Global Insight Perspective | |
Significance | The National Development and Reform Commission has approved the construction of a second major west-east natural gas pipeline that will have an annual capacity of 30 Bcm. |
Implications | Connecting Xinjiang and Guangzhou, the link will allow China to speed gas deliveries from Turkmenistan and Russia to its main markets in the south-east of the country. However, the task is now to upgrade distribution systems so that these new gas supplies can actually capture the markets sought by Chinese policymakers. |
Outlook | Design work on the new pipeline is set to begin later this year, with a preliminary completion date of 2009. The consolidation of China's midstream infrastructure raises expectations of future growth across the economy, from gas-fired power generation to manufacturers and residential consumers. |
Bridging the Gap
China set out an ambitious plan to ramp up natural gas consumption to roughly 100 Bcm per year by 2010 as part of the Five-Year Plan set out in 2001. To that end, it has been actively tying up a variety of different gas supply sources from new domestic production and LNG imports. Securing overland gas deliveries from production centres in central and northern Asia has been a key platform in this initiative. Indeed, China has made notable successes in this area, tying up major agreements with Turkmenistan and Russia to supply over half of the projected gas demand target (see "Related Articles" below). LNG deliveries have already begun arriving from Australia's Northwest Shelf (NWS) and a new LNG supply deal has just been wrapped up with Indonesia.
However, despite the confidence engendered by these supply-side additions, questions have persisted in relation to China's gas consumption. Specifically, observers have questioned just how China was intending to get all this gas to its consumers. From the power sector, where gas shortages have forced shut-ins, to city gas users, whose consumption has remained stunted by virtue of inadequate distribution systems, China is rife with examples of supply-side breakdowns and undermined consumption. Abundant access to gas matters little if it doesn’t reach intended end users.
New Accommodation
China's groundbreaking West-East gas pipeline was first conceived and constructed to ease the strain that had become apparent in the midstream sector. Completed in 2004, it connects the country's principal gas production centres in the west, found in the Tarim, Qaidam and Ordos basins, to the leading consumption centres in the south-easterly coastal provinces. The 4,200-km link was built at a cost of some US$20 billion and has a capacity of roughly 12 Bcm. Although upgrades have been discussed, the new supplies that China's pipeline deals with Turkmenistan and Russia promise, alongside increased domestic production, have prompted a rethink. The West-East pipeline cannot accommodate all the gas that is going to build up in China's north-west. Recognising this, Chinese authorities have acted quickly to move against the bottleneck and supply-side breakdown on their hands.
Dow Jones, Upstream and Gas Matters Today have reported the preliminary details of a new west-east gas pipeline. This new link will run between Xinjiang Autonomous Region and Guangzhou City in the Guangdong province. At 30 Bcm, this new link has capacity over double the current West-East link. No financial details of the proposal have been released, though at this early stage it looks as though China's leading NOC, the China National Petroleum Corp. (CNPC), will build and operate the pipeline. According to Dow Jones's coverage of the China Pipeline Planning meeting that was held in the capital, Beijing, this week, design work on the pipeline is being finalised, and with an aggressive work programme likely to follow, there is the expectation that construction could be complete by 2009. It is notable that the timetable and capacity of the new link coincides with the 30 Bcm of gas China is set to receive from Turkmenistan from as early as 2009. Whether or not it has emerged solely to service those supplies, the stronger midstream connection between the west and east of China that is promised with the new pipeline goes some way to accommodating all the gas supplies it will enjoy in the future.
Outlook and Implications
Still more needs to be done as China makes the transition to a leading gas consumer. Today's suggestion of an expansion in the main arteries of gas consumption across the country is certainly encouraging from the point of view of the supply mix and increased consumption sought in China. Looking to wean the country off its overt coal dependency, on environmental and energy security grounds, another west-east pipeline allows China to make the most of the international supply deals it has fought so hard to achieve.
However, expanding China's gas market will require greater additions to the distribution infrastructure to follow the improvements that are being made to trunkline transmission links. If gas is to make inroads as a fuel of choice in the power sector or for domestic use, the market needs to improve both its availability and its price. Currently, China's officials are working under the assumption that gas demand will hit the 2010 target, which incidentally doubles to 200 Bcm by 2020. Yet gas is neither sufficiently available, nor sufficiently affordable to support this kind of demand across China at present. One major supply-side gap that has contributed to this situation looks to be handled with the new pipeline plan, but authorities must redouble their efforts to address the others that stand in the way of a competitive gas market in China.
Related Articles
Indonesia: 21 September 2006: CNOOC Finally Wraps Up Groundbreaking LNG Supply Deal with Indonesia
China: 29 June 2006: Amid Great Fanfare, China Set to Receive First LNG Supplies from Australia
Russia: 22 May 2006: China Gas Pipeline Deal Gives Russia Supply-Side Security
Turkmenistan: 4 April 2006: Eastward Orientation? Turkmenistan Signs Deal to Supply Gas to China