china gas dash

Thursday, 13 September 2012


THE vital signs of China’s economy may be faltering, but its gas demand projections remain unwavering. Even as it goes about securing overseas assets, key pricing reforms will have to be made at home to boost domestic production. By Gomati Jagadeesan

China’s plan to secure its energy supply is not new. It has put in place a very aggressive asset-acquisition plan, buying up stakes in key projects from the coal seam gas plays in Queensland to shale resources in North America. CNOOC’s bold $US15 billion play for Canada’s Nexen Energy is part of that strategy.

While China’s energy supply security has been underpinned by overseas acquisitions and is import driven, it has taken steps to boost domestic production by tapping unconventional resources. It is likely to announce a second round of shale auctions next month.

Under China’s 12th Five-Year Plan, which ends in 2015, Beijing calls for doubling the amount of gas it uses to around 9.2 trillion cubic feet a year.

The International Energy Agency, in a recent country report, called China’s gas use goals “ambitious”.

“This requires that all these supply sources deliver at the targeted level, whereby import levels depend crucially on the supply sources linked to long-term contracts to deliver supply in a timely manner at contracted levels,” the IEA report states.

With gas becoming an increasingly fungible commodity, China’s gas markets cannot develop in isolation.

The report notes pricing reforms are key to boosting supply as it would make selling higher-priced imported LNG easier as well as encourage production of unconventional sources.

With China following a regulated cost-based approach, there are significant issues arising from its reliance on imports and unconventional resources.

“With growing LNG imports, China is increasingly exposed to global gas dynamics and the spread between cheaper domestic gas production and expensive spot LNG cargoes is growing wider,” the IEA report says.

Though the country has tried to move to a market-based approach, its efforts to develop Shanghai as a price benchmarking hub has not yielded much results.

The Shanghai hub received coverage, for the first time, this summer, as it was designed to be used to cover peak demand by generators. However, the number of contracts and volumes traded has been limited.

Wholesale pricing reforms also will need to include third-party access to certain key energy infrastructure including pipelines and LNG import facilities. This would provide the necessary incentives for domestic production and competition at large-customer level.

A key regulatory reform China needs to undertake is to liberalise its upstream sector.

The IEA report notes a more market-based approach in the upstream sector in the US was a key driver for the growth in gas production there.

However, in China, the sector is dominated by the Big Three (CNPC, Sinopec and CNOOC). They collectively hold most of the exploration and production licences, causing significant barrier to entry for other players.

The IEA reckons the government should move towards setting up a national energy regulator, or another government entity that can take care of both the upstream and downstream activities without the interference from the Big Three national oil companies.

“This implies that the key people in charge should have no position/financial interest in Chinese companies,” the report says. “All interested players, and not only the Big Three, should be consulted in the process of developing new regulations.”
http://www.energynewspremium.net/StoryView.asp?StoryID=9637305