China's rapidly growing economy has pressured China's political leaders to secure energy resources for stable development. According to British Petroleum (BP), China makes up 25% of total energy demand growth through 2030 while accumulating an energy production-consumption deficit worse than the U.S. or Europe. China's 2012 energy mix contained 68% coal, 18% oil and only 5% natural gas compared to 20% coal. China's main state planning agency body, the National Development and Reform Commission (NDRC), targeted natural gas to make up 10% of China's overall energy consumption mix by 2020 from 4% in 2012.
China's aggressive pursuit of natural gas is driven by increased supply availability from the innovations in shale production, larger LNG markets and China's efforts to displace coal for natural gas to promote environmental sustainability. Natural gas emits less carbon dioxide and zero sulfides compared to coal. A study estimated that economic losses from pollution in 2010 came in at 1.1 trillion Yuan, more than doubling the total from 2004. General Electric stated in a white paper that China could save $820 billion in environmental costs by 2025 by doubling its current natural gas consumption at the expense of coal. The more apparent the economic losses from poor environmental management become, the more pressure there will be for China to increase natural gas consumption and encourage switching from coal. Yet, aggressive natural gas expansion will require the Chinese to think about how natural gas fits into their energy security scheme.
Energy security and natural gas are linked because of the way natural gas has traditionally been transported. Natural gas can be transported to markets in two ways, pipelines or liquefied natural gas (LNG) via large shipping tankers. Natural gas agreements have detailed supply, timing, and price arrangements between importers and exporters. Non-interruptible supply of natural gas is essential for consumers; if natural gas arrangements can be interrupted, countries must have alternative supply arrangements or maintain storage to meet domestic demand. As China rebalances its energy mix to meet environmental targets, it will have to cope with more complex energy security challenges.
China became a net importer of natural gas in 2007 and as of 2012, Beijing imported 29% of its natural gas consumption with import dependency projected to rise sharply. Shale production in China may help limit dependency but China is far from achieving unconventional production levels in the U.S. or Canada. According to the EIA, regulatory hurdles, transportation problems and competition with other fuels and conventional natural gas has contributed to the lack of shale gas development in China. Chinese state-owned firms have limited experience in the shale extraction methods and many of the large shale reserve areas are near population centers making extraction costly and challenging.
Anticipating large growth in natural gas consumption, China has invested heavily in its pipeline infrastructure and LNG capacity. China had nearly 27,000 miles of main natural gas pipelines at the end of 2011 with the government planning to construct 24,000 new miles of pipeline by 2015. China already built its first international natural gas while 5 LNG regasification terminals currently exist with 4 under construction and several waiting for government approval with a total initial, expansion capacity of 106 bcm/y.
Even with massive spending in infrastructure, China faces serious obstacles in meeting its 10% natural gas energy mix target by 2020. In 2012, China consumed 144 bcm of natural gas and produced 107 bcm with the difference coming from imports from Central Asia (22 bcm) and LNG (20 bcm). The U.S. EIA projects that final energy consumption in 2020 for China will be 4.5 tcm. If China wants to meet its natural gas target, it must consume ~450 bcm of natural gas by 2020, a 213% increase from 2012 levels. The demand side of the China's energy rebalancing entails rapid switching from coal to natural gas at incremental LNG world prices which would be inflationary to China's economy. At the same time, the move away from nuclear energy by Japan and the E.U. and India's growing hydrocarbon needs will place further pressure on natural gas prices.
Even if China was able to stimulate enough domestic natural gas demand, it would face serious problems meeting demand with its current infrastructure. If we assume all of China's LNG terminals built and currently under construction are 100% utilized at their initial and expansion capacity, China still would have a 197 bcm/y shortfall it must supply with either domestic production expansion or pipeline imports. The gap is larger than Russia's total exports and more than double the exports from Australia, Indonesia, Malaysia and Yemen (4 of the 5 largest LNG partners for China) combined in 2012.
To fill the supply gap, China must increase its pipeline imports to meet its 2020 target and rebalance its energy mix by developed countries standards. Moving forward, China's grand energy strategy will focus on how effective its energy diplomacy will be in obtaining hydrocarbons via pipelines from Central Asia, Russia and the Middle East. China's entrance into pipeline politics has already had a significant impact on existing pipeline dynamics. In 2009, China built the CAGP, bringing gas from Turkmenistan, Uzbekistan and Kazakhstan. A recent trip from President Xi Jinping to Turkmenistan resulted in a 65 bcm/y expansion of the Central Asian Gas Pipeline. Russia and China strengthened energy ties in September 2013 when they signed a legally binding agreement to bring Russian gas to China along the eastern route by 2018. China's energy demand has had some speculating whether the Iran-Pakistan- India pipeline will extend a line to China with others even pointing to China's heavy investment in Afghanistan as precursor to a possible TAPI line into China.
Economic growth needs energy. Though recent data from the NDRC shows a significant pickup in natural gas consumption and production, it is improbable that China will be able to meet its 10% natural gas consumption mix target by 2020 due to supply constraints and the high-costs of switching from coal to natural gas. The natural gas supply deficit will force China to apply its form of ‘gazpolitik' in the region, historically the game of Russia, Central Asia and Europe. However, China's expanding ties into Central Asia has challenged Russia's influence while other suppliers like Iran have begun to look at China as a major demand hub. China's natural gas demand will be a critical catalyst in regional integration or disruption. Either way, China's complex energy rebalance will influence global energy patterns for decades to come.
Hamid Poorsafar
Mr. Poorsafar is currently a National Security Education Program Boren Scholar at the Hong Kong University of Science and Technology conducting research on Chinese energy security. He was formerly an intern for Wikistrat, a geostrategic consultancy, and is an incoming analyst for Goldman Sachs' Global Natural Resource Group. He has published with the International Affairs Forum and the Atlantic Sentinel. He can be contacted at hpoorsafar43@gmail.com