China montly: China's energy picture changes

16 May 2014 09:54 Source:ICIS Chemical Business

Unlike the US, which is now dominated by shale gas and tight oil, China is pursuing multiple equally important options in an effort to boost energy independence and tackle environmental problems

Everybody knows, or at least they think they know, about the US energy story. Thanks to the rise of shale gas and tight oil, the States seems to be heading towards energy independence.

But what is far less understood is the energy story in China.

 China’s energy mix is developing

Copyright: Rex Features

Why? Because this doesn’t feel as if it is as straightforward a narrative.

Whilst China might make substantial of use of its own shale gas and tight oil reserves, which are greater than those in the US, imports of conventional gas, by both pipeline and via liquefied natural gas tankers, are also growing.

“Dirty old coal”, blamed for much of China’s economic ills, will also continue to play an important role, even if efforts are stepped-up to limit further consumption growth.

And because of the pollution caused by coal and other hydrocarbons, renewables are another big part of the pictures.

All of the above have implications for petrochemicals, which we will discuss in a series of two articles.

In the first part of our series, we will focus on shale gas, conventional gas and coal.

And in the second part, which will appear in June, we will look at renewables – and also the on-going efforts to bolster China’s overseas energy reserves.

Both articles can only scratch the surface of what is an immensely complex and constantly changing story.

But we hope that they will at least add something to the debate.

A Rapidly Changing Picture
What perfectly illustrates the complexity of the Chinese energy picture is the slight shift in sentiment over the past couple of months concerning the prospects for shale gas.

In our 14 February column, we wrote that:

Even though China has enough recoverable shale gas to last more than 240 years, land ownership issues and water shortages pose huge obstacles to exploitation.

There is also nothing like the same number of service companies in China as in North America, and it can be very difficult to secure the services of an experienced drilling contractor.

The geology of shale in China is more challenging than in the States – for example, the reserves are a lot deeper.

State control has discouraged the type of private-sector innovation that has enabled the US to overcome its geological challenges.

But in March, Sinopec announced that it would put its first shale-gas field into commercial operation sooner than expected, aiming for annual production of 10bn cubic metres (bcm)/year by 2017.

The company’s engineers said that they were excited by initial results at wells drilled this year at Fuling, near the city of Chongqing, in southwest China.

Sinopec targeted an annual capacity at Fuling of 1.8 bcm/year by the end of this year, rising to 5 bcm/year by 2015, This would be well above its earlier target of 2 bcm/year by 2015 from all of its shale wells in China.

But even if China hits its longer-term target of producing 100 bcm/year of gas from shale by 2020, this would compare with the approximately 266 bcm/year produced in the US in 2012.

Complacency might, however, be a risk for those who think that the US position in shale, and its connected competitiveness in petrochemicals, is almost beyond any realistic challenge.

“Sinopec does seem to be drawing ahead and is more bullish over shale than PetroChina,” said an Asia-based gas consultant.

“Still, we need a bit more information from Sinopec before we can start getting comfortable with the new production forecasts, but they seem happy to go out on a limb now with some pretty bullish numbers.”

And what could add further impetus to investments in shale is the decision by China’s top economic planning body, the National Development and Reform Commission (NDRC) to raise gas prices.

Existing non-residential consumers would see their prices rise, first in 2014 and possibly again in 2015, said an NDRC document, which was released in March.

Although the exact details of this latest round of price rises are unclear, the increases will follow a 15% rise in nationwide prices that occurred last June.

“Investment has up until now been deterred by heavy government controls on gas pricing,” the consultant added.

“As these controls are further relaxed, we could see more of an incentive to invest in shale.”

And whilst Sinopec pursues shale, the consultant believes that the bigger priority at PetroChina is realising pipeline investments, which could also substantially improve China’s energy position.

“PetroChina is more focused on getting a Myanmar/China pipeline project to work and clinching a deal with Russia for piped supplies,” he said.

“The Russian deal could be for anything between 30bcm and 70bcm/year.”

King Coal
Last December, Greenpeace released a study on the use of coal in China, which it had commissioned from US environmental experts.

The study found that emissions from coal plants in China could have contributed to quarter of a million premature deaths in 2011.

Some 320,000 children and 61,000 adults suffered from asthma in China in that same year because of emissions from coal plants, the report added.

Approximately 340,000 hospital admissions and 2m visits to doctors were also linked to the burning of coal, which generates 80% of China’s electricity.

The big shift in China is that the government is now taking studies, such as the one above, very seriously indeed.

John Mathews, a professor of strategic management at the Macquarie Graduate School of Management, Macquarie University , Sydney, divides China’s coal story in to two chapters.

Chapter one was the rapid growth in manufacturing following China’s admission to the World Trade Organisation in 2001. This led to coal consumption rising from around 1.5bn tonnes in 2002 to slightly above 3.5bn tonnes in 2012.

The second chapter will involve a cap on consumption at around the 2012 level because of the “shocking pollution of air and water and the black smog created by coal burning,” he wrote in a 16 April article for the Australian investment news and analysis service, Business Spectator.

Last September, China set an official target of reducing coal consumption as a percentage of primary energy production to below 65% by 2017. This compares with the 69% produced via coal in 2011, according to the latest US Energy Information Administration data.

This target helps to explain the push for domestic shale gas production and greater imports of conventional gas.

“It is very early days yet, but who knows – shale could yield important supplies of natural-gas liquids feedstocks for petrochemicals,” said a Hong Kong-based source with a global polyolefins producer.

“And a key part of the more immediate story around capping coal consumption will be greater energy efficiency,” he added.

“This is where the petrochemicals industry can benefit through the supply of, for example, polymers that go into insulation materials for offices, factories and homes. China wants to build new ‘smarter’, more energy efficient cities, and we can be part of the solution rather than the problem.”

But on the surface, this is bad news for China’s coal-to-olefins (CTO) project proponents. Some 50-odd projects have been announced.

Nothing, though, is ever that straightforward in China. One school of thought is that job creation in the country’s less- developed western provinces will remain more important than the environment, resulting in ­plenty of CTO projects gaining approval.

As we shall discuss in our next column, there is no such conflict where renewables are concerned as they both generate jobs – and, of course, have excellent green ­credentials.

By John Richardson