[NGW Magazine] China's five-pronged gas plans
China’s coal-to-gas-economy-switching project continues in 2018 and there are five separate, economy-dependent factors that will determine the success or otherwise of the gigantic scheme to improve air quality.
Overall the country bounced back from 2016, seeing greater economic growth last year, and this will continue to fuel China's coal-to-gas economy in 2018. Five contributing factors will be closely watched and measured to determine its health.
The first is expanding China's sources of supply including imports; the second is the liberalisation of power utilities; third is the establishment of the carbon trading market; the fourth is an increase in green financing options; and the fifth is more state-owned trading to fill in the peak-season gaps when required.
China’s economic growth forecast for 2018 was further raised to 7% from 6.9%, resulting from stronger external demand and the strength in consumption and manufacturing investment, according to the State Council quoting investment firm China International Capital Corp. And even after the US threatened a trade war, in early March the National People’s Congress said 6.5% was achievable this year.
External and domestic demand for products is expected to add to inflationary pressures and the consumer price index is to rise 2.6% in 2018, up from 2.5% last year. The resilience of the actual infrastructure investment activity is also expected to continue, amid other positive signs. The World Bank however maintained its forecast for China’s 2018 and 2019 gross domestic product growth unchanged at 6.4% and 6.3% respectively thanks to continued credit reduction and adjusted monetary policy.
More sources of gas
As China consumes more energy compared with other countries, it remains on the lookout for more gas sources that it sees as clean. The Chinese government further plans to increase the proportion of natural gas in energy demand to more than 10% from the current 5.9% by 2020 and to 15% by 2030.
In November last year, China found a new possible supply: liquefied natural gas from Alaska. This will take investments of up to $43bn, with first gas planned for 2025. About 20mn mt (27bn m³)/year are expected to be loaded and shipped from Alaska’s Nikiski liquefaction facility, benefiting from a secure and quick journey across the Pacific. Tokyo Gas however might be taking a slice of that gas, depending on how talks progress between it and the project partners: Alaska Gasline Development Corp and the state of Alaska itself, which owns AGDC; as well as three Chinese entities: CIC Capital, Sinopec and Bank of China.
Compared with China’s gas demand of 210bn m³ in 2016, such additions are significant. China’s total gas production was 138.3 bn m³, up 1.4% from 2015. China also produced more shale gas in 2016. Its annual shale gas yield increased 76.3% to 7.9bn m³ in 2016, a record high according to the ministry of land resources. A total of 8.79bn renminbi were invested in shale gas exploration that year. A target has been identified for annual shale gas output to 30bn m³ in 2020 and further to 80-100bn m³ in 2030.
Liberalising utilities
Besides adding clean gas supplies, demand and how energy is used is going through a domestic transformation. The 2017 merger between China Guodian Corp and Shenhua Group represented a major focus on shifting Chinese utility companies away from coal dependence to form a vertical power-generating conglomerate, now known as China Energy Investment Corp, with installed capacity of 225 GW.
And more mergers involving the country largest power generators are expected – the China Huaneng Group and the State Power Investment Corporation (SPIC) are said to be in talks, for example. Such market manoeuvres are going to pave the way for China’s national carbon emissions trading market which is expected to be fully functional by 2020. This shifts priority towards ensuring the full efficiency of carbon credits, and shifts the power and electricity sector’s focus from coal prices to managing carbon emissions instead.
China’s carbon emissions market is also expected to deal with the overall increase of carbon emissions since energy and gas demand rose. From BP’s recent published data analysis in its 2018 Energy Outlook, it shows that as carbon emissions from coal are falling, carbon emissions from gas are on the rise. Since 2011, the state planning agency National Reform Development Council and the Emissions Trading Scheme pilot cities have been working on setting an emissions cap; an allowance allocation methodology; a monitoring, reporting and verification system; an emissions registry for allowances; and eventually there will be an emissions trading platform.
The trading mechanism is intended to enable users to plan and manage their carbon emissions when required, reducing carbon and ensuring the efficient use of resources. The insight of a decade’s worth of emission trading experience is expected to formalise the transformation from a coal to a gas economy that China wants.
Green financing grows
Green lending will speed up the development of China’s gas economy, encouraged by growing links between green bonds and green finance. According to the Climate Bonds Initiative in January this year, China has maintained its level of 2017 green bond issuance at $36.4bn, or almost a quarter of the world’s total of $155.5bn. Of China’s share, $22.5bn are fully compliant with international green bond standards.
Notably however, the analysis, which was compiled by the Climate Bonds Intiative and the China Central Depository & Clearing Company, has excluded direct coal-to-gas and hydro projects. Green bonds is thus seen as a general diversification and the ‘greening’ of a portfolio focused on carbon-intensive assets. This also highlights the question of how measurably ‘green’ is any economy today.
More state trading
In the meantime, as China’s economy adjusts, trading will continue to fill the peak-season gaps. The winter of 2017 caused gas demand to spike in eastern and northern China and several state-owned enterprises stepped in. In January 2018, the China National Offshore Oil Company delivered a total of 5,226 metric tons of liquefied natural gas from Dapeng LNG, Yuedong LNG, Zhuhai LNG terminals to the North of China where 500,000 residents could benefit. CNOOC-Petrochina gas trade added over 3mn m³ of gas supply at Guangdong.
Guangdong Dapeng LNG Terminal (Credit: Guangdong Dapeng LNG Company Ltd.)
For parts of the country where coal remains a priority, state-owned asset management company Chengtong Holdings stepped in via its subsidiary Chengtong Development which traded 10,000 mt of Gaolan Port thermal coal for renminbi 6.75mn in December.
While it is not known where the coal is being used, it is important to note that state-owned enterprises involved in China’s major reform plans are deeply involved in the market dynamics of completing the coal-to-gas economy for China’s future. Chengtong Holdings is a state-owned enterprise established in China with a registered capital of some renminbi 12.8bn as at end-2017.
Staff