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China Following U.S. Lead on Natural Gas for All the Right Reasons

natural gas now - Tom Shepstone ReportsTom Shepstone
Shepstone Management Company, Inc.

 

China is on a natural gas tear. Following the U.S. lead, the country is developing its shale while. It’s also importing LNG. The reasons are environmental.

If any further proof is needed that natural gas development and use is the ticket to environmental improvement, it is provided by what China is doing. The Energy Information Administration (EIA) reports, in fact, that China leads projected growth in global natural gas consumption. It is, of course, merely following the U.S. lead, which tells us a lot about the incredible miracle our shale revolution has been. Imitation being the sincerest form of flattery, China’s natural gas strategy is the ultimate compliment of what fracking has wrought for America.

China

Asian Vision LNG tanker docks at Cheniere Energy Sabine Pass export facility

Here are the key elements from the EIA story by Victoria Zaretskaya (emphasis added):

Global natural gas consumption is expected to grow from 340 billion cubic feet per day (Bcf/d) in 2015 to 485 Bcf/d by 2040, primarily in countries in Asia and in the Middle East, based on projections in EIA’s latest International Energy Outlook 2017 (IEO2017). China accounts for more than a quarter of all global natural gas consumption growth between 2015 and 2040.

The projected growth in natural gas consumption in China is driven by environmental policies, relative cost competiveness of natural gas in the industrial and transportation sectors, and relatively high economic growth.

China’s environmental policies are designed to reduce air pollution and carbon emissions by promoting natural gas in the country’s energy mix—replacing some coal and oil use with natural gas. In China’s 13th Five-Year Plan and the latest Energy Production and Consumption Revolution Strategy (2016-30), the Chinese government set targets to increase the share of natural gas in the primary energy mix from 5.9% in 2015 to 10% by 2020 and 15% by 2030.

EIA projects China’s natural gas consumption to grow from 19 Bcf/d in 2015 to 57 Bcf/d in 2040, surpassing all other countries except the United States… the world’s largest natural gas consumer.

China

Source: U.S. Energy Information Administration, International Energy Outlook 2017, China Development and Reform Commission, China Customs

China’s domestic natural gas production reached 13 Bcf/d in 2016, accounting for 64% of China’s total natural gas supply. The IEO2017 Reference Case projects China’s domestic natural gas production will reach 39 Bcf/d by 2040, driven primarily by the development of shale gas resources. EIA estimates that China holds the largest reserves of technically recoverable shale gas in the world, and China was among the first countries outside of North America to develop its shale resources.

The IEO2017 Reference case projects China’s shale gas production will grow from 0.7 Bcf/d in 2016 to 10 Bcf/d by 2030 and 19 Bcf/d by 2040, when shale gas is projected to account for a third of China’s total natural gas supply. China’s natural gas production from other sources, such as coalbed methane, tight formations, and more traditional natural gas reservoirs, is projected to increase more modestly, from 12 Bcf/d from these sources in 2016 to 20 Bcf/d by 2040.

Pipeline natural gas and liquefied natural gas (LNG) imports make up the rest of China’s supply, collectively accounting for 36% of the 2016 total and projected to account for 32% of the 2040 total. China’s LNG imports tripled between 2010 and 2016, reaching 3.5 Bcf/d (17% of total supply) in 2016. By 2018, China is projected to surpass South Korea as the world’s second-largest LNG importer. By 2040, China is expected to import about 11 Bcf/d, as much as the world’s largest LNG importer, Japan.

China’s pipeline imports increased to 3.7 Bcf/d in 2016, accounting for 19% of the total natural gas supply. Although the IEO2017 Reference Case expects China’s imports of natural gas by pipeline to rise in absolute terms to 7.3 Bcf/d in 2040, their share of China’s total supply is projected to fall to 12% by that year. China began importing natural gas by pipeline from Turkmenistan in 2010 and has since begun importing natural gas from Uzbekistan, Kazakhstan, and Myanmar. EIA expects natural gas imports from Russia on the new 3.7 Bcf/d Power of Siberia pipeline to begin in late 2019.

The fact China is aggressively pursuing the development of its own natural gas from shale and simultaneously pursuing LNG sources is a reflection of its desire to not be too dependent on Russia, of course. It is wisely diversifying its supply. The U.S. is the beneficiary, as Bloomberg reported earlier this month:

U.S. LNG export terminal developers will now be able to target Chinese buyers directly, potentially helping the projects to secure financing, Massimo Di-Odoardo, an analyst at Wood Mackenzie, said in a note to clients Friday. The deal could also support direct Chinese investment in the terminals, he said.

NextDecade LLC, which is developing an LNG project near Brownsville, Texas, welcomes the agreement, Rene van Vliet, chief operating officer, said by phone Friday. China is slated to become a prime LNG importer as it shifts from coal generation to cleaner energy. At the same time, the contracts with LNG exporters that China signed in the early 2000s are about to expire and the country will be looking to replace those with the “most competitive LNG in the market,” Vliet said.

“There was a meeting of minds at the highest government levels that LNG could play a very important role,” he said. “We see ourselves as the leader of that second wave” of U.S. LNG export projects…

American supplies accounted for almost 7 percent of China’s total imports in March, customs data shows

And, China is not only investing in developing its own shale gas reserves, LNG import capabilities and export capabilities here, but is also investing in developing our natural gas to supply that LNG as well as petrochemicals and power. Area Development reports the following:

China Energy Investment Corporation Limited plans to invest $83.7 billion in shale gas development and chemical manufacturing projects in Appalachia areas of West Virginia.
West Virginia Secretary of Commerce H. Wood Thrasher and China Energy President Ling Wen signed a Memorandum of Understanding, marking the first step in a series of commitments China Energy plans to make in the Mountain State.
Planning for the projects is underway and will proceed in phases over the course of 20 years, the West Virginia Department of Commerce said. The projects will focus on power generation, chemical manufacturing, and underground storage of natural gas liquids and derivatives. The plans clearly demonstrate a total value chain approach, integrated from raw materials through the production of useful chemical intermediates locally…
According to state officials, China Energy selected West Virginia for this project because of the State’s position as a key energy-producing state and home to one of the world’s largest shale gas reserves, underpinned by a longstanding relationship between the two entities.
Both Justice and Thrasher say that the state has offered nothing in exchange for the investment or been asked to provide tax breaks, changes in policy or any other incentives at this point.

That last part is especially revealing. It means the U.S. and West Virginia did some good negotiating and also how just important following the U.S. lead on natural gas is to the future of China. We have pioneered an economic and environmental revolution without subsidizing it; by merely allowing an industry to develop, innovate and prosper. The benefits of natural gas are taking hold in a part of the world that’s been its biggest polluter and most in need of the cure.

China

Beijing air pollution

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