Reform is key to China's future gas demand growth

Adrienne Blume's picture
Adrienne Blume, Editor, Gas Processing & Hydrocarbon Processing
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At Gastech’s commercial stream, Xianfeng Ren, China Market Fundamentals Manager for BG Group, posed the question: Has the Chinese market hit a turning point?

"China has become a hot spot again, especially this year," Ms. Xianfeng stated. "There are a lot of questions about what is going on in the economic markets and in the gas markets." Between 2014 and 2015, China expects to lose about one year of demand growth. "That is going to have a significant impact on global gas demand," she said.

Economic and non-economic drivers: Ms. Xianfeng examined China's drivers, both economic and non-economic, for gas demand growth. Economic drivers are based on the relationship between GDP growth and gas demand growth. However, if economic drivers were the only factors at work, China would still be posting double-digit demand growth, Ms. Xianfeng acknowledged. In the first half of 2015, however, growth was only 3%. The large gap comes from non-economic factors in addition to the effects of the severe economic recession, she explained.

Many economic and energy market transitions are underway in China. Rebalancing is occurring on both the demand and supply sides of the gas market, as China's gas demand structure is a mirror image of its economic structure. Approximately 60% of China's gas demand is directly related to investment and industry. "Basically, China is caught in the transition period for gas demand," Ms. Xianfeng said. "In that transition period, some sort of volatility is inevitable."

An institutional transition is also underway as the market grows. Traditionally, the Chinese government tightly controls the gas value chain. National oil companies control upstream exploration and production, along with midstream pipelines. Meanwhile, provincial pipeline companies and local distribution companies control downstream distribution.

Gas as a commodity: Ms. Xianfeng explained that gas is becoming more like a commodity in China, rather than just a utility product. As a commodity, China's gas needs a market; it needs a stable pricing structure; and it needs more market participants and new entrants. It will be desirable to break up the value chain so that new participants can capture value from the value chain more easily. China is presently working to split up and diversify the value chain and deregulate prices.

However, Ms. Xianfeng noted that China's market reform has failed to deliver pricing flexibility, which has led to demand destruction. Over the short term, China must establish real linkages between its gas and oil prices, and it must establish bilateral trade over the medium term.

Low-carbon goals in sight: China must also use gas to facilitate its transition to a low-carbon fuel mix. China has made a commitment to reduce its carbon intensity level by at least 60% from the 2005 level by 2030. To reach its goal, the country must improve fuel efficiency and utilize a combination of solutions, including natural gas, non-fossil fuels, and energy efficiency improvements. China is aiming for a balance of 20% non-fossil fuels and 20% gas in its energy mix by 2030. […]

Energy reform is needed: In summary, Ms. Xianfeng noted that the recent Chinese market downturn has interrupted the country's decade-long double-digit growth trajectory, although this should not be a turning point for a "new normal." One factor that will ultimately shape China's gas market outlook is the country's fuel-mix choices, which will require robust gas consumption growth.

The gap between what is required by the fuel mix transition and the status quo scenario can be closed if the right policy responses are taken, she said. These responses include the completion of economic transition and consolidation, the building of a more flexible pricing mechanism, the implementation of energy market reforms, the enforcement of stricter environmental regulations, and the unleashing of demand potentials from urbanization and income growth.

In closing, Ms. Xianfeng asserted, "I can summarize my entire talk in one word: reform."

To read the full article by Gas processing, click here.

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