Hemado Energy Strategy Whitepaper
The Global Impact of
China’s New Natural Gas Strategy
Executive Summary
China’s carbon pledges and coal-to-gas initiative set the tone for a robust outlook of gas consumption in coming years. We forecast the country’s gas demand to grow by 4.8% a year on average to reach 758 billion cubic metres (bcm) in 2035.
Gas consumption will continue to outstrip domestic production, pushing import dependency to 53% by 2035. This, coupled with recent market turmoil and geopolitical tension, prompts the country to shift its strategy with renewed emphasis on energy security. We summarise China’s strategic actions into 5 broad themes and discuss their global impacts.
1. Diversify both the source and method of gas supply
China is levelling up its supply diversification, expanding both the supply sources and delivery methods. This will accelerate the integration of global gas markets, prompting major LNG buyers to adjust energy strategy amid growing competition and volatility.
2. Boost receiving and storage capacities
China is pushing for a boost in gas infrastructure to enhance flexibility and redundancy. This, coupled with increasing trading arms around the globe, will prompt China to emerge as a rival to major trading houses such as Vitol and Trafigura, gaining influence on global gas trade and prices. And China's capability to optimise storage and switch import methods will enable it to play a stabilising role in global markets.
3. Further increase the proportion long-term contracts
Since 2H 2021, China has signed a dozen multi-decade LNG and pipeline contracts to increase its long-term coverage. In the next 2-3 years, we will see continued interests from Chinese buyers in long-term deals, bring an opportunity for international suppliers to enhance income visibility, accelerating FID of global projects.
4. Proactively participate in the global gas industry
China is playing an increasingly active role in investing overseas E&P projects. Continued Chinese involvement will accelerate upstream development in countries with weak infrastructure and financial resources, increasing global gas supply in 2H of the decade.
5. Carry out reforms to strengthen domestic value chain
China is carrying out structural reforms to its domestic gas value chain. Its gas industry will have a centralised midstream infrastructure, while the upstream and downstream will be increasingly exposed to competition. Market opening up and deregulation will provide international companies with E&P and downstream opportunities in the world's largest gas buyer and one of the fastest-growing gas market.
Traditionally, natural gas played a small role in China's energy system, accounting for less than 5% of primary energy consumption in 2010. But pollution and climate concerns have encouraged the country to promote gas, which is recognised by authorities as a low-polluting and less carbon-intensive alternative to coal.
Over the past 10 years, China's gas demand grew by an average of 12% per year to reach 397 bcm in 2021, or 9% of the country's energy mix. The strong growth has been underpinned by a coal-to-gas initiative, continued urbanisation, and fast expanding gas infrastructure.
Last year, China became the world’s largest LNG importer, surpassing the former top three buyers in just ten years’ time. And it is now set to become the largest gas consumer.
Robust demand growth to 2035 underpinned by carbon pledges
Robust demand growth is expected to continue in the coming decade, thanks to a recent stepping up of climate pledges. In September 2020, China set forth a “dual carbon” national goal, referring to peak emissions by 2030 and net zero by 2060.
In this context, gas is recognised by Chinese authorities as a strategic bridging fuel for the country to sail through its 30-year journey of carbon neutrality. CNPC, the largest state-owned oil company in China, expected the country to further increase gas consumption in its primary energy mix to 12% by 2030.
In volume, we forecast gas demand in China to grow from 397 bcm in 2021 to 758bcm in 2035, corresponding to an annual growth of 4.8%, surpassing the 1% global average forecast for the same period. The expected strong growth in China will be driven by further coal-to-gas switching in industrial and residential sectors, as well as an increase of gas use for transport and power generation.
In a global context, China will continue to be the engine of growth for inter-regional gas trade. In 2021, China became the world's largest LNG buyer with 108 bcm of imports. The country surpassed the former top three importers in just 10 years. And sustained growth will make China the world's top gas consumer in the next two decades.
Rising import dependency raises the alarm of energy security
In light of surging gas demand, China has strived to boost domestic production from conventional, shale and synthetic resources. Still, demand growth continues to outpace supply. As a result, China's import dependency for natural gas has been rising steadily. In 2021 the share of imports reached 45% of total demand, compared with just 5% a decade ago. In the coming years, we expect gas demand to continue outstripping production, pushing import dependency to 53% by 2035.
For Beijing, ever-rising import reliance of a strategic fuel has caused concerns about the reliability and affordability of its supply. And recent market gyration and geopolitical tension have further raised the alarm on energy security. Last autumn, China experienced widespread blackout and power curtailment across the country. Since last winter, global LNG prices have surged to record highs. And recently, rising geopolitical crisis and conflicts have emerged from Kazakhstan to Ukraine.
With short- and long-run supply risks rising simultaneously, China sensed an urgency to recalibrate its energy strategy.
On energy, there is a well-known trilemma of economics, environment, and security. The trilemma suggests that sound energy planning is about striking a right balance between affordability, sustainability, and stability in energy supply.
During the five years to 2020, energy security took a back seat to economics due to an oversupply of fossil resources, and to environment thanks to a global push of decarbonisation.
Now, as China revaluates supply risks attached to natural gas, its government has put a renewed emphasis on energy security. This means being able to secure uninterrupted gas availability in the short run and adequate supply in the decades to come. In other words, China wants to strike a sound balance between security, environment, and economics, in that order.