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China proposes measures to avoid future gas shortages

06 Mar 2018 18:26 GMT
China proposes measures to avoid future gas shortages

London, 6 March (Argus) — China is aiming to expand pipeline and storage infrastructure as well as sign more supply deals to avoid the gas shortages it experienced this winter, top economic planning agency NDRC chairman He Lifeng said today.

This winter's gas shortages indicated structural problems in the market and a lack of distribution and storage infrastructure in particular, He said.

The NDRC is working with the country's principal gas suppliers — PetroChina, Sinopec and CNOOC — to address these issues, He said.

It is the government's role to ensure sufficient distribution infrastructure, including the development of pipelines and storage assets to better connect the northern and southern parts of the country, he said.

Limits in south-north pipeline capacity resulted in a substantial number of LNG truck loadings from southern terminals for delivery to northern provinces this winter, with some taking round trips of several thousand kilometres.

The country is also looking to prioritise the development of storage infrastructure, He said. Shanghai served as a good example of what other cities and provinces should achieve, with working gas capacity equivalent to 15 days' demand, He said. At a minimum, other cities should have at least 10 days of supply available. China's average gas demand was 652mn m³/d last year.

China has limited storage capacity relative to demand and is planning to expand this slightly with the start-up of the Wen23 storage facility in Henan province in May. This will add 3.27bn m³ of working gas capacity to the 7bn m³ which was in place during winter 2016-2017.

The lack of storage capacity is the basis of market views that China will drive an increase in global seasonal LNG demand swings over the coming years.

The country is targeting a peak shaving mechanism for 200mn m³ of supply, half of which would be provided by the country's main gas suppliers and the other half by local governments. This is to avoid future supply cuts to industrial users to ensure flows to residential consumers. Future cuts in industrial supply will only be made in "extreme conditions", He said.

Boosting supply

China plans to sign more short and long-term supply agreements, particularly with neighbouring countries in central Asia, Russia and other exporting countries in the Asia-Pacific region, He said.

Aggregate demand in recent months has risen well above the country's production and contracted supply, supporting the country's need to buy on the spot market.

The flexibility to increase imports has come from the LNG market with the country's receipts breaking consecutive records in November-January.

CNPC recently became the first Chinese company to agree to US supply with two deals for a combined 1.2mn t/yr from US exporter Cheniere. This was after China had, without long-term US offtake, already been the third largest destination for US cargoes last year, after Mexico and South Korea.

But increasing LNG supply will depend on the speed at which Chinese state-owned and private-sector firms construct LNG import capacity in the coming years. Sinopec's recently installed Tianjin terminal received its first cargo last month and the country plans to increase import capacity to 75.6mn t/yr by the end of the year from 62.9mn t/yr at the end of 2017.

Similarly, plans to increase supply from central Asia may be constrained without new capacity being built, with imports only 13bn m³/yr below aggregate import capacity of 55bn m³/yr on the three existing West-to-East Pipelines (WEP). Plans for a fourth 30bn m³/yr pipeline was scrapped in 2017.

China is also seeking to boost its own production, in particular through further exploration and development of tight and shale gas resources, He said. Auctions for shale gas licences last year attracted bids well above expectations. China plans to raise shale gas output to 30bn m³/yr by 2020. But shale gas production missed the country's 10bn m³ target last year and in any event this would be a small share of the country's aggregate 2017 gas production of 148bn m³.

Assuming LNG import infrastructure and downstream pipelines are built in time, Chinese supply flexibility may continue to come from LNG over the coming years.

Coal-to-gas drive

Demand outstripping China's ability to deliver to the market had been driven last year by the government-led drive to switch residential heating from coal to gas.

There was substantial additional work required to complete this project and Northern China's Hebei province is putting its ambitious coal-to-gas conversion plans on hold for the next 2-3 years following acute gas shortages.

But the country is also planning to switch to gas-fired output in the power sector from plants burning coal. The country is targeting the shutdown of coal-fired units of less than 300MW generation capacity, He said.

Power generation consumption should climb by around 16pc/yr, to account for 21pc of gas use by 2020, the NRDC said in November.