Why is the demand for natural gas so high? How can we prevent another gas shortage?

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This winter’s gas shortage is more severe than usual. According to PetroChina Co., Ltd., which is responsible for 70% of the country’s natural gas supply, the shortage of natural gas this winter will be as high as 4.8 billion cubic meters. This figure is several times that of the previous gas shortage, and this is only the shortfall within the CNPC system. Tight natural gas supplies are accompanied by price fluctuations. At the end of last year, the price of liquefied natural gas (LNG) soared, reaching a peak of 12,000 yuan per ton. Recently, the **National Development and Reform Commission fined a number of companies that raised prices without authorization, and the price of LNG has begun to decline. As LNG prices return to normal levels, the most difficult period of this gas shortage seems to have passed. Today, natural gas has become an important commodity for people’s daily lives; a disruption in gas supply, just like power outages or water shortages, can severely affect people’s normal living conditions. This is the second time since 2009 that there has been a widespread gas shortage; will such situations occur again in the future? To answer this question, it is necessary to conduct a comprehensive analysis of the causes of the gas shortage. 　What is the main cause of the gas shortage? 　　The abnormal growth in domestic natural gas demand has disrupted the supply-demand balance. Liu Yijun, a professor at China University of Petroleum, believes that this abnormal increase in demand has broken the supply-demand equilibrium and is the direct cause of the natural gas shortage. **Data from the National Development and Reform Commission show that in 2017, China’s natural gas consumption exceeded 230 billion cubic meters, with an increase of over 33 billion cubic meters, representing a year-on-year growth rate of 17%. This increase is more than twice the average annual increase over the previous 5 years, setting a new record for the growth in natural gas consumption in our country. Why is the growth rate of natural gas consumption so rapid? First is the transition from coal to gas. 2017 was the target year for the **Air Pollution Control Action Plan**, and various regions stepped up efforts to replace coal with gas. For example, Hebei Province saw an increase of around 2.6 million urban and rural users who rely on gas for heating in winter, resulting in a rise in demand for gas for heating purposes of about 2 billion cubic meters. “Such a growth rate far exceeds the normal rate of development. ”Liu Yuwen, who is in charge of CNPC’s natural gas sales in the northern regions, said, “The north is a key area that CNPC focuses on protecting. In 2017, CNPC allocated 3/4 of its increased natural gas supply to the companies in the north, with 2/3 of that going to Hebei Province. Yet it was still not enough.” ” Zhang Fan, deputy general manager of China National Petroleum and Natural Gas Sales Corporation, said that the planned conversions from coal to gas can still be managed, but what is most unexpected are those sudden, unplanned increases. For example, the number of users in Shandong who switched from coal to gas was 500,000 higher than planned, and this huge increase posed a problem: where would the gas come from? Apart from the surge in the shift from coal to gas, industrial users’ demand for natural gas is also rising rapidly; for instance, demand for gas as an industrial fuel and for power generation both increased significantly in 2017. With demand increasing so rapidly, is it possible for the supply side to keep up quickly? Qu Guangxue, a spokesperson for CNPC, explained that demand is growing too rapidly, and the supply side really finds it difficult to keep up. China’s energy situation is characterized by a shortage of oil and gas. The output of China’s four major gas fields – Tarim, Changqing, Qinghai, and Sichuan-Chongqing – is increasing every year. Ten years ago, the output from these fields was only 50 billion cubic meters; by 2017 it had reached nearly 100 billion cubic meters, with an annual growth rate of over 7%. However, such a growth rate is still not sufficient to keep up with a 17% increase in demand. To ease the situation, imports need to be increased. Over the years, CNPC has successively built cross-border natural gas pipelines in Central Asia and between China and Myanmar, while the China-Russia natural gas pipeline is also under active construction. At the same time, several large-scale LNG receiving stations have been built in areas such as Dalian, Tangshan, and Jiangsu. Natural gas imports rose from less than 5 billion cubic meters in 2010 to over 50 billion cubic meters today, with an average annual growth rate of nearly 50%. This growth rate is the highest among the world’s major natural gas importers. Why is the demand for natural gas so high? 　　As an inevitable outcome of the adjustment in energy structure, demand will continue to grow. China still relies primarily on coal as its energy source, and there is significant environmental pressure; therefore, the demand for natural gas, a clean primary energy source, is on the rise. In other words, this strong demand is an inevitable result of the adjustment in energy structure and a natural trend in economic and social development, and it will continue. Looking at the history of the past nearly century, developed countries have also gone through a process in which oil and natural gas gradually replaced coal. In regions such as Europe and the United States, coal accounted for around 70% of primary energy sources, while natural gas made up only a few percent. By 2017, natural gas accounted for between 31% and 33% of primary energy use in Europe and the United States; even Africa had a share of 26%. The Asia-Pacific region, which had the lowest share, still reached 12.7%, while China’s share was only 7%. According to the 13th Five-Year Plan for Energy Development, by 2020 the share of natural gas in energy consumption will only increase to 10%. Industry experts believe that, based on international experience, there is enormous potential for growth in China’s natural gas demand, and the growth we are seeing now is just the beginning. According to the predictions of the Economic and Technical Research Institute of China National Petroleum Corporation, China’s demand for natural gas will continue to grow rapidly in 2018; the consumption of natural gas is expected to reach 258.7 billion cubic meters, representing a 10% increase compared to 2017. Domestic natural gas production is expected to reach 160.6 billion cubic meters this year, an increase of 8.8%. In other words, the growth rate of production is likely to still fall short of the growth rate of demand. This year, natural gas imports are expected to reach 105 billion cubic meters, representing a growth rate of 13.4%. Where lies the solution to avoiding gas shortages? 　　The key is to arrange the transition from coal to gas in a steady and orderly manner on the demand side, while building sufficient peak-shaving capacity on the supply side is crucial. In the long term, it is necessary to rationalize prices. On one hand, demand will continue to grow unchecked, and on the other hand, the supply side remains under strain – so what is the solution to avoid gas shortages? Liu Yijun believes that efforts must be made simultaneously on both the demand side and the supply side. On the demand side, it is crucial to arrange the transition from coal to gas in a steady and orderly manner. It is difficult to achieve complete control of air pollution in just one go. Europe and the United States have been switching from coal to gas over a period of 30 to 50 years; it’s impossible for us to complete this process in just one or two years. The transition from coal to gas must be carried out step by step, without rushing it. One must be prepared for a protracted struggle; only with an adequate supply of gas can the transition from coal to gas be carried out at an appropriate pace, thereby avoiding the awkward situation where coal-fired boilers are shut down but there is not enough gas available. Secondly, although the gas shortage is mainly caused by the demand side, it also exposes numerous problems on the supply side. Industry experts point out that it is necessary to fully consider the uncertainties associated with importing gas for supply, to prepare contingency plans in advance and to leave room for flexibility; moreover, building sufficient peak-shaving capacity is of utmost importance. At present, the seasonal shortage of natural gas in our country is very evident; for example, in Beijing, the peak-to-valley ratio reaches 10:1, which means that the demand for gas during winter peaks is 10 times that during the low-demand periods. Furthermore, even within winter, there is a significant difference between cold winters and normal winters; according to data provided by CNPC, the daily gas consumption differs by about 50 million cubic meters between the two. Zhang Fan said that to address such a large gap between peak and off-peak demand, it is necessary to improve China’s natural gas capacity for peak shaving. At present, the working gas volume of the national gas storage facilities tasked with peak-shaving purposes accounts for only 3.4% of natural gas consumption, which is far below the 10%–15% level seen in developed countries, and thus it is difficult to meet the demands for peak-shaving during winter. Based on international experience, once a country’s dependence on imported natural gas reaches or exceeds 30%, the working capacity of underground gas storage facilities must be more than 12% of total consumption, and **the overall gas storage capacity must reach a certain level. The overall gas storage capacity refers to the need to build large-scale urban gas storage tanks and gas storage facilities similar to LNG receiving stations, in addition to underground gas storage facilities. At present in our country, the infrastructure for such gas storage facilities is extremely weak; aside from large cities like Beijing which have a certain capacity for urban gas storage, other second- and third-tier cities have almost none. Liu Yijun pointed out that accelerating the development of gas storage capacity is not only the responsibility of enterprises but also that of local authorities. At the corporate level, in addition to the upstream enterprises and storage and transportation companies being responsible, the downstream city gas companies also bear responsibility. Many hands make light work; if everyone stores a little, capabilities will improve. Once again, completely resolving the gas shortage issue ultimately relies on market mechanisms; the prerequisite for breaking monopolies and introducing competition is to streamline the price mechanism. Since 2017, **through a series of measures and adopting a strategy of controlling the middle stage while liberalizing the two ends, efforts have been made to advance the marketization of natural gas prices. **The NDRC’s approach is clear: pipeline transportation prices are **regulated**, while prices at the two ends are gradually liberalized. Including domestic and imported gas, the sales price will ultimately be determined by the market, **with no further regulation. Since September 2017, in accordance with the requirements of the National Development and Reform Commission, CNPC has utilized the Shanghai Petroleum and Natural Gas Trading Market to organize two rounds of open competitive bidding for natural gas. Hundreds of millions of cubic meters of natural gas were sold out quickly, and the prices were determined through market mechanisms, with transactions being facilitated by market forces. Of course, experts also point out that the key to the issue lies in finding a balance between marketization and ensuring people’s livelihoods – it is necessary to allow natural gas prices to be determined by the market while at the same time ensuring that hundreds of millions of users can afford to use it and do so effectively; this is the fundamental goal of our reforms.