“\"Low-speed growth\" represents the new trend in the supply and demand dynamics of China’s natural gas market during the 13th Five-Year Plan period

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“\"Low-speed growth\" represents the new trend in the supply and demand dynamics of China’s natural gas market during the 13th Five-Year Plan period. Author/Source: China Chemical Industry News; Date: 2016-03-28; Clicks: 33. Towards the end of the 12th Five-Year Plan period, China’s economic growth entered a \"new normal,\" which led to new developments in the natural gas market. “\"Low-speed growth\" has become the new trend in the development of both the supply and demand sides of China’s natural gas market during the 13th Five-Year Plan period. Under the new circumstances, there will be many uncertainties in the natural gas market from an economic perspective, as well as in terms of resource supply and consumption. The author expects that, under the current system and policies, an average annual growth rate of 5% to 7% in China’s natural gas consumption during the 13th Five-Year Plan period would already be a relatively ideal level. At such a growth rate, natural gas consumption will reach 250 billion cubic meters in 2020. Therefore, **setting a consumption target of 360 billion cubic meters for China’s natural gas market by the end of the 13th Five-Year Plan period is extremely difficult to achieve. 　　Consumption growth was only 1.4%. In terms of demand, based on statistics from the Ministry of Land and Resources and PetroChina, China’s absolute natural gas consumption in 2014 was 176.1 billion cubic meters, an increase of 12.1 billion cubic meters compared to the previous year, representing a growth rate of just 7.3%; for the first time during the 12th Five-Year Plan period, this growth rate fell below 10%. In the first half of 2015, natural gas consumption was around 91.5 billion cubic meters, with a year-on-year increase of only 1.4%, indicating a continuous decline in the growth rate. In the second half of 2015, demand increased due to winter heating, which led to an acceleration in growth rates; however, this was still different from the normal high growth rates of 10% to 30% seen over the past decade. A ‘low-speed growth’ trend throughout the year has become an inevitable reality. 　　On the supply side, according to available data, China’s natural gas production in the first half of 2015 was 67.4 billion cubic meters, representing a year-on-year increase of 4.3%. Taking into account the growth of domestic conventional gas, the development capacity of unconventional gas, the operating rate of coal-to-gas projects, and new import projects, the natural gas supply is projected to reach 193.4 billion cubic meters in 2015, continuing to show relatively slow growth. 　　Furthermore, experts from CNPC have pointed out that during the 13th Five-Year Plan period, China’s natural gas supply will continue to be influenced by factors such as the steady economic growth amid structural adjustments in the \"new normal\" and low international oil prices, leading to low growth rates. Domestic demand for natural gas will mainly stem from industrial use and urban gas supply; if policies aimed at replacing coal with natural gas and using natural gas for power generation are effectively implemented, demand in these two areas could increase. However, overall, there is limited potential for a significant rise in total demand. 　　Reasons for \"slow growth\": Oil price factors and the difficult recovery of economic growth have led to a sluggish overall situation in the international natural gas market. Low oil prices have led major international oil companies to cut their investment budgets for 2015, which directly affects the level of investment in their natural gas projects and, over time, impacts the sustainable development of the global natural gas market. For example, the investment budgets of international oil giants such as Total, ExxonMobil, and Shell in 2015 showed a negative growth of 10% to 15% on a year-on-year basis, which led to a corresponding decline of 3% to 12% in their natural gas production during the first half of the year. Furthermore, the difficult recovery of economic growth is another important factor affecting the development of the international natural gas market. Affected by these factors, the growth rate of energy consumption in various developed economies and major emerging economies has generally slowed down, particularly that of primary energy; in 2014, this growth rate was less than 1%, which is significantly lower than the average rate of over 3% since 2004. It is expected that in 2015, this trend of weak economic recovery leading to slow growth in energy consumption will continue, which in turn will also slow down the growth in natural gas consumption. 　　The domestic natural gas industry faces severe challenges on both the production and sales sides. In terms of natural gas production, the three major oil companies are currently facing significant operational difficulties. According to the annual reports of these listed companies, PetroChina, Sinopec, and CNOOC experienced declines in their operating revenues in the first half of 2015, by 23.9%, 23.3%, and 34.2% respectively. Declining performance has led the three major oil companies to significantly cut back on investments in upstream exploration and development. In 2015, China’s investment in oil and gas exploration was only 40 billion yuan, reaching the lowest level since 2006; investment in development was estimated at 140 billion yuan, also a low figure for the past decade. In addition, according to statistics from the Ministry of Land and Resources, in the first half of 2015 Chinese oil companies completed 1,200 exploration wells, a 33% decrease compared with the same period in 2014; they completed 12,500 development wells, representing an 8% decline year-on-year. Both the volume of 2D seismic surveys and 3D seismic surveys carried out also decreased significantly on a year-on-year basis. Although **and China’s major oil companies continue to emphasize the importance of developing natural gas resources, the consequences of reduced investment will inevitably become apparent during the 13th Five-Year Plan period, restricting the ‘slow growth’ of natural gas production. From the perspective of the natural gas consumption market, there are two main reasons for the \"low growth\". Firstly, the poor expansion of the consumer market still boils down to price issues. Amid the sluggish international natural gas market, natural gas prices in our country have risen instead of falling, resulting in a lack of economic viability in its consumption and use as well as insufficient competitiveness, which directly leads to a slowdown in market expansion. Secondly, the poor expansion of the consumer market can be attributed to inadequate adjustments in the energy structure and environmental protection policies, which has prevented natural gas from fully demonstrating its advantages as a highly efficient and clean energy source. Our country has, in a series of policies such as the \"Action Plan for Air Pollution Prevention and Control\" and the \"Detailed Rules for Implementing the Action Plan for Air Pollution Prevention and Control in the Beijing-Tianjin-Hebei region and its surrounding areas\", set forth measures such as \"optimizing the use of natural gas, ensuring that any new natural gas supply is first used for residential needs or to replace coal\", as well as a target to reduce coal consumption by 63 million tons between 2013 and 2017. In fact, however, there are no accompanying plans for these measures, making it quite difficult to implement the policies. In particular, the supporting measures for environmental protection penalties are not detailed enough and lack the necessary enforcement capacity, which prevents the environmental value of natural gas resource utilization from being fully reflected. 　　Looking at the natural gas market during the 13th Five-Year Plan period, both domestically and internationally: Global natural gas consumption is expected to grow by less than 2% per year during this period. Over the next 3–5 years, the global economy will continue to grow at a slow pace, and the natural gas market will face a rather challenging situation. First, consumer competition continues to intensify. Overall energy demand remains low, and the development of the natural gas market will continue to face competition from alternative energy sources such as coal and crude oil, which are inexpensive among primary energy sources. Moreover, ongoing advancements in technologies for developing and utilizing new energy sources reduce their economic viability, which in turn enhances the competitiveness of natural gas resources. Secondly, there is considerable uncertainty regarding advancements in exploration, development, and utilization technologies; insufficient investment and unfavorable market conditions may **reduce the pace of technological progress as well as the enthusiasm of technical personnel to improve their skills. According to the IEA’s forecast in June 2015, at current levels, global natural gas consumption will grow by less than 2% per year during the 13th Five-Year Plan period. However, if the world economy experiences a significant recovery during this period, or if substantial progress is made in the global effort to address climate change, accelerating the optimization of the energy structure, it is possible that the world natural gas market could emerge from its downturn and experience rapid growth. 　　From three perspectives, it can be seen that the development of the natural gas market faces multiple uncertainties. From the perspective of economic growth, according to the relevant documents and promotional materials issued in 2015, China’s GDP growth rate is expected to remain at a relatively low level of 6.5% over the next five years. The national economy will go through a period of structural adjustment, making it a challenging time for energy transformation and adjustments in the energy sector. In this process, China’s energy development model will shift from one characterized by high consumption, high pollution, and low efficiency to one that features moderate use, low carbon emissions, cleanliness, and high efficiency. Natural gas will also have the opportunity for rapid growth in the future, but it remains uncertain whether this window of opportunity will open up during the 13th Five-Year Plan period. From the perspective of natural gas resource supply, there are four aspects of supply uncertainty in the development of China’s natural gas market. First is the issue of resources, including the increasing difficulties in increasing reserves and production of conventional natural gas, the gradual decline in output from existing gas fields, and a decrease in the reserve-to-production ratio. Second is the technical aspect, as there are current technical challenges related to exploration, development, and environmental protection in the fields of shale gas, coalbed methane, and gas produced from coal in China. Third is the issue of infrastructure; inadequate infrastructure such as pipelines increases the costs and risks associated with the development of natural gas resources like shale gas and coalbed methane. Fourth is the issue of market prices; the standardization of domestic gas prices facilitates the expansion of the natural gas consumption market, but it also puts significant operational pressure on companies involved in natural gas production and import. From the perspective of natural gas resource consumption, the development of China’s natural gas market also faces uncertainties. First, the expectation of \"adjusting the economic structure\" in our country is on the rise, with economic growth shifting from high speeds to moderate-to-high speeds, which will have a certain impact on natural gas demand in the near to medium term. Second, environmental policies and price policies will directly affect the demand for natural gas in our country, but there are uncertainties associated with these policies; for example, if economic benefits are insufficient, there may be a shift toward encouraging the use of clean coal, which would suppress consumption of natural gas. Third, inadequate urban pipeline networks and insufficient peak-shaving storage facilities will all limit the growth in natural gas consumption during China’s 13th Five-Year Plan period. 　　Reaching 360 billion cubic meters is a challenging goal. Preliminary estimates suggest that by 2020, China’s total natural gas supply could reach between 500 billion cubic meters and 650 billion cubic meters, thus meeting the target of 400 billion cubic meters to 420 billion cubic meters set out in the notice issued by the State Council in 2014 regarding the establishment of a long-term mechanism to ensure a stable supply of natural gas. On the demand side, under the current system and policies, an average annual growth rate of 5% to 7% in China’s natural gas consumption during the 13th Five-Year Plan period is already considered a fairly satisfactory level. At this growth rate, natural gas consumption will reach 250 billion cubic meters by 2020. The target set in the **Plan for Addressing Climate Change (2014–2020)** of reaching a natural gas consumption level of 360 billion cubic meters by the end of the 13th Five-Year Plan period was determined based on an assumption that natural gas consumption would increase by 30 billion cubic meters per year during the 2015–2020 period. Therefore, achieving this goal is extremely difficult. 　　Therefore, the author puts forward several suggestions for the development of China’s natural gas market during the 13th Five-Year Plan period. 　　Clarify the role of natural gas in optimizing the energy structure. It is necessary to clarify the role of natural gas in China’s primary energy structure during the 13th Five-Year Plan period, so as to increase its share in the overall energy consumption structure – with the goal of achieving double-digit percentages by 2020. Policies aimed at environmental protection should be introduced, such as the implementation of a carbon tax and the establishment of coal-free zones. Various departments, including the National Development and Reform Commission, the Energy Administration, and the Ministry of Environmental Protection, should work together to ensure the effective implementation of the Action Plan for Air Pollution Control through appropriate institutional arrangements. Local financial subsidies should also be provided. Furthermore, it is necessary to explicitly state support for enterprises in tapping into market potential from the following aspects. First, it is necessary to accelerate the development of natural gas power generation by motivating the efforts of natural gas producers, power generation companies, and grid operators, formulating appropriate plans for this area, and promoting the large-scale expansion of natural gas power generation. Second, it is important to expand the areas where natural gas is used in industry, improve the efficiency of its use, and ensure its economic viability. Third, efforts should be made to promote the use of natural gas in transportation, with a focus on developing vehicles and ships powered by LNG. 　　Rationalize and optimize the natural gas pricing mechanism. Price issues are a key factor restricting the development of China’s natural gas industry. Currently, China's natural gas price reform is faced with a dilemma. First, the consumer market scale has not yet stabilized; raising domestic natural gas prices will lead some natural gas users to turn to alternative resources, resulting in a situation of supply exceeding demand for natural gas. Secondly, the costs of imported natural gas from abroad and domestic natural gases such as shale gas are relatively high; a reduction in domestic natural gas prices will increase the operational pressures on some enterprises. Based on international experience, market-oriented reforms are generally carried out only when the natural gas market reaches maturity. Given the current stage of development in China’s natural gas market, the conditions for completely liberalizing natural gas prices and achieving full price marketization are not yet available. For now, it is still necessary to adhere to **guided pricing, and it is recommended that the \"market net return\" pricing mechanism be improved as soon as possible. Therefore, our country urgently needs to streamline and optimize the natural gas pricing mechanism. Firstly, establish an effective mechanism for linking gas and electricity prices in order to promote the scaled development of natural gas-based power generation. Secondly, create a price guidance system for industrial gas users; this will help to change the current situation where residents can afford higher gas prices than industrial users, while at the same time taking into account the economic costs associated with air pollution control, and formulating environmental policies to accelerate the shift from coal to natural gas. Lastly, efforts should be made to reduce the costs of natural gas supply through both imported sources and domestic production. 　　Strengthen the construction of supporting systems and mechanisms for natural gas development. Firstly, it is necessary to advance reforms of market mechanisms and further open up the market, especially in areas such as exploration, development, import, sales, as well as infrastructure construction and utilization. Access should be gradually relaxed to introduce competition and stimulate market vitality. Secondly, it is necessary to strengthen the construction of market supervision systems to ensure orderly competition in all stages of natural gas resource development, transportation, and distribution, as well as a dynamic, fair, and efficient market. Once again, it is necessary to establish and improve the ecological compensation mechanism, and intensify efforts in the capture, utilization, and sequestration of carbon dioxide. A sound carbon trading system should be put in place to curb the development and utilization of highly polluting energy sources, thereby enhancing the spillover value of natural gas resources. Finally, establish incentive systems for technological and management innovation to improve the level of natural gas development and utilization, enhance efficiency, reduce costs, and boost the competitiveness of natural gas development and utilization. 　　Improve the infrastructure for natural gas development and utilization. Infrastructure support is the \"hardware\" necessary for the healthy development of China’s natural gas market, but there are many problems at present. In terms of pipeline construction, according to estimates by experts from CNPC, to achieve the target consumption volume of 360 billion cubic meters, China needs to build a total of 153,000 kilometers of various gas transmission pipelines (including branch lines). In terms of natural gas reserves, the insufficient \"peak-shaving capacity\" is a long-standing issue that hinders the development of China’s natural gas market. Therefore, natural gas infrastructure construction during the 13th Five-Year Plan period should be strengthened from the following three aspects: First, diversify investment in the construction of natural gas transmission and distribution networks, and encourage private capital to participate in order to enhance construction capabilities; second, continue to implement the relevant policies and measures regarding the fair access to natural gas pipeline facilities; third, accelerate the construction of gas storage facilities, increase the volume of effective reserves, and gradually improve the management mechanisms for underground gas storage.