China has just passed Japan as the world’s second-largest economy after the US and while there is some debate about whether it has passed the US in energy consumption, it uses more than four times the energy of Japan.
China’s thirst for energy is playing an important part in underwriting LNG development in Australia. The first Chinese LNG contract, by China National Offshore Oil Corporation (CNOOC), was signed with the North West Shelf Venture in 2002. CNOOC has also contracted for LNG from BG Group’s coal seam gas project on Curtis Island at Gladstone. In the last two years PetroChina has signed up for LNG from Gorgon and joined with Shell in taking over Arrow Energy.
But what is the future outlook for Chinese LNG demand from Australia? Are we experiencing a narrow window of opportunity until China is able to meet its own natural gas needs from growing domestic production? Or can we expect further contracts as Chinese demand continues to grow?
A recent high-level LNG Forum in Shanghai suggests that Chinese demand for Australian LNG will continue to grow.
The meeting was organised by the Australia-China Natural Gas Technology Partnership Fund, a partnership between the Australian and Western Australian governments, the North West Shelf and the National Development and Reform Commission (NDRC), China’s central economic planning agency.
For people like me who are interested in the demand and supply outlook, the presentation by Mr Jiang Xuefeng, Deputy Chief Economist at China National Petroleum Corporation’s (CNPC)’s Economic and Technical Research Institute, was particularly interesting.
CNPC expects Chinese gas demand to more than triple over the next 10 years to around 10.5 TCF. This reflects rapidly growing energy demand plus a national aim of increasing the market share of gas. Currently gas is only 3.8% of energy consumption, very low by international standards. The Chinese Government wants to increase gas-use to reduce dependence on foreign oil imports (currently 53%) and to reduce the heavy air pollution from coal that is familiar to any visitor to China.
How will this demand be met? China has huge gas potential. CNPC estimates that China has around 4,200 trillion cubic feet (TCF) of prospective gas resources, including conventional gas, coal seam gas and shale gas.
However, despite this potential, demand is expected to outstrip domestic production, by around 3.5 TCF by 2020.
Much of the conventional gas resource suffers from low permeability and development of coal seam gas (CSG) and shale gas are at an early stage. CNPC expects that CSG will only contribute around 10% of production by 2020.
Like Australia, China too suffers from a geographic imbalance between where its gas resources are located and the centres of demand. Historically gas consumption has been concentrated in the areas with gas fields. However the highest rate of economic development is on the east coast and while the pipeline transmission system is growing quickly it is still limited.
Distance is also a constraint on imports of pipeline gas. China started importing gas from Turkmenistan in 2009. However this gas is not cheap. The price is linked to oil prices and it has to be transported almost 7,000 kilometres to China’s east coast through Kazakhstan and Uzbekistan.
Accordingly China recognises the need for a multi-source supply system, comprising LNG as well as domestic gas and pipeline imports. This diversifies supply and reduces risks. Australia is clearly well placed to meet a part of China’s ongoing LNG needs.
However LNG isn’t only about economics, it also relies on good long-term relationships and the indications from the Forum are that the China-Australia relationship is very strong.
China had a large, high-level delegation. It numbered 85 and was led by Zhang Guobao, Director of the National Energy Administration and the second-highest ranking NDRC official, with full ministerial ranking. Zhang Guobao will be the Deputy in charge of day to day affairs in the new National Energy Commission, behind Zhang Ping, who is Minister of the NDRC.
The Chinese party also included no less than 19 officials of the NEA plus numerous delegates from other central and provincial agencies. All the Chinese oil companies were also well represented.
Furthermore, the relationship with Australia is not only at the high levels of government. For many years now the Partnership Fund has sponsored managers from the Chinese gas industry to attend executive training programs in Perth. There have already been 88 managers attend these programs. These create lasting bonds between the Australian and Chinese companies.
Between Australia’s natural advantages as an LNG supplier to China and the strong relationships there is a good foundation for continuing growth in our LNG trade for many years.
Graeme Bethune is CEO of EnergyQuest, an economic consultancy specialising in oil and gas. This piece was originally published on afr.com, Resources Daily.