A roundup of the top ten hot topics regarding natural gas in China in 2015

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This post was last edited by 654262293 on 2016-2-12 at 17:30. A roundup of the top 10 major events in China’s natural gas sector in 2015. Author/Source: Date: 2016-02-04. Views: 19. In 2015, some significant changes took place in China’s natural gas market ecosystem; the development of this market slowed down. Steps were taken toward marketization in the upstream sector, reforms to the pipeline network were imminent, the Shanghai Natural Gas Trading Center began operating, and industries other than those related to oil and gas showed increased interest in importing LNG at lower prices. For the first time, China reduced the price of natural gas. In the overall natural gas market, positive and negative factors are in competition with one another. This article selects 10 major events that have influenced the natural gas industry for review. I. The increase in natural gas consumption fell below 10 billion, hitting a new low since 2004. Review of the situation: In 2015, as China’s economy remained in a \"new normal,\" there was structural adjustment in the industrial sector, leading to overcapacity in traditional manufacturing industries and a decline in the operating rates of some factories. At the same time, international crude oil prices continued to drop, while adjustments to China’s natural gas supply prices were slow, resulting in insufficient momentum for growth in natural gas consumption in the country. In April, natural gas consumption in China experienced negative growth for the first time, with natural gas consumption declining in half of the provinces. For example, in the western provinces of Xinjiang, Qinghai, and Ningxia, natural gas consumption dropped to varying degrees due to the impact of the chemical industry. In Jiangsu Province, a representative province in the southeast coastal area, power generation companies were less inclined to use natural gas because of rising prices, resulting in a 35% decline in demand for natural gas for power generation. Affected by the issues in the power generation sector, overall natural gas consumption in the province decreased by 15% on a year-on-year basis. In 2015, China’s absolute natural gas consumption was 184.5 billion cubic meters, with a year-on-year increase of less than 10 billion cubic meters – only 8.4 billion cubic meters – representing a growth rate of 4.8%. Comment: From 2004 to 2013, China’s natural gas consumption maintained a rapid growth rate of over 10%, with an average increase of 13.8 billion cubic meters over those 9 years, resulting in an average growth rate of 17.0%. In 2014, influenced by China’s new normal in economic development, low international oil prices, and changes in the price ratio between natural gas and alternative fuels, natural gas consumption increased by 12 billion cubic meters on a year-on-year basis, representing a growth rate of 7.3%. This growth rate was roughly on par with the GDP growth rate, indicating a significant slowdown. In 2015, the environment for China’s natural gas market continued to deteriorate. International oil prices continue to decline. China’s macroeconomy remains sluggish, with GDP barely managing to stay above the 7% mark. The slowdown in natural gas consumption in China has become even more evident; in April, consumption actually registered negative growth for the first time. Throughout 2015, China’s natural gas consumption increased by only 8.4 billion cubic meters, representing a growth rate of 4.8%, which is less than 5 percentage points and represents the lowest level since 2004. It was also the first time since 2004 that the growth in China’s natural gas consumption fell short of the GDP growth rate. II. First reduction in natural gas prices, and it exceeded expectations. Event overview: On November 18, 2015, the **National Development and Reform Commission issued a notice stating that, in line with the spirit of the \"Several Opinions of the Central Committee and the State Council on Promoting Price Mechanism Reforms\" (Document No. Zhongfa 28), and with the approval of the State Council, it was decided to reduce the gate price of natural gas for non-residential users starting from November 20, 2015, thereby further increasing the degree of marketization in natural gas pricing. The notice stipulates that the maximum gate price for natural gas consumed by non-residents will be reduced by 700 yuan per thousand cubic meters. Additionally, the current management mechanism based on a maximum gate price will be replaced with one based on a benchmark gate price. The revised gate price shall serve as this benchmark. Both suppliers and consumers may negotiate and determine the actual gate price within a range where it can be increased by up to 20% or decreased without any limit. During the implementation of the plan, station fares will not be increased temporarily; an increase will be allowed starting from November 20, 2016. Comment: On April 1, 2015, China introduced new policies to rationalize the pricing of gas for non-residential users, piloting the liberalization of gas prices for those who receive direct supply. Although the Notice stipulates that the maximum price at the terminal station for incremental gas should be reduced by 440 yuan per thousand cubic meters, against the backdrop of continuously falling international oil prices, the economic viability of natural gas remains under threat from alternative fuels such as fuel oil and liquefied petroleum gas, due to the lag in its correlation with oil prices. As a result, the economic attractiveness of natural gas is challenged, and consumption of natural gas in China is suppressed. The high natural gas prices in our country have led to weak demand from industrial users, who are particularly sensitive to gas prices; over the long term, such high prices will be detrimental to the development of downstream industries reliant on natural gas in our country. This price adjustment by the **National Development and Reform Commission represents the first real reduction in the prices of natural gas at distribution stations for non-residential users in China, with the reduction amounting to 0.7 yuan per cubic meter. This adjustment exceeds the market expectations of around 0.4 yuan to 0.5 yuan per cubic meter. This adjustment is aimed at stimulating consumption in China’s natural gas market, serving as a boost for this sluggish sector. It will significantly improve the current situation of weak demand for natural gas in the country. The price reduction will help address the unsatisfactory conditions in the downstream sectors of this industry, play an important role in reducing the burden on industries that rely on natural gas, and promote economic growth, thereby laying a solid foundation for China’s natural gas industry during the 13th Five-Year Plan period. III. For the first time, oil and gas blocks in Xinjiang were put up for public bidding; this marks the first step toward market-oriented development in the upstream sector. Event recap: On July 7, 2015, the Ministry of Land and Resources issued the “Announcement on the Bidding and Transfer of Oil and Gas Exploration Blocks in Xinjiang”. With approval from the State Council, it was decided to carry out a pilot program for reforming oil and gas exploration and exploitation in the Xinjiang Uygur Autonomous Region. As a pilot project, Xinjiang has launched public bidding for 6 blocks for the first time, located in: the Buerjin area of the Buerjin Basin, the Yumin area of the Tacheng Basin, the Gongliu area of the Ili Basin, the northern Keping area of the Tarim Basin, the Shule area of the Kashgar Basin, and the southeast part of Lop Nur in the Dunhuang Basin. The total area is 15,000 square kilometers, and the validity period of the exploration license is 3 years and 3 months. In accordance with the bidding requirements, domestic companies that are registered in China, have a domestic entity as their ultimate absolute controlling shareholder or ultimate actual controller, and possess net assets of over 1 billion RMB can submit bids; both state-owned and private enterprises are eligible to participate. Foreign companies are excluded from the bidding process. On October 27, the Ministry of Land and Resources announced the results of the project bidding process. During this period, a bidding process was launched for the Dunhuang area, while the Yumin region in the Tacheng Basin saw no bids submitted due to fewer than 3 companies applying. For the remaining four blocks, the candidates for winning the bids include various companies such as Beijing Energy Investment (Group) Co., Ltd. and Shandong Baomo Biochemical Co., Ltd. Among them, Beijing Energy is willing to invest the most, committing a total investment of 6 billion yuan; this company could become the first in Xinjiang to carry out oil and gas exploration and development activities. Comment: This is the first public bidding for oil and gas exploration blocks, with Xinjiang being chosen as a pilot area for reforms in the upstream oil and gas sector. The aim is to increase investment in oil and gas exploration and extraction, as well as to promote diversification among the entities involved in such investments. The open bidding for blocks has broken the monopoly of state-owned oil companies on upstream exploration and extraction, marking a substantial step forward in the reform of China’s upstream oil and gas sector. It also allows various investment entities, including private enterprises, to enter the upstream sector of China’s oil and gas industry, thereby making the market more dynamic. This is in line with the clear direction toward openness in China’s oil and gas industry, and it further demonstrates the determination to deepen reforms in the petroleum and natural gas sector. Opening up the upstream exploration sector is a key step in the reform of China’s oil and gas industry. However, for companies interested in entering the oil and gas exploration sector, there are still many uncertainties, and it is even more necessary to conduct comprehensive evaluations of geological resources, engineering aspects, environmental conditions, and economic factors. Technical support and a pool of skilled personnel will be essential conditions for the winning bidder to complete the tasks successfully. IV. CNPC integrates its gas pipeline and downstream sales operations to pave the way for pipeline network reforms. Event recap: On December 24, 2015, CNPC used its wholly-owned subsidiary CNPC Pipeline as a platform to integrate Eastern Pipeline, Pipeline United, and Northwest United. By then, CNPC Pipelines will hold 100% of the shares in Eastern Pipeline, Pipeline United, and Northwest United respectively; CNPC, through its 100% stake in Eastern Pipeline, 50% stake in Pipeline United, and 52% stake in Northwest United, will own 72.26% of CNPC Pipelines’ shares, while the other transferors will hold 27.74% of those shares through their respective stakes in Pipeline United and Northwest United. The entities involved in this integration – Eastern Pipeline, Pipeline Joint, and Northwest Joint – mainly consist of the pipeline assets of the West-East Gas Transmission Lines 1, 2, and 3. On November 24, 2015, CNPC approved the “Proposal on the Integration of Kunlun Gas and Kunlun Energy”. Under this proposal, Kunlun Energy was to acquire the equity, assets, or other components of CNPC Kunlun Gas Co., Ltd. (hereinafter referred to as “Kunlun Gas”) in order to facilitate the integration. Currently, CNPC holds a 58.33% stake in Kunlun Energy and 100% of the shares in Kunlun Gas. Comment: The news regarding CNPC’s pipeline integration has pushed natural gas pipeline reforms to the forefront; the goal is to achieve complete independence and marketization of these pipelines, reflecting the policy orientation behind oil and gas reforms. As China’s largest producer of oil and natural gas, CNPC has begun to consolidate and divest its assets related to natural gas and pipelines, reducing its stake significantly to allow other companies to enter this sector. This is a prudent step toward separating these operations, and it indicates that the natural gas industry will develop a diversified competitive landscape in the future. Moreover, pipeline integration further improves management efficiency, reduces operating costs, and lays a solid foundation for the coordinated planning and implementation of future pipeline construction. Kunlun Energy is committed to becoming China’s largest enterprise in natural gas retail sales. CNPC is stepping up its efforts at natural gas sales terminals; by shedding its underperforming assets, Kunlun Gas, with its high-quality assets, will join Kunlun Energy, which will surely play a greater role in helping CNPC expand the scale of its natural gas sales terminals and improve operational efficiency. V. Operation of the Shanghai Natural Gas Trading Center: Another step forward in market-oriented reform. Event overview: On July 1, 2015, the Shanghai Petroleum and Natural Gas Trading Center began trial operations. At present, the products traded on this trading center are petroleum products, natural gas, and natural gas transmission capacity. The two spot products that have been put into trial operation are pipeline natural gas (PNG) and liquefied natural gas (LNG); in the future, trading of the receiving capacity of LNG terminals will also be introduced. The operational framework of the trading center is \"one center, two trading models, and three products\"; it employs two trading methods – listing (negotiation) and bidding – to trade in three product categories: pipeline natural gas (PNG), liquefied natural gas (LNG), and LNG receiving station windows. Commentary: This marks a crucial step forward in the market-oriented reform of natural gas, one of China’s important resource products. It also lays the foundation for the establishment of a “Chinese price” for natural gas in the future. As the supply and demand situation for natural gas gradually improves in the future, long-term supply and delivery contracts for natural gas will inevitably be replaced by short-term spot supply and delivery contracts, presenting an important opportunity for those currently engaged in wholesale business to switch to retail business. At the same time, the trial operation of the Shanghai Petroleum and Natural Gas Trading Center serves, on the one hand, to implement the strategy of revolutionizing energy production and consumption, restore the commodity nature of energy, and foster the development of energy-related markets; on the other hand, it is also an important mechanism for Shanghai to accelerate the establishment of an energy market trading center with international influence, to foster positive interactions with financial and shipping markets, and to strive to establish the required \"four centers\" at an early date. The trading center will pioneer market transactions for pipeline natural gas in China, establishing the first true market price for pipeline natural gas in China and even in the Asia-Pacific region. Xinhua News Agency’s participation in the construction of the trading center as an independent third party meets the requirements for the strategic transformation and development of its economic information services, and it is also in line with international practices regarding the involvement of news agencies in the development of capital markets. In the future, as the number of trading entities increases, particularly with the entry of overseas players, this trading center, acting as a regional pricing hub, is expected to establish the \"Chinese price\" as the benchmark price for natural gas in the Asia-Pacific region. VI. Decades of effort yield results: Construction of the China-Russia East Route gas pipeline begins successfully. Review of key events: On May 21, 2014, China and Russia signed a memorandum on the China-Russia East Route gas cooperation project, bringing to an end more than a decade of negotiations regarding gas supply between the two countries; on September 1, 2014, construction began on the Russian section of this pipeline, namely the “Siberian Power” pipeline; on June 29, 2015, construction of the Chinese section of the pipeline started in Heihe City, Heilongjiang Province, marking the commencement of construction across the entire route that connects the two countries; on December 17, 2015, the Agreement on the Design and Construction of the Cross-border Section of the China-Russia East Route gas pipeline and the Memorandum of Understanding on cooperation between CNPC and Gazprom were signed, further accelerating the construction of this pipeline and deepening and expanding the areas of cooperation between the two sides. The China-Russia East Pipeline is scheduled to be completed and put into operation by the end of 2018; at that time, Russia will begin supplying gas to China through this pipeline, with the volume of gas transported increasing year by year until it reaches 38 billion cubic meters per year. The contract period is 30 years in total, and the total value of the natural gas supply agreement is 400 billion dollars. Comment: From the signing of the Sino-Russian East Route agreement to the actual commencement of its construction, there was a long period of negotiation and stagnation. This was mainly due to the continuous decline in international oil prices, which made natural gas less economically advantageous compared to alternative energy sources in industrial and automotive applications, resulting in a slowdown in the growth rate of natural gas consumption in China. At the same time, compared to imported pipeline gas, imported LNG is more convenient and economical for our country. Furthermore, as China’s economy has entered a \"new normal\" with significantly slower growth rates, adjusting the structure of imported energy sources has also affected the progress of projects along the China-Russia East Route. Although the China-Russia East Pipeline has been successfully put into operation, its future remains uncertain due to factors such as the ongoing decline in international oil prices, an unreasonable structure of domestic natural gas prices, and an excess supply of both domestically produced and imported natural gas resources. VII. Non-oil companies are entering the natural gas industry at rock-bottom prices; diversification of capital investment in natural gas has become an inevitable trend. Review of events: Since OPEC refused to cut production at its meeting in 2014, oil prices plummeted from over $100 per barrel to a low of $40 per barrel by December 2015. As oil prices plummeted, driving down the trading prices in the oil and gas industry, the import CIF prices for spot and long-term natural gas remained around 6–7 dollars/MMBtu, which is equivalent to 1.5 yuan per cubic meter in terms of import cost. The price of imported natural gas was about 10 dollars/MMBtu lower than in 2013 and 2014. Due to the decline in international prices for oil and gas, domestic \"non-oil\" companies have shown a great deal of enthusiasm for entering the oil and gas industry. In particular, companies led by China Huaneng Group Corporation (hereinafter referred to as \"China Huaneng\"), China Huaxin Energy Co., Ltd. (hereinafter referred to as \"Huaxin Energy\"), and Beijing Gas Group Co., Ltd. (hereinafter referred to as \"Beijing Gas\") have signed purchase or strategic agreements with international natural gas traders, aiming to assume the role of resource suppliers. Among them, China Huaneng signed a sales and purchase agreement worth tens of billions of dollars with BP on October 21, 2015. Under this agreement, BP will supply up to 1 million tons of liquefied natural gas (LNG) per year to China Huaneng over a period of 20 years. On November 3, 2015, Beijing Gas signed a Strategic Cooperation Framework Agreement in Beijing with Pacific Oil & Gas Pte Ltd, a subsidiary of Singapore’s Golden Eagle Group (hereinafter referred to as “Golden Eagle Group”). Jinying Group will engage in comprehensive cooperation with Beijing Gas in areas such as upstream clean energy natural gas resources, investment in the construction of natural gas liquefaction plants, and the downstream market; on July 6, 2015, Huaxin Energy officially signed a cooperation agreement with Gazprom Neft JSC (hereinafter referred to as “Gazprom Neft”). Under the agreement, Gazprom Neft will transfer to China Huaxin the equity in three oil field blocks of the Baikal Project in Eastern Siberia, Russia; the two parties will jointly invest in the development of the Baikal Project and share the profits. Exploration data indicate that the oil and gas reserves in these three blocks could amount to 1.905 billion barrels of oil equivalent. They are located 90 kilometers away from the \"East Siberia–Pacific\" oil pipeline and near the \"Power of Siberia\" gas pipeline, which facilitates the import and export of oil and gas resources. Comment: The decline in international oil prices has a significant impact on both the supply of natural gas resources and the development of downstream markets. Moreover, the entry of non-oil companies demonstrates domestic enterprises’ optimism regarding natural gas as a clean energy source, as well as their urgency to develop integrated industries across the upstream, midstream, and downstream sectors in order to obtain low-cost oil and gas resources. Non-oil companies need secure access to energy resources. In recent years, the price of oil and gas resources as well as their availability have become major concerns for these companies. The decline in oil prices has presented opportunities for non-oil companies, prompting them to strengthen cooperation with resource providers, increase their purchases of natural gas, and enter the natural gas industry. Although there are significant risks involved, this approach has positive effects on diversifying the supply of domestic oil and gas resources, promoting market-based development, advancing strategic expansion in related industries, and deepening reforms within the oil and gas sector. VIII. Shale gas moves forward amid controversies, achieving a production capacity of 6.5 billion cubic meters. Event recap: On December 29, 2015, Sinopec officially announced that significant progress had been made in shale gas development. The **-class shale gas demonstration area—the Sinopec Fuling Shale Gas Field—had successfully achieved its production target of 5 billion cubic meters per year. This marked the official completion and commissioning of the first large-scale shale gas field in China to be put into commercial operation; meanwhile, work began on the second phase of expansion with a goal of reaching a production capacity of 10 billion cubic meters by 2017. By the end of 2015, the Fuling shale gas field had produced a total of 3.888 billion cubic meters of shale gas, with a peak daily production volume of 16.2 million cubic meters. Meanwhile, CNPC’s shale gas production capacity in 2015 exceeded 1.5 billion cubic meters per year. The capacity expansion project in the Changning–Weiyuan demonstration area, which aims to reach 2 billion cubic meters per year, is in its final stages. In 2015, a total of 1.006 billion cubic meters of gas was produced; 70 wells were put into operation, with a daily gas output of 6.1896 million cubic meters. By this point, China’s total shale gas production capacity in 2015 reached over 6.5 billion cubic meters per year. Comment: Affected by falling oil prices, international oil companies have encountered successive obstacles in the development of shale gas. However, the enthusiasm for developing shale gas in our country remains strong, largely thanks to the substantial support provided for its exploration and development in terms of policy, technology, and funding. With the successful development of China’s first large-scale shale gas field, the Fuling Shale Gas Field, which now has a production capacity of 5 billion cubic meters, China has become the third country after the United States and Canada to achieve commercial exploitation of shale gas. This marks the beginning of a new phase in China’s energy revolution, and it implies significant changes in the structure of China’s natural gas supply. At present, natural gas consumption accounts for only 5.5% of China’s total primary energy consumption, which is far lower than the world average of 24% during the same period. The significant breakthroughs in shale gas production capacity in China indicate that large-scale exploration and development of shale gas are on the way. This will be of great significance in alleviating the imbalance between supply and demand for natural gas in China, reducing dependence on imported fuels, enhancing security in energy supply, meeting people’s livelihood needs, promoting energy conservation and emission reduction, and preventing air pollution. IX. A Long Wait – Sinopec’s Xinjiang Coal-to-Gas Transmission Pipeline Project (Xin Yue Zhe) Finally Approved. Recap: In mid-October 2012, Sinopec received approval from the National Development and Reform Commission to carry out the preliminary work for the Xinjiang coal-to-natural gas transmission pipeline project (Xin Yue Zhe Pipeline). On July 2, 2015, the website of the Ministry of Environmental Protection issued the “Approval on the Environmental Impact Assessment Report for Sinopec’s Xinjiang Coal-to-Gas Transmission Pipeline Project (Xin Yue Zhe Pipeline)” (Document No. Huan Shen [2015] 149). On October 14, 2015, it was announced that the National Development and Reform Commission had officially approved this project (Document No. Fa Gai Neng Yuan [2015] 2295). The total length of Sinopec’s Xinjiang-Guangdong-Zhejiang pipeline project is approximately 8,000 kilometers. It consists of one main pipeline and five branch lines, with an annual gas transmission capacity of 30 billion cubic meters. The total investment amounts to 159 billion yuan. The main pipeline starts at the Yining station in Xinjiang and ends at the Shaoguan terminal in Guangdong Province. It passes through 13 provinces: Xinjiang, Gansu, Ningxia, Shaanxi, Henan, Shandong, Hubei, Hunan, Jiangxi, Zhejiang, Fujian, Guangdong, and Guangxi. The five branch lines serve the Junggar Basin, southern Xinjiang, Henan-Shandong, Jiangxi-Fujian-Zhejiang, and Guangxi regions respectively. The entire project was constructed by Sinopec Xinjiang Coal-to-Natural Gas Pipeline Transmission Co., Ltd., a wholly-owned subsidiary of Sinopec. Comment: After four long years of waiting, Sinopec’s new Guangdong-Zhejiang pipeline project has finally been approved. In terms of both pipeline length and investment scale, Sinopec’s Xin Yue Zhe pipeline exceeds CNPC’s West-East Gas Transmission Line 3, which was put into construction in the past two years; it is currently the largest approved **trunk pipeline project in China. The construction of the New Guangdong-Zhejiang Pipeline Project began in 2011. It is paired with China’s largest coal-to-gas project – the Jundong Coal, Electricity, and Heat Integration Demonstration Project in Xinjiang. Although the decline in energy prices over the past two years has reduced the attractiveness of coal-to-gas projects, this has not prevented the New Guangdong-Zhejiang Pipeline Project from being approved for construction as scheduled by Sinopec. As China’s pipeline networks become increasingly dense in the future, various gas sources will be fed into the Xin Yue Zhe pipeline. The oil and gas resources located upstream of Sinopec require pipeline transportation, and the completion and operation of the Xin Yue Zhe pipeline will help Sinopec strengthen its position in the natural gas market. X. This winter, Beijing’s daily natural gas consumption reached a new high of 98.97 million cubic meters, highlighting the pressure on gas supply in the North China region. Review of events: With the gradual commissioning of four major thermal power plants, Beijing’s demand for natural gas grew rapidly; in 2015, the city’s consumption of natural gas amounted to 14.5 billion cubic meters, an increase of 28.4% compared to the previous year. In late November, Beijing experienced the lowest temperature for that time of year in 64 years; it was about 6.0°C lower than the average temperature during the same period in previous years. As a result, natural gas consumption rose significantly. In November, the average daily gas consumption in Beijing reached 65 million cubic meters, an increase of 43 million cubic meters compared to the previous month and about 20 million cubic meters year-on-year. This represents a significant rise of 45.5%. The peak daily consumption hit 98.97 million cubic meters, surpassing last winter’s record peak of 79 million cubic meters. Comment: As a region severely affected by air pollution, North China has seen a relatively rapid pace of switching from coal to gas for heating. Additionally, with winter approaching and the peak period for heating needs, the demand for gas for heating increases significantly. Moreover, the substantial reduction in the price of gas for non-residential use in November also contributed to an increase in natural gas consumption in North China. To meet the natural gas demand in North China, the Shaanxi-Beijing pipeline system has been supplying over 100 million cubic meters of gas per day since November 11th; this figure was reached 4 days earlier than last year. The highest daily supply volume reached 158.8 million cubic meters. It is expected that during the winter of 2015–2016, there will be 125 days with daily supplies exceeding 100 million cubic meters, which is 32 days more than during the same period in 2014, highlighting the pressure on gas supply in North China.