Analysis: China struggles to hit 2020 gas demand target

China's gas demand growth is likely to slow this year, raising doubts over whether the country will meet its consumption and production targets for 2020.

Government think-tank the Development Research Centre of the State Council (DRC) expects Chinese gas consumption to rise by around 30bn m³ or 10pc to 310bn m³ in 2019. This would be a significant slowdown from 17.5pc growth in 2018, when demand hit 280bn m³.

The government in 2014 set a gas consumption target of 360bn m³ by 2020, as part of plans to increase the share of the fuel in the country's energy mix to 10pc by that year from 6pc in 2014. A 10pc increase in gas consumption this year would then require demand to increase by around 16pc next year to hit Beijing's target.

But insufficient gas supplies to meet demand and slower economic growth, together with faster-than-expected declines in the cost of renewable fuels that have weakened the economics of gas use, are posing challenges for any increase in consumption growth.

China's domestic upstream development slowed during 2014-16 because of declining oil prices. Production growth eased to 7.7pc in 2014 from 9.4pc a year earlier, and then weakened further to 3.4pc and 1.7pc in the following two years.

Domestic gas production growth then rebounded to 8.2pc in 2017 and 8.3pc in 2018, taking output to 160.3bn m³. Beijing last year set a production target of 200bn m³ by 2020, which would require 12pc/yr growth.

But output is not rising quickly enough to meet this target. Production in the first seven months of this year rose by just 9.7pc to 100.3bn m³, an annualised rate of 172bn m³.

Challenges of shale

China has 50 trillion m³ of recoverable gas reserves, mainly in the Sichuan, Erdos and Tarim basins. Shale gas reserves of 22 trillion m³, much of which is more than 4,500m deep, account for 44pc of the total, data from the natural resources ministry show.

The reserve/production ratio remains high, because low oil prices and a lack of technological expertise threaten to hinder development.

China's biggest producer state-controlled PetroChina expects the country's shale gas production to hit 35bn m³ by 2025, which would account for around 17pc of projected total gas production in that year. This would require output to more than triple from 10.9bn m³ in 2018, when shale made up just 6.8pc of total Chinese production.

Fellow state-controlled producer Sinopec has forecast that China's total domestic gas output may rise by 32pc to 208bn m³ by 2025 from 157.5bn m³ in 2018.

China's push for a switch from coal to gas use in rural households since 2017 has been a major driver of gas consumption, but also led to severe shortages and a surge in prices of the fuel during the 2017 winter.

And outages at Central Asian producers that supply piped gas to China have strained supplies over the past two years, limiting consumption and highlighting the need for diversification of supply.

The government has eased its coal-to-gas drive this year, by relaxing its ban on coal use to ensure it has stable, sufficient and affordable energy supplies.

Import reliance

Sinopec and PetroChina expect imports to play a comparatively larger role in meeting gas demand than domestic production, given limits on upstream expansions.

Sinopec expects China's gas imports to surge by 92pc to 172mn t (238bn m³) by 2025 from 90mn t or 124bn m³ in 2018, far outpacing the 32pc growth in domestic production over the same period.

China's gas imports rose by 10.8pc to 54.74mn t or 75.5bn m³ in the first seven months of this year, faster than the 9.7pc increase in domestic production to the equivalent of 72.68mn t.

Limits to growth

Beijing is planning to set new targets late next year for its economic and energy development in 2025. The country's economic slowdown, and strong competition from renewables, may put downward pressure on gas consumption in the period.

China's economic growth slowed to a 30-year low of 6.2pc in the second quarter, down from a full-year 2018 increase of 6.6pc. And worsening trade relations with the US have forced economists to lower China's growth rate to below 6pc in 2020.

The impact of slowing growth has been felt in the industrial sector, where gas is used as a feedstock in many industries. China's industrial output grew by just 4.8pc in July, the slowest monthly increase in 17 years. Industrial output increased by 6pc in both July 2018 and the first half of this year. Industrial users account for around 34pc of China's total gas consumption, according to PetroChina.

Wind and solar have taken the lead in new energy installations in China for the last two years, taking total installed capacity for wind and solar turbines to 330GW by July this year — around 18pc of China's total power capacity. Installed capacity for gas accounts for 89GW, or around 5pc of total power capacity.