China unveils the extent of its gas ambitions

The US, Europe and Russia may each consume more gas. Japan imports more LNG. But make no mistake, China is the world’s most important gas market. Why? Because today, as demand stalls in so many parts of the world, China is the engine of global gas growth.

Amidst the chaos of the pandemic, China’s gas demand has exceeded expectation. Government stimulus has been critical, supporting economic recovery through Q2. Domestic production has remained strong, Low prices have encouraged LNG imports and encouraged additional demand, particularly in the industrial sector. H1 demand growth came in at 4% year-on-year, hugely impressive given the severity of China’s lockdown through much of Q1.

Critically, the structure of China’s gas market is also changing. On 23 July, PetroChina and Sinopec Corp - historically the dominant players through the value chain - announced details of pipeline asset sales to the new national pipeline company, PipeChina. LNG terminals will also be transferred to the new company.

These moves reveal the extent of China’s gas ambitions. The government is now looking to dramatically accelerate the pace of market liberalisation by separating gas sales from transportation. The move will encourage greater competition, attract more capital and stimulate the development of the domestic gas network. Gas in China is now very big news.

The PipeChina asset deal and why it’s good for gas

Long-anticipated, the asset sale to PipeChina has moved quickly in recent weeks. With the deal expected to close in September, PetroChina and Sinopec Corp will receive cash and equity ownership in exchange for transferring most of their domestic pipeline assets. The agreement creates the world’s largest gas pipeline company, a giant with equity capitalisation of over US$70 billion. Ownership will be split between PetroChina (30%), Sinopec Corp and its midstream subsidiary (14%), CNOOC Gas & Power (3%) and seven state-owned financial institutions (53%).

The transfers will also end PetroChina and Sinopec’s near-duopolistic control of China’s midstream sector. PipeChina’s mission statement will be to manage China’s transmission network, drive connectivity across the country and support growth in gas demand. The inclusion of LNG terminals is important, giving third-party access to critical gas-importing infrastructure. China’s emerging LNG buyers must be delighted.

The deal is bold, ambitious and a positive step for China’s gas sector. PipeChina can now accelerate market liberalisation by separating gas sales from transportation. Speaking to my colleague Xueke Wang in our China gas team, she believes that the move will kick-start a new infrastructure investment cycle – critical for to drive greater gas use. According to Xueke, the deal is “China’s most significant energy market reform in decades”.

Renewed confidence in China’s demand outlook

The coronavirus pandemic has slowed the pace of China’s gas demand growth in the short-term. But the fundamentals of long-term demand growth remain strong. China’s clean air policies, rising urbanisation, continued economic growth, and improved gas affordability all support growth over the next two decades. PipeChina will support this through continued investment in infrastructure.  

There’s no doubt gas faces competition. Coal-fired power plants are still being approved and built. Renewables are taking an increasing share of the generation mix. I expect hydrogen will feature strongly in the 14^th five-year plan. But gas gives China what it needs: cleaner electricity, faster coal-to-gas switching in industry and less polluting residential and space heating sectors where coal-fired district heating is still widespread. In fact, in our latest H1 outlook, we now see gas demand by 2040 higher than in our previous view, despite the pandemic. As my colleague Miaoru Huang, head of China gas research, puts it: “The Chinese government clearly sees gas as a destination fuel for its very distinct brand of energy transition”.   

China’s changing supply mix – LNG does well but Russian pipe supply also well placed

The PipeChina asset deal could also alter the supply mix. PetroChina will face rising competition in eastern coastal markets for its Central Asian supplies as domestic production and rising LNG imports target the region. The company may shift the focus of Central Asian sales to China’s less developed western provinces, closer to the border and benefiting from lower delivered costs. The deal may also encourage PetroChina to delay additional volumes from Central Asia and slow investment in connecting pipelines, potentially stalling the start-up of Line D.

Russian gas could be a notable beneficiary. Pipe supply from East Siberia will be more competitive than Central Asian gas into coastal China, with upside depending on PetroChina’s gas marketing strategy. With the Power of Siberia 2 and Altai pipeline options remaining under discussion, Russia could realistically account for half of China’s pipeline imports by 2040.

Much still needs to be done. China still lacks market pricing for gas and its nascent gas hubs offer too little liquidity. The creation of PipeChina should improve third-party access to infrastructure essential for serving customers, yet supply remains dominated by the NOCs. But real change is happening, and with reform comes opportunity. China’s gas ambitions are becoming increasingly clear.

Check out: Webinar: China’s call on Russian and Central Asian gas – what to watch in the 2020s?

APAC Energy Buzz is a blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.