.00, TP: HK$5.00), Fushan (639 HK, HK$2.19, TP: HK$2.10) and Hidili (1393 HK,
HK$0.89, TP: HK$0.60) as Underperform, given our bearish view on HCC, with large
earnings declines forecast in 14-15 (6-53%).
Fig 38 Thermal Coal Cost Curvemarginal costs have come down to RMB550-600/t post government initiativeto lower fees & levies on coal and also lower charges
Source: SXCoal, CCTD, Macquarie Research, March 2014
0
100
200
300
400
500
600
700
Shenhua
Chin a Coal
Yanzhou
Hebei small
mines trucked
Other ShanxiSOE
Shanxi smallmine rail
Inner Mongolia
rail
Inner Mongoliatrucked
Shanxi smallmine trucked
VAT
Transportationcost
Tax, fees andothers
Cash cost
RMB/t
mnt
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Gas supply rising fast but faces midstreamconstraints
At present the Kunlun Energy/Beijing Enterprises-operated Shaanjing or Shaanxi-
Beijing gas pipelines cater to more than 90% of gas demandin Beijing, Tianjin andHebei. Even with Keqi coal-to-gas, Tangshan and Tianjin LNG regas terminals, these
pipelines would remain the major conduit of supply (70%+) to these provinces until the
end of this decade.
The major sources of gas supply to the Shaanjing pipelines are local production from the
Ordos basin, and gas volumes via the West-East pipelines(in turn supplied by
Turkmen importsand the Tarimbasin).
Based only on existing and confirmed new capacity we expect total available gas supply
to these provinces to grow an impressive 17% pa to 53bcm by 2020e.
Our analysis indicates that the gas supply to these provinces could easily increase by at
least another 25bcm (i.e. taking total supply to ~80bcm), if new midstream capacity gets
commissioned.
In 2013, 92% of Beijing-Tianjin-Hebeis combined 18.2bcm gas demand was supplied via the
Kunlun Energy/Beijing Enterprises-operated Shaanjing or Shaanxi-Beijing gas pipelines
(three lines with a current combined 35bcm capacity). The main source of gas supply to the
Shaanjing pipelines is the PetroChina-operated Changqing gas fields in the Ordos basin, with
the remaining volumes sourced from the West-East pipelines (in turn supplied by Turkmen
imports and the Tarim basin). In addition to gas volumes via the Shaanjing pipelines, these
provinces are also served by three small local gas fields (Dagang, Jidong, and Huabei all
operated by PetroChina), Datangs Keqi coal-to-gas (CTG) plant (started in Dec-13),
PetroChinas Tangshan LNG regas terminal (started in Nov-13), and CNOOCs Tianjin
floating LNG regas terminal (started in Dec-13). In fig 39 we summarize the gas supply
outlook for the key fields, LNG regas terminals, CTG plants, supplying Beijing, Tianjin, Hebei.
Fig 39 Beijing, Tianjin and HebeiGas supply from existing sources andprojects confirmed under constructionShaanjing pipeline volumes dominate
Source: WMAC, Macquarie Research, March 2014
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2010 2013 2015 2020
(bcm) Gas Supply (existing + under construction) Tianjin LNG (Sinopec)
Tianjin FLNG(CNOOC)
Tangshan LNG
Local f ields (Dagang,Jidong, Huabei)
Keqi coal-to-gas
Turkmen Imports(Shaanjing/WEP)
Tarim(Shaanjing/WEP)
Ordos (via Shaanjing)
Demand Target
Via ShaanjingPipelines
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The Shaanjing pipelines and Jing bian
Jingbian in Shaanxi province is a major gas transmission hub in China. Gas from the Tarim
basin (Xinjiang, NW China), the Ordos basin (Shaanxi, NW China), and pipe imports from
Turkmenistan via the West-East pipeline (WEP) all converge in Jingbian before reaching the
designated end-markets. Jingbian is also the starting point for the major Shaanjing or
Shaanxi-Beijing pipelines that supply gas to Beijing, Tianjin and Hebei (BTH). Apart from theBTH market, the Shaanjing pipelines also supply gas to Jiangsu and Shandong, via a spur-
line from Anping in Hebei. While the Ordos basin will likely continue to supply the bulk of
Shaanjings gasvolumes, we note that increasingly gas from the Tarim basin and pipe
imports via the West-East pipeline (Shanghai, Guangdong primary end-markets) would also
flow via the Shaanjing pipeline.
Fig 40 Gas supply options for Beijing-Tianjin-Hebei
Source: Wood Mackenzie, Macquarie Research, March 2014. Note: Shaanjing pipelines also known as Shaanxi-Beijing pipelines
Existing sources of gas supply
1) PetroChina Ordos basin (Changqing gas fields) via Shaanjing pipelines
Nearly two-thirds of overall Shaanjing pipeline volumes flow to Beijing, Tianjin and
Hebei; with the remainder flowing to Jiangsu and Shandong. In turn, Ordos basin gas
is responsible currently responsible for nearly two-thirds of gas supply to the
Shaanjing pipeline, however this should decline to ~50% by 2020 as the share of
Tarim and Turkmen imports rises.
Turkmen gas imports and
indigenous production from
Tarim basin flows via the West-East pipelines to Jingbian
Jingbian (Shaanxi) is a major gas hub
from where gas could be sent to
Beijing-Tianjin-Hebei via the
Shaanxi-Beijing pipeline; Shanghai
via WEP1; Guangdong via WEP2
Shaanjing pipelines
Ordos Basin
Ordos basin gas production
flows to Jingbian
Tangshan, Tianjin,
Dalian LNG
Ordos as % of 2014e supply
Ordos66%
Source: WMAC, Macquarie Research, March 2014
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Fig 41 A closer look at Shaanjing pipelines
Source: Wood Mackenzie, Macquarie Research, March 2014
Over the past three years,the Changqing gas fieldsin the Ordos basin (Shaanxi
province, North-West China) have witnessed a 1.6x rise in gas production and have
been responsible for a bulk of overall Chinese gas production growth. Gas production
from Changqing is dominated by the Sulige fieldChinas largest onshore gas field
(20bcm in 2013)although there are many other gas discoveries in the basin
awaiting development, e.g. South Sulige (PetroChina/Total).
We estimate that, at present, nearly two-thirds of gas from the Ordos basin flows via
the Shaanjing pipelines (fig 43), with the remaining gas catering to local demand in
Shaanxi and neighbouring Ningxia. Gas from Changqing could also serve Shanghai
and Guangdong via the West-East 1 and 2 pipelines, respectively.
In 2013, gas production from Changqing grew 20% y/y to reach 34bcm. We expect
PetroChina to focus the bulk of its upstream gas capex towards further developing its
flagship Changqing gas fields (770bcm remaining 2P reserves)and forecast 9% pa
production growth over the next two years, to 40.7bcm by 2015e (PetroChina
targets 41.5bcm by 2015).
Overall, Shaanxi province expects local gas production (Changqing and others) to
reach 45bcm in 2015, of which 15bcm is planned for local use and the remaining
30bcm for sale to other provinces, mainly via Shaanjing.
Fig 42 Shaanjing volumes by end-markets: a majorityof volumes flows to Beijing, Tianjin, Hebei
Fig 43 Shaanjing volumes by source: Ordos basinand gas via the West-East pipelines matter most
Source: WMAC, NDRC, Macquarie Research, March 2014 Source: WMAC, NDRC, Macquarie Research, March 2014
Gas from West-
EastPipelines(Tarim, Turkmen
Imports)
Ordos Basin Gas
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm) Shaanjing Pipeline Vols by End-Market
Beijing, Tianjin, H ebei Jiangsu Shandong
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm) Shaanjing Pipeline Vols by Gas Source
Ordos Basin WEP (Imports, Tarim basin)Tangshan LNG regas Unrisked additional WEP volsCa ac it
Line4 start-up
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Fig 44 Nearly two-thirds of gas volumes from Ordossold via Shaanjing pipelines
Fig 45 Ordos basin gas production to rise 8% pa overthe next two years driven by start-up of new fields
Source: WMAC, NDRC, Macquarie Research, March 2014 Source: WMAC, NDRC, Macquarie Research, March 2014
2) PetroChina-operated gas fields in Tianjin, Hebei
Dagangand Huabeioilfields in Tianjin and Hebei provinces respectively have been
producing oil for nearly 40 years, with associated gas production from the field
catering to local demand. The gas produced from the Dagang field caters to demand
in Cangzhou (via the Banqiao-Cangzhou pipelines), while that from Huabei flows to
Beijing via two 70km pipelines. We forecast gas production from these fields to
remain broadly flat at 1.2bcmuntil 2015, and thereafter decline at c.5% pa. At
present Huabei has 3bcm of gas storage capacity (7.3bcm by 2015e), and a 180km
pipeline links the Shaanjing pipelines to gas storage in Dagang (2.2bcm today rising
to 2.7bcm by 2015e).
Jidonggas field in Tianjin has seen 15% pa production growth over the past three
years to 0.7bcmin 2013. We expect production to decline at c.2% pa from current
levels.
3) Keqi coal-to-gas from Inner Mongolia via the new Keqi-Beijing pipelines
Datang Powers Keqi coal to gas (CTG) project was the first large-scale project
(US$4.2bn cost) to be approved by the NDRC, with commercial operations starting in
Dec-13. The Keqi project is split into three phases with 1.2bcm/yr to be supplied in
phase-1 (planned capacity 4bcm)via a newly constructed 490km pipeline running
from Keqi to Beijing. At the time of commissioning the Keqi plant, Datang also signed
a 30-year gas off-take agreement with PetroChina. Under this agreement,
PetroChina will sell the gas, likely via Beijing Enterprises, to end-customers in
Beijing, and in return Datang will get a fixed tariff of Rmb2.75/cu.m till 2016, and a
market price thereafter.
4) LNGTangshan (PetroChina), Tianjin FLNG (CNOOC)
Tangshan/Caofeidian LNG (3.5mtpa/4.8bcm, start-up Nov-2013, PetroChina
51%, Beijing Enterprises 49%). The Tangshan LNG regas terminal in Hebei
province started up in Nov-13, with first volumes flowing from Qatar. PetroChina
operates the terminal, but as was the case with the Rudong and Dalian LNG
terminals, we expect the Tangshan terminal to be injected to Kunlun Energy; albeit
this would likely be done at a fair market valuation rather than 1x book , as was the
case in the past. Associated with the regas terminal are a 9bcm/129km trunk line and
a 3.5bcm/28km spur line to feed Hebei and Tianjin. There are plans to increase
terminal capacity to 6.5mtpa (8.8bcm), and eventually to 10mtpa (13.5bcm), but
PetroChina has made no firm investment decision on these expansion projects asyet.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2010a 2013a 2015e 2020e
(bcm) Ordos (Changqing) gas by end-market
Vols via Shaanjing to BTH, Other Local use in Shaanxi
0.0
10.0
20.0
30.0
40.0
50.0
60.0
bcm Ordos (Changqing) gas production outlook
Sulige South Sulige J ingbian/Yulin/Mizhi C hangbei Others
Local fields (% of 2014 supply)
Local
Fields
5%
Source: WMAC , Macquarie Research, March 2014
Keqi CTG (% of 2014 supply)
Keqi
3%
Source: WMAC, Macquarie Research, March 2014
LNG regas (% of 2014 supply)
LNG
regas
13%
Source: WMAC, Macquarie Research, March 2014
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Tianjin FLNG - CNOOC (2.2mtpa/3.0bcm, start-up Dec-13, CNOOC 100%).
CNOOC commissioned Chinas first floating LNG receiving and storage facility
(FSRU) in Dec-13. CNOOC plans to expand capacity at the terminal to over 6mtpa
(8.1bcm), but this would likely come in 2018+. The terminal would supply gas to an
integrated petchems and industrial park (Lingang Economic Zone) and residential
customers in Tianjin.
Fig 46 LNG regas terminals supplying Beijing-Tianjin-Hebei
Source: Wood Mackenzie, Macquarie Research, March 2014
Potential incremental sources of gas supply
1) West-East pipelines (Tarim basin, Turkmen imports) feeding Shaanjing pipelines
The West-East pipelines (WEP) already supply c.8bcm of gas via the Shaanjing
pipelines, with 6bcm going to Jiangsu and 2bcm to Shandong. WEP is the backbone of
Chinas gas transmission network, and at present there are two lines operational: WEP-1
(15bcm capacity, started 2004) transports gas from Lunnan in Xinjiang (NW China) to
Shanghaion the east coast 4000km away, also serving Anhui, Henan, Jiangsu, and
Zhejiang en route; WEP-2 (30bcm capacity, started 2009) transports gas from Horgos
(Xinjiang) on Chinas border with Kazakhstan to Guangdong(South China). A third line,
WEP-3 (35bcm from Xinjiang to Fujian), is under construction with first volumes expected
in 2015. While Beijing, Tianjin and Hebei are not the main designated end-markets for
WEP, it is important to note that these provinces still receive gas from WEP via the
connection in Jingbian (starting point of the Shaanjing pipelines). The main sources of
gas for WEP are: a) local production in the Tarim and Junggar basins, and
b) pipe imports from Turkmenistan (fig 47).
WEP (% of 2014 supply)
WEP - Tarim,
Turkmen
Imports
13%
Source: WMAC, Macquarie Research, March 2014
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The Tarim basinis already the largest contributor of domestic gas, and will supply a
major portion of the West-East pipelines throughput in the coming years. PetroChina
is the main operator in Tarim and has three large fields, including, Kela-2, Dabei-1,
and Keshen. We forecast Tarim gas production grow 12% pa over the next two years
to 25.8bcm in 2015, mainly driven by the ramp-up in Dabei-1 and Keshen gas fields.
Gas from the Tarim basin is consumed locally in Xinjiang as well as sent to its end-
markets on Chinas eastcoast via the WEP.
Gas imports from Turkmenistan.China imported 25bcm of gas from
Turkmenistan in 2013, equal to 15% of overall Chinese gas supply. We expect
imports from Turkmenistan to increase by 5bcm pa to reach 65bcm by 2020 as the
Galkynysh gas field ramps up. As we noted for gas production from Tarim, pipe
imports from Turkmenistan could also flow to Beijing, Tianjin and Hebei via the
Shaanjing pipelines.
Fig 47 West-East pipelines (WEP) supplied by gasfrom Tarim basin and Turkmen imports
Fig 48 Gas via WEP flows to multiple end-markets,including potentially Beijing, Tianjin, Hebei
Source: WMAC, CEIC, Macquarie Research, March 2014 Source: WMAC, CEIC, Macquarie Research, March