China's recently announced goal to achieve a peak in CO2 emissions before 2030 and a carbon-neutral economy by 2060 has brought renewed focus on the role natural gas might play in the country's energy transition.
Natural gas has seen rapid growth in the last few years, as government polices to eliminate air pollution and reduce the use of coal supported switching to cleaner fuels. Despite this, natural gas will still account for just 6% of China's primary energy demand this year, below the 8.3%-10% target in the last Five Year Plan, which runs to 2020. This is also well below the global average, with gas forecast to account for 22% of primary energy consumption this year, according to S&P Global Platts Analytics' Global Integrated Energy Model.
In an effort to create a more competitive market, reduce costs and increase the use of gas, the government has engaged in a series of reforms, including making it easier for private and foreign companies to invest in China's upstream sector.
But the most significant change came last year with the formation of a new midstream company, PipeChina, to manage the country's pipeline assets. These were previously owned and controlled by China's three major national oil companies, PetroChina, Sinopec and CNOOC.
Historically, these companies each developed and operated their own pipeline network in order to optimize revenues from their own upstream operations. In 2014 the government passed measures requiring the companies to open up their pipelines to others—so called third-party access—but they had little effect on the structure of the market, and the NOCs saw little challenge to their upstream dominance.
Making space for markets
By spinning off China's pipeline network into an independent midstream company that will focus solely on distribution, the government hopes to attract a wider range of players into the upstream and downstream sectors. Creating a more competitive gas market will, the government hopes, facilitate the emergence of trading hubs where gas prices will be dictated by market fundamentals of supply and demand.
This, in tandem with the development of electricity markets, should help increase the role of gas in the power sector. Platts Analytics forecasts natural gas will only account for 3.6% of China's generation mix in 2020. As the government tries to reduce coal use and increase renewables, gas has a key role to play in balancing the market when renewables, which by nature are intermittent, are unable to meet electricity demand.
By focusing just on the midstream, PipeChina will also be in a better position to develop the network more rationally, extending it to parts of the country that currently have little access to natural gas.
According to Liu Zhongyun, PipeChina's deputy general manager, quoted by local media at an energy forum at the end of October, the company will build more than 25,000 km of pipelines over the next five years, in line with recent 14th Five Year Plan proposals which call for faster construction of national trunk oil and gas pipelines. Even with this investment, China will fall short of the medium-term pipeline network target of 240,000 km of oil and gas pipelines by 2025.
Released in 2017, the medium-term plan envisaged that between 2015-2020 the total length of the gas pipeline network would grow 10% a year from 64,000 km to 163,000 km—a sizeable increase, but one that has to be put in context. The US, which including Alaska has a nearly identical land area to China, has a gas pipeline network of nearly 4.8 million km, according to the US Energy Information Administration.
At the moment, PipeChina controls 90,000 km of mainly inter-provincial, long-distance pipelines. But this is only around 60% of China's total network. There are still around 20 provincial pipeline companies that control distribution networks in their province. Guangdong and Hainan provinces have already incorporated their networks into PipeChina, but other provincial pipeline companies have more complex shareholding structures which may prove harder to incorporate. The dream of a unified pipeline network may be some way off.
As well as investing in pipelines, the company will also invest in other infrastructure like storage and LNGreceiving terminals. According to Platts Analytics, China currently has a total of 20 LNG terminals, one of which is a floating storage and regasification unit (FSRU). Seven of these, including the FSRU, will be incorporated into PipeChina.
A further three terminals currently under construction will also be transferred to the company, so PipeChina will control 10 terminals in total. This should in theory provide greater third-party access for LNG importers, which hitherto have had to pay highly for the privilege of slots at LNG-receiving terminals.
But building and managing the pipelines and infrastructure might be the easy bit. The bigger question might be whether the government can create a regulatory regime that gives fair and equal access to the pipeline network for new entrants and upstream companies so that they can compete with, and challenge the upstream dominance of, China's NOCs.
There is a tension at the heart of the government's reform agenda that is clearly visible in the recently released proposals for the 14th Five Year Plan, the overarching blueprint to guide China's development from 2021 through to 2025. On one hand, it calls for the market to play a decisive role in allocating resources, as well as in the reform of state-owned companies, but at the same time it emphasizes the strategic supporting role of the state-owned economy.
The creation of PipeChina is an important stepping stone on the way to the creation of more competitive gas markets, and market-based gas pricing. The question is how quickly this can happen if the NOCs continue to play such a big role China's energy industry.