China’s Natural Gas: Uncertainty for Markets

Summary

China could potentially be a much larger producer and consumer of natural gas than it is now. Despite China’s pollution problems and international environmental commitments, the role of natural gas in China’s energy mix remains relatively low, particularly compared to the United States. China has announced big plans for its natural gas development and use, but the changes will require significant investment in exploration, production, infrastructure, and consumption. With a slowing economy, China may not be in a position in the short-term to undertake these investments.

China’s natural gas plans have implications for a number of issues in which Congress has expressed a strong interest. Those issues include the prospects for U.S. hydrocarbon exports to China, prospects for U.S. energy companies’ investments in China, Chinese investment in the U.S. energy sector, China’s ability to meet its global commitments to reduce greenhouse gas emissions in order to combat climate change, and China’s plans for disputed waters in the South China Sea, which may contain hydrocarbon resources, among other topics.

In the 114th Congress, Members have expressed interest in Chinese policy related to natural gas in hearings, such as the Senate Committee on Energy and Natural Resources’ January 2015 hearing on S. 33, The LNG Permitting Certainty and Transparency Act, and the same committee’s February 2015 hearing on The Fiscal Year 2016 Budget Request for the U.S. Department of Energy.

China’s energy sector, including its natural gas industry, is controlled by the government via the National Development and Reform Commission’s National Energy Administration and other regulatory and planning bodies. There are three main national energy companies—China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec), and China National Offshore Oil Company (CNOOC). The first two are among the world’s largest energy companies. These companies are the primary actors domestically and internationally.

China has made significant strides in diversifying its natural gas supplies. Domestic production rose 164% from 2004 to 2014, to 135 billion cubic meters (BCM). Natural gas imports, which did not begin until 2006, grew from one BCM that year to over 58 BCM in 2014. With its imports split almost evenly between pipeline and liquefied natural gas (LNG), China is the fourth largest natural gas importer in the world, with Turkmenistan supplying just under half of its imports.

Growth in China’s demand for natural gas has slowed in recent years. State media reported that annual consumption in 2015 was 191 BCM, up 3.7% from 2014. This represented the lowest rate of annual growth in a decade. China’s government expects its overall energy consumption to grow in 2016, and for natural gas to rise to 6.2% of primary energy needs, from 6% in 2014. Part of the slowdown in consumption growth is attributed to the slowing economy. In November 2015, China cut natural gas prices to spur demand.