China’s energy consumption has long been dominated by coal, however; due to the vigorous promotion of clean energy and energy conservation program adopted by the central government, natural gas industry has entered into its golden period. Natural gas production and consumption have both maintained its robust growth since the 2000’s. And in 2016 natural gas production reached 138 billion cubic meters (bcm) while consumption was at 210.3 bcm.
As one of the largest contributors of CO2 emissions, China has been suffering from air pollution and smog, which has paved the way for the government to take decisive action in substituting coal with natural gas as part of a sustainable energy transformation system. National development and reform commission’s data shows the government tendency on increasing the share of gas in energy mix to ease the air pollution that choked cities and posed health risks for the lives of its citizens for many years.
China’s national energy development strategy action plan for 2014 - 2020 has projected to bolster the natural gas outlook in overall energy mixture by at least 10 percent as of 2020. Substitution natural gas over coal has been the main target with this policy with the aim of addressing increasingly degraded air quality in China and thus increasing the quality of life in Chinese cities. Increasing overall natural gas consumption to in manufacturing, power generation as well as transportation and heating is encouraged with this plan.
While China’s two thirds of primary energy consumption came from coal (66 percent in 2016), only 5.9 percent of primary energy supply was met by natural gas. These figures highlight the fact that natural gas in country’s energy mixture has kept a minor share in its proportion for a country as large and as complex as China.
While production between 2005-2015 reached an annual growth rate of 10.3 percent, totalling 138.4 bcm in 2016. Growth rate in consumption per annum from 2005 to 2015 achieved a double-digit growth rate, equaling at 15 percent (BP, 2017).
Current production and consumption levels have not been as encouraging as it has been projected in the strategy action plan. Both institutional as well as economic barriers stand as part of impediments for natural gas expansion in China’s energy mix. Among various obstacles, pricing policy stands as one of the most vital hurdles in promoting natural gas in China as anticipated in the strategy plan, followed by climate policy related policy.
It is estimated that reaching the government’s target of 360 bcm at the end of the decade, gas demand in China has to grow by at least 13 to 15 percent annually. However, as coal prices dropped significantly, as low as 500 yuan a ton this year in China, price sensitive natural gas sector would possibly have hard times to deal with the shrinking gas demand. Although gas prices are heavily regulated, which has usually resulted in much lower prices in comparison with its real market price, gas prices, still, have remained relatively higher compared to coal prices.
Chinese government took a further step for its strategy by introducing pricing reform back in 2011. To encourage natural gas production and increase overall gas demand to meet the government’s set target of 360 bcm by 2020, market based pricing mechanism was launched nationwide in 2013.
Since 2015, wholesale gas prices in China have linked to the international fuel oil and liquid petroleum prices, which has provided Chinese gas sector more predictability and transparency compared to previously highly regulated gas prices. Liberalization of gas market in China has been the ultimate goal for the government. And to achieve this goal, market based pricing mechanism has been initiated nevertheless as recent years trend shows natural gas in the energy mix would possibly remain much smaller than previously anticipated.
Pricing reform carried in China has addressed the major deficiencies in the market and has made progress towards establishing market pricing regime. Pricing reform encouraged both producers and gas importers to supply additional gas supply, at the same time created market pricing principles linked to the imported fuel oil and liquefied petroleum gas. However, it should be noted that a complete market pricing mechanism has not yet been developed but substantial progress has been made.
Regarding the climate policy related obstacles, China’s commitment of carbon intensity target for post 2020 has perceived to be too ambitious to achieve. In addressing the fight against the global warming, China has pledged to reduce its CO2 emissions level by 60 to 65 percent in 2030 below the 2005 level. With the aim of meeting highly ambitious pledges of Intended Nationally Determined Contribution (INDC), China has launched an emission-trading system to be implemented nationwide in 2017.
In the context of recent gas pricing reform along with plunge in oil prices since mid 2014, competitiveness of natural gas in the energy mix against coal started to lose ground, and this has been evident when one looks at the recent years annual growth rate that was hitting the lowest level since 2000. Additionally, following the gas pricing reform launched back in 2013, end users price in natural gas also has been on the rise, which again indicates the fact that gas consumption would only remain modest. Given that coal prices in China dropped to its lowest level in the last six years, the role natural gas is likely to remain moderate in years to come.