China Center for International Economic Exchanges

Zhang Xiaoqiang: We should attach great importance to the gas shortage problem
Date:Jan 19,2018    Source:CCIEE

First, the gas shortage appeared in the fourth quarter of 2017.

When the winter began in the fourth quarter of 2017, some provinces and cities in the North,Central and East of China have experienced a gas shortage, causing serious problem to the local residents and led a sharp increase in the gas price. For instance, the price of the LNG increased from 4200 yuan per ton on 15 November to 8800 yuan at the end of December. In some places, the price even exceeded 10000 yuan. In Zhengzhou, Henan Province, the price of natural gas used by taxi drivers rose from 3.66 yuan/cubic meter to 4.8 yuan on 19 December, which triggered a big strike and caused a huge traffic jam.

In response, the General Secretary Xi Jinping made several important instructions and Premier Li Keqiang pointed out that all departments and local governments should always put the people’s interest first and ensure affordable central heating during the winter. In early January of 2018, the price of LNG dropped to 5600 yuan per ton. However, the reasons for the incident should be analyzed and summarized carefully.

Second, the reason of the sharp price increase.

In order to improve the atmospheric environment and optimize the energy structure, many places in China has accelerated the process of replacing coal with gas during recent years. They have good intention but made some mistakes with the implementation.

The first mistake is that they only focus on consuming less coal or not any coal at all. For example, you can easily find such slogan as “whoever uses coal will be punished,” “burning coal is strictly prohibited” in the rural areas. As a result, many people suffered from the extremely low temperature. This is against our fundamental intention of seeking truth from facts and always putting people’s interest first.

The second problem is that the supply of natural gas can not keep up with the increased demand for gas in the short term due to the “coal to gas” campaign. Coal is the primary energy consumption in China and in 1990, the use of coal accounted for 76.2% of the total energy consumption, this figure dropped to about 60% in recent years while the use of natural gas has started to rise. In 2005, China consumed 46.8 billion cubic meters of natural gas, accounting for 2.7% of the total energy consumption, and increased to 205.8 billion cubic meters in 2016, accounting for 6.2%. The consumption and production of natural gas are closely linked, and the growth of the natural gas production is closely related to the investment, exploration and development of natural gas. In 2017, some places in China only focused on speeding up the “coal to gas conversion” without analyzing the supply capacity of natural gas. For example, Hebei Province aimed to replace coal with gas for 1.6 million households, which means it would require 8.3 billion cubic meters. However, the province’s own production capacity was less than 1 billion cubic meters and the rest had to be sourced externally. By the end of November, 2.32 million households completed the “coal to gas project but the insufficient supply of natural has also become a huge problem. According to the Energy Bureau of Anhui Province, 1/4 of the demand for natural gas can not be satisfied. In Wuhan, the demand for gas consumption during peak time is 12 million cubic meters per day but actually only 3/4 of the consumption can be provided.

The third issue is that China’s natural gas reserve is too low. The storage of natural gas is very difficult and there is a huge difference in consumption between the winter and summer. Taking Beijing for example, the consumption demand of natural gas reached 110 million cubic meters in winter, 5.5 times higher than the consumption in summer. In general, a country’s storage capacity of the natural gas is about 10% of annual consumption, but by the end of 2016, China’s storage capacity of the natural gas was only 5.5 billion cubic meters, accounting for 2.67% of its annual consumption.

The fourth problem is that China’s import of natural gas and LNG grew rapidly in recent years. In 2010, China imported 12.7 billion cubic meters, accounting for 11.8% of China’s total natural gas consumption. In 2017, it imported about 92 billion cubic meters, an increase of 27%. The supply of the LNG in the international market is relatively stable as more than 85% of the LNG is supplied in long-term agreements. Obviously, a sudden surge in demand of LNG will only lead to a sharp price increase. Due to the substantial increase in LNG import from China last year, the LNG price rose by 30% in the international market, compared with the previous year. In December 2017, China imported a record high of 7.89 million tons of natural gas, with the price of US $ 379 per ton, up 23% from the lowest level in April 2017.

Three, I have four suggestions on solving the shortage of natural gas.

In 2018, we have to continue promoting the “coal to gas” project, optimizing the energy structure and using more clean energy. According to the goal of the 13th Five-Year Plan, China’s natural gas should account for 10% of the primary energy consumption by 2020. To this end, we must summarize our experience and make continuous progress in our work.

First of all, we should emphasize the development of the supply-side natural gas, increase domestic exploration and development of natural gas, and accelerate the construction of gas storage facilities and pipeline. If we want to increase the consumption of natural gas to 10% of China’s primary energy consumption by 2020, (total amount should be 5 billion tons of standard coal), the annual demand will be about 370 billion cubic meters and 10% of the gas storage capacity is 37 billion cubic meters. Thus, we have to make a plan quickly and put it into practice to increase our storage capacity and speed up production.

Secondly, we should ensure the quality and safety of the “coal to gas” project and the residents involved in the project should not be burdened financially. Generally speaking, the installation fee for one household is about 3,000 yuan or more, that means peasants have to pay more than 1,000 yuan despite the government subsidies, which can be a burden for some of them. Apart from that, the cost of gas consumption will be higher than that of coal because of the poor housing condition in the rural area. Due to low investment standard, some disqualified companies and workers are being used for the project, causing a great safety concern. If the supply of natural gas is insufficient, we should come up with an alternative measure immediately and make sure that the demand of households can be guaranteed, especially in the winter. (In 2015, natural gas consumption in China accounted for 30%, industrial fuels accounted for 24% and chemical and power generation accounted for 14% respectively) Whatever we do, we should always put our people’s interest first.

Thirdly, we should deepen reform. China’s supply channels of natural gas and the major market participants are rather limited and thus, we should relax the market access appropriately to encourage and attract more enterprises to the construction of gas storage facilities. Furthermore, we should speed up the reform of oil and gas pipe network, as well as the pricing mechanism.

Last but not least, we should participate actively in the international cooperation on the gas market. On the one hand, we ought to actively participate in the upstream of the gas market to increase our capacity of natural gas production. On the other hand, more efforts should be made on gaining pricing power, RMB settlement and diversifying our gas sources (89% of China’s LNG imports are from five countries in 2017, 47% from Australia, 19% from Qatar, 12% from Malaysia and Indonesia accounted for 8%, the United States accounted for 3%).

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