focus : china steps up use of gas

Faced with a growing economy, rising urban energy use and a mounting bill for oil imports, China is trying to switch as much of its energy consumption as possi-

ble to domestically-produced sources. The principal choices are between oil, coal and gas.

Oil production looks to be close to its long-term peak. Coal has some potential to increase output–as do nuclear and hydro-electric power–but environ-mental considerations increasingly favour natural gas, especially in the country’s rapidly growing cities. Many of these are blighted by smog caused by the

burning of coal in power stations. In May this year, the government approved in-

creases in gas prices to consumers of up to 35%. It was hoped that this measure would encourage explo-ration and production of gas, thereby allowing a large proportion of any increase in consumption to be pro-vided from domestic production. Given the likely

increase in gas consumption, this appears to be a for-lorn hope. Imports of gas look set to rise sharply as well.

Changing the energy balance

China’s energy has traditionally been supplied princi-pally by coal. Despite attempts at substitution, the energy balance remains dominated by coal (see Table A). Coal accounts for nearly 71% of primary energy consumption. Oil comes in a poor second, at just un-der 19%, whilst gas is fourth at only 4%.

Totals rounded * Excludes Hong Kong Source: BP Statistical Review of World Energy, 2010

The consumption of coal has risen by 134% over the last decade. Production has risen by a roughly similar amount. The rise in consumption also matches pretty closely the increase in primary energy consumption as

a whole (see Table B). Moreover, coal’s share of en-ergy consumption has scarcely changed, being 70.2% in 1999, compared with 70.6% in 2009.

Whilst it is true that the increase in the consump-tion of natural gas is much higher in percentage terms over the same period, it occurred from a much lower

base. Gas accounted for just 2.1% of Chinese primary energy demand in 1999. Similar considerations apply to hydro-electricity and nuclear power.

Because the consumption of gas, hydro-electricity and nuclear power has been relatively low, they have had little substitutionary effect on coal. Their main effect appears to have been on oil, where consumption has risen at only 70% of the rate for primary energy as a whole, whilst every other form has risen at a faster rate (see Table B).

Totals rounded * Excludes Hong Kong Source: BP Statistical Review of World Energy, 2010

In resource terms, coal is by far China’s principal fuel. Its proven reserves at the beginning of 2010, at 114.5 bn t, were the third-largest in the world, after

the US and Russia. China also has a healthy re-serves:production ratio for coal of 38:1, compared with only 11:1 for oil and 29:1 for natural gas. There are, however, a number of problems associated with the production and consumption of coal.

Nearly half of China’s coal reserves are of gener-ally poor-quality sub-bituminous coal and lignite,

which are often high in sulphur and other contami-nants that help to form the thick smogs that affect many Chinese cities. China’s coal industry also has a poor safety record. Underground explosions and other hazards have led to heavy loss of life on a number of occasions.

The air pollution, though, caused by burning large

quantities of coal in power stations and industrial premises, appears to have caused the authorities the most trouble. It was initially advanced as a major ob-jection, for example, to the holding of the Olympic Games in Peking. The result was that the government began to build a series of new gas-fired power sta-tions. The first one–Jingfeng–was opened in 2006, with a capacity of 780 MW. It was followed by two

others–Taiyanggong and Zhenchangzhuang–with a combined capacity of 1,200 MW. Other cities have also built gas-fired stations. As in the Chinese capital, the idea has been to substitute gas for coal, particu-larly in electric power generation and in district heat-

Table A

China: Primary Energy Consumption, 2009

Fuel Consumption*

(mn toe) (%)

Coal 1,537.4 70.6

Oil 404.6 18.6

Hydro-electricity 139.3 6.4

Gas 79.8 3.7

Nuclear power 15.9 0.7

Total 2,177.0 100.0

Table B China: Increase in Primary Energy, 1999-2009

Fuel Increase * (%)

Coal 134.3 Oil 92.7 Hydro-electricity 202.2 Gas 238.1 Nuclear power 367.6 Total 132.9

FOCUS

China steps up use of gas

© Blackwell Publishing Ltd, 2010

ing schemes. The switch to gas does not necessarily mean a

contraction in the coal industry. China’s abundant coal reserves are increasingly being seen as a source of natural gas. Much of the interest centres on con-

verting coal to gas, but there are also plans to extract methane directly from underground coal-measures (see below).

Dash for gas

The government’s plans to increase the consumption of natural gas are–to say the least–ambitious. De-mand is officially forecast to rise by 222% over the next decade: from this year’s estimated level of 9 bn cfd to 29 bn cfd in 2020. An even more spec-tacular gain is planned for Peking. Here, consump-tion is set to treble from 600 mn cfd to almost

1.8 bn cfd within the next five years. Some 6,000 MW of new gas-fired capacity is to be added to the city’s generating capacity whilst 2,000 MW of coal-fired generation is retired. The result of this is likely to be a 25% reduction in the capital’s use of coal: from 25 mn t annually to 20 mn t.

Much of the increase in natural gas use across China will be accounted for by electricity generation

or co-generation to produce hot water for district heating in addition to electricity. Peking alone plans around five new of these combined heat and power plants. Many Chinese cities are also installing gas distribution networks to supply gas to households for heating, cooling and hot water. There is also a rela-tively small but rapidly growing consumption of natu-

ral gas as a transport fuel for taxis, omnibuses, motor cars and other vehicles, in the form of compressed natural gas.

The government’s National Development and Re-form Commission (NDRC) has set a target to increase natural gas’s share in the energy mix from its present level of 3.7% to 8.0% in 2015 and 10.0% in 2020 (see

Table A). Peking has set a target of 12.0% for as early as 2012.

* As at year-end ** The Oil & Gas Journal gives a figure of 107.0 trillion cf † Based on 2009’s production Figures exclude Hong Kong Totals rounded Source: BP Statistical Review of World Energy, 2010

Finding the gas

China produced 8.2 bn cfd of gas in 2009 and con-sumed 8.6 bn cfd, leaving it to import 0.4 bn cfd (see

Table C). Output has grown rapidly in recent years. Between 2004 and 2009, it more than doubled from 4.0 bn cfd. Further growth is planned and the aim is to achieve a total of 11.6 bn cfd in 2020 (see Ta-ble D).

Figures exclude Hong Kong Totals rounded Source: (2004-9) BP Statistical Review of World Energy,

2010 (2010 Actual) NDRC (Other 2010-11) NEA (2020) NDRC

The government’s National Energy Administration (NEA) has forecast a total of 11.6 bn cfd as early as 2011, but production figures for the first half of 2010 suggest the NEA is erring on the side of optimism. Indeed, the NEA’s forecast for 2010 looks like being undershot by 1 bn cfd or more (see Table D).

China’s gas production has traditionally been cen-tred on its south-western province of Sichuan, but there are several promising areas elsewhere, notably the north-west of the country and the continental shelf. Sichuan is a mature gas-producing area, as is another important source of China’s gas: the oilfields of the north-east, which include the country’s largest, Daqing, and from where most of China’s associated

gas is produced. Any increase in production will have to come

from newer fields. Many of these, however, are in marginal areas or contain deposits of unconventional gas. These new sources of gas include: The conventional gas reserves of the remote

Tarim Basin;

Offshore gas; Sour gas deposits; Shale gas; Tight gas deposits;

Table C China: Gas Profile, 2009

Proven Reserves * 86.7 trillion cf ** Reserves Remaining 28.8 years † (bn cfd) Production 8.2 Consumption 8.6 Net Imports 0.4

Table D China: Gas Production, 2004-20

Year Production (bn cfd)

2004 4.0 2005 4.8 2006 5.7 2007 6.7 2008 7.8 2009 8.2 2010 9.0 (Actual, first half) 8.9 (Original Planned Total) 10.2 (NEA Forecast) 2011 11.6 (NEA Forecast) 2020 11.6 (NDRC Forecast)


4 OIL AND ENERGY TRENDS, 15 OCTOBER 2010 FOCUS

Coal-bed methane; and The gasification of coal. The conventional gas reserves of the Tarim Basin are officially estimated at 35 trillion cf. They lie in the remote north-western Zinjiang-Uighur Autonomous

Region. It is the country’s remotest gas-producing area, but output has risen steadily in recent years as it has become connected to the cities of the eastern sea-board by new pipelines. The Tarim Basin produced 1.8 bn cfd in 2009. Five years previously, output was only 270 mn cfd.

Another relatively new gas-producing area is the

Ordos Basin, which stretches across several provinces in northern China. The main field here is Changqing, which also produced 1.8 bn cfd last year. The state oil and gas company, PetroChina says that Changqing has reserves of 106 trillion cf, but it is not at all clear how much of the gas can be recovered. The field is characterized by difficult conditions and low pres-sures.

Gas is becoming increasingly available from the continental shelf. Most attention is concentrated at present on the shallow-water fields offshore. This is the sector with the most participation by foreign com-panies, but the fields here show signs of becoming progressively smaller as the older fields are worked out. More gas is believed to exist further out in

deeper waters, some of which may contain gas hy-drates, but there are several offshore boundary dis-putes to be resolved with neighbouring countries.

In one instance, however, China appears to have pre-empted any discussion about its offshore bound-ary by moving equipment into a part of the East China Sea which is disputed with Japan. Japanese

sources reported in September that ‘production equip-ment’ had been taken to the Shirakaba gasfield. The two countries agreed in 2008 to develop the field jointly. Some Japanese officials believe that China is proposing to develop it unilaterally. A number of other gasfields are disputed between the two coun-tries, including the Asunaro, Kashi and Kusunoki fields.

Unconventional gas

China’s gas reserves include large volumes of uncon-ventional gas that is costly either to extract or proc-ess. Included in this category are several fields con-

taining sour gas, amongst which is the Chuandongbei gasfield in Sichuan. The country’s largest gas pro-ducer, state-owned PetroChina, has sought the help of Chevron to exploit the field, where the gas is reported to have sulphur concentrations of up to 15%. Chuan-dongbei’s reserves are estimated at 5 trillion cf and there are said to be other large untapped fields in Si-

chuan, though these may also contain sour gas or have other problems such as a high carbon dioxide content.

Some other undeveloped fields in Sichuan are in formations known as ‘tight gas’, where the gas is

trapped in reservoirs and does not flow easily into the wells. Again, PetroChina is seeking help from for-eign firms to exploit its difficult fields, and has re-cently signed a 30-year agreement with Shell cover-ing the Jinqiu field. There are other tight gas forma-tions in the Ordos Basin, where foreign technical as-sistance has also been sought.

Shale gas is another category of unconventional gas that China expects to exploit in the near future. China is reputed to have large reserves of oil- and gas-bearing shales but lacks the expertise and experience to develop them, which will almost certainly provide another opportunity for foreign businesses to become involved in the upstream gas sector.

Gas from coal

China’s huge reserves of coal (see above) have poten-tially a huge part to play in the country’s gas industry. Most of the effort so far has been focused on the ex-traction of gas from underground coal seams. Pro-

duction of coal-bed methane (CBM) is now running at 720 mn cfd and looks set to rise much further. The government has introduced a series of policies and tax incentives to encourage the formation of foreign joint ventures. In July 2010, PetroChina announced that it had signed a ‘cooperation accord’ with BP on CBM in part of the Turpan-Hami Basin in the west of

China. Another state company, Sinopec, is exploring for CBM in one of China’s most important coal min-ing areas, Shanxi province.

Chinese reserves of CBM are estimated at 1,300 trillion cf, making them the third-largest in the world; but the extraction of gas from coal has been slow to develop. There are a number of factors that

make the extraction of CBM difficult in China, in-cluding low underground pressures. There have also been disagreements between the gas industry and the much more powerful coal industry over the priorities between coal extraction and gas production. There is also little in the way of an infrastructure to collect and distribute CBM across China. A new pipeline net-work will be needed though, as a short term measure,

some CBM schemes are considering converting the gas they produce into LNG then distributing the LNG by road-tanker.

There has been considerable interest in recent months in the production of synthetic gas from the gasification of coal. Little is produced at present on a commercial scale in China but there are proposals for


OIL AND ENERGY TRENDS, 15 OCTOBER 2010 5 FOCUS

Iran claimed to have thwarted attempts by the US to cut off its imports of gasoline in protest against Iran’s nuclear programme by exporting a gasoline cargo to Iraq. The Iranians have greatly increased their pro-duction of gasoline by producing some of it in petro-

chemical plants, which have been able to provide up to 140,000 bpd, according to a government source. Before this, Iran was importing approximately 130,000 bpd. There have been complaints that the new strategy has led to a shortage of some petro-chemicals. Japan and South Korea meanwhile im-posed further sanctions on Iran covering investment

in energy projects. The US was reported to have asked Japan to go further, by withdrawing from the development of Iran’s Azadegan oilfield.

Iraqi exports via Ceyhan were interrupted for four days by what was described as an ‘electrical fault’. The agreement to export via Turkey has been ex-tended for a further 15 years following a new accord between Baghdad and Ankara. Baghdad also an-

nounced proposals for two more oil export pipelines–along with a gas pipeline–from Kirkuk to Banias in Syria. The oil pipelines will have a combined capac-ity of 2.75 mn bpd. The capacity of the Basrah Oil Terminal is also to rise by 50% to 3 mn bpd. The Iraqi Oil Ministry has told the Kurdistan Regional Government that it will not be allowed to supply gas

for the Nabucco Pipeline, which is designed to pipe gas from Turkey to Austria.

Three French oil workers were kidnapped in Nige-

6 OIL AND ENERGY TRENDS, 15 OCTOBER 2010 FOCUS


THE MONTH IN BRIEF

Iran defies sanctions, Iraq plans pipelines, and BP’s shares rise

This section summarizes downstream developments of the previous month. Exploration & Production are covered in ‘Upstream Review’.

at least 15 gasification projects with a planned com-bined output of 2.4 bn cfd by 2020. The plants would be sited in the main coal-producing areas, such as

Shanxi and Inner Mongolia. Coal gasification is energy-intensive and generally

requires the coal feedstock to be provided cheaply in order to make the process economic. It is usually more efficient to extract the methane directly from the coal seams as CBM than to mine the coal and process it into synthetic gas. There are also concerns from coal consumers that the widespread use of coal to

make gas will divert coal from its normal markets and so drive up domestic coal prices.

Despite such objections and the more general diffi-culties of extracting unconventional gas, such forms of gas appear destined to play an increasing role in China’s energy mix. On present evidence, China’s conventional gas sector is simply unable to meet the

ambitious targets for gas production between now and 2020. Of the 29 bn cfd of gas consumption that is planned for 2020, conventional gas looks like being able to provide only about 11-12 bn cfd (see Table D). Unconventional gas looks to have the potential to pro-duce a roughly similar volume, though it is unlikely to reach this total by 2020. A more realistic date would

be 2030: all of which leaves China in the position of having to import increasing volumes of natural gas.

Increasing imports

China already imports gas. Last year, the total was

0.4 bn cfd: equivalent to 5% of its gas consumption. By 2020, this proportion could have risen above 40%

if Chinese consumption increases as planned. In vol-ume terms, this would mean imports somewhere in the region of 12 bn cfd.

China has already begun the search for foreign gas supplies. It began importing LNG in 2006 when the country’s first regasification terminal was commis-sioned at Dapeng, in Canton. By about 2015, import capacity could have risen to 4 bn cfd, based on current proposals for new regasification terminals.

It may be difficult for China to secure volumes much in excess of this by 2020, leaving it to import up

to 8 bn cfd by pipeline if it is to be consuming 29 bn cfd by that date. China opened its first foreign pipeline link in December 2009 with the commission-ing of a line to Turkmenistan. First half imports to-talled 330 mn cfd but are set to reach 1.4 bn cfd when the line is operating at full capacity. The gas transmis-sion network inside China is also being extended to

allow gas imported from Central Asia to be delivered to cities in eastern and southern China.

There are plans for further pipeline links: to Burma and to Russia. The line to Burma is already under construction and will supply south-western China with 400 mn cfd of gas from Burma’s offshore Shwe gas-field. Negotiations are also under way with Russia for

the supply of 6.8 bn cfd of gas from Siberia and the Russian Far East from 2015. As yet, there is no for-mal agreement on volumes and prices, but China will need to come to terms with Russia’s Gazprom if it is to secure the 12 bn cfd or so of gas imports required to plug the likely gap between domestic production and planned consumption of 29 bn cfd in 2020.

focus : china steps up use of gas

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