HONG KONG — As global diplomats parley in Paris for a new agreement to curb greenhouse gas emissions, demand for a cleaner fuel has been nosediving in China.
According to the latest data from the National Development and Reform Commission, China’s natural gas consumption increased by 2.7 percent year on year during the first 10 months of 2015. This is a significant slow down in a market where the natural gas demand had expanded at a double-digit rate since 2000, until the growth began to taper last year.
The new data also signal an acceleration in China’s shrinking gas demand. Government statistics show that Chinese natural gas consumption grew 7.1 percent during the same period of 2014.
Natural gas, the cleanest form of fossil fuel, has been touted as the fuel of the future because it can provide a quick fix to China’s air pollution. But the recent slowdown suggests that even natural gas can’t escape the shadow of a weakening overall energy demand.
In the first half of 2015, the latest official data available, the country’s total energy consumption rose merely 0.7 percent from 2014 levels, in line with its sluggish economic growth, notable progress in energy efficiency improvements and ongoing economic restructuring. China, once the world factory floor for everything from toys to cements, is now shifting its economy away from power-hungry manufacturing to one driven by service.
At the same time, Chinese developers have been adding wind turbines, solar panels, nuclear reactors and hydroelectric dams at a massive scale, stirring up the competition in an already downsized energy market.
Analysts say crimping gas demand is also partly the result of government-regulated pricing that is discouraging its use. Despite falling prices globally, Beijing has been slow to cut domestic gas tariffs. When crude prices fell over the past year, natural gas here lost its cost competitiveness to fuel oil. Coal is also a cheaper option in China.
"However, the lower gas demand growth this year does not necessarily indicate that China has lost its appetite for natural gas," said Jane Nakano, a researcher specializing in global gas market at the Center for Strategic and International Studies, a think tank based in Washington, D.C.
Nakano said there is still a strong potential for gas use in China as the government here remains committed to switch away from coal. Natural gas, used in industry, power generation, heating and transport, is an ideal candidate to aid the country’s energy transition; gas is cleaner than coal and oil, and it can cope with power grids more easily than unpredictable wind and solar.
Disappointed motorists and ceramics makers
But for now, the ailing demand for natural gas has touched all the aspects of the market. Chinese drivers used to wait in gas stations for hours to get their natural gas-fueled vehicle refilled; they no longer need to do so this year. Government officials have found it increasingly challenging to persuade factories to replace coal with natural gas in production. And those who have made the switch have regretted their decision.
An acute case was in southern China’s Quanzhou city. Earlier this year, ceramics makers there complained that high gas prices pushed their business to the edge, and business leaders took to the streets to protest.
As China’s demand for natural gas has cooled, global suppliers are also feeling the pitch.
In 2013, General Electric Co. published a report, "China’s Age of Gas," predicting that rising Chinese demand would bring buzz to natural gas exporters worldwide. Now, developers of liquefied natural gas projects from Australia to Qatar are nervously watching China, which has contributed to falling Asian gas prices.
Edinburgh, Scotland-headquartered energy consultancy Wood Mackenzie slashed its China gas demand forecast by about 15 percent to 360 billion cubic meters (bcm) by 2020. The International Energy Agency, an intergovernmental organization based in Paris, forecasted China’s gas demand in 2020 to be as low as 314 bcm.
To spur demand, the Chinese government recently made a deep cut in its so-called city-gate gas prices. The city-gate prices refer to the prices local distributors pay pipeline operators such as PetroChina Co. Ltd., and has a significant impact on the gas bill of Chinese energy users.
Government tries cut-rate prices
China’s National Development and Reform Commission estimates that the new prices — which took effect late last month — will save factories, power generators and other commercial users an estimated $6.7 billion each year. The price adjustment does not affect natural gas used by Chinese families.
"The recent price cuts will help boost gas demand," said Lin Boqiang, director of Xiamen University’s Center of China Energy Economics Research. But to which extent this boost would be is difficult to pin down, Lin said, as the artificially high price is only one of many headwinds facing the Chinese natural gas sector.
The good news is that China will still likely meet its mitigation targets despite the grim picture of domestic gas consumption, Lin said. He added that, even though the gas volumes are growing at the slowest pace in a decade, China is on the right track to bring up the share of natural gas in its energy mix to 10 percent by 2020, because demand for other energy sources such as coal and oil is decreasing even faster.
But the chilled gas market has shaken the development of an unconventional energy source to its foundations. Shale gas, or natural gas trapped inside deposits of shale rock, has helped the United States to reduce its dependence on imported gas, and interest in tapping into shale gas potential in China has spread — until recently.
Jin Zhijun, president of Sinopec Ltd.’s Petroleum Exploration and Production Research Institute, told participants in a recent forum that Sinopec may abandon its plan of producing 3.5 bcm of shale gas by the end of the year, due to concerns over the dim market outlook, local media China Business News reported.
Sinopec, formally known as China Petroleum & Chemical Corp., is a state-owned Chinese energy heavyweight. It is also a front-runner in the country’s shale gas development.
According to the government plan, China should reach an annual shale gas production capacity of 6.5 bcm in 2015. However, a report published in June by government agency China Geological Survey shows that progress remains slow, with less than half of that target being met at the end of last year.