With exports to the U.S. declining, Canada's natural gas industry is actively exploring new markets for production, including the export of liquefied natural gas (LNG) to China. This bulletin provides a brief update on China's LNG industry, and highlights the opportunity of China's LNG market for Canadian natural gas. The article includes a discussion of China's recent dedication to significantly increasing its LNG importation capacity, the location and operatorship of China's current and planned LNG import facilities, and the potential future impact of domestic shale gas development on China's LNG importation policies.
INCREASING CHINESE DEMAND FOR IMPORTED NATURAL GAS
China has recently committed to a significant expansion of its natural gas use, highlighted by a series of interrelated state-mandated development plans and the construction of coastal LNG import and regasification facilities. This push toward greater LNG capacity will involve significant participation by China's state-owned oil and gas companies, including CNOOC (the China National Offshore Oil Corporation), Sinopec (China Petroleum & Chemical Corporation) and CNPC (China National Petroleum Corporation). Drivers include energy security as well as a desire to reduce dependence on coal and cut greenhouse gas emissions. In total, while current Chinese LNG import capacity stands at approximately 18.8 million tonnes or 26 billion m3 (BCM), by 2015 it is expected that China will possess LNG import capacity of more than 47 million tonnes or 64.8 BCM per year.
As a socialist market economy, China's economic development is in good part steered by state-mandated plans or guidelines mapping strategies and initiatives at both the national and regional levels. These are exemplified by "five-year plans" which each contain smaller, industry or sector-specific programs. The National Development and Reform Committee (NDRC) issued its 12th Five-Year (2011 to 2015) Plan for natural gas development (the Natural Gas Plan) to central and local governments in October 2012. Importantly, the Natural Gas Plan calls for a marked expansion of natural gas utilization at both the industrial and residential levels. This was followed by the issuance by the State Council in January 2013 of its 12th Five-Year Plan for Energy Development (the Energy Plan) establishing guidance, fundamental principles, development targets, key tasks, and measures and policies for China's energy development.
Pursuant to its Natural Gas Plan, the NDRC predicts that China's annual consumption of natural gas during the 12th Five-Year period will increase an average of 20 BCM per year to reach 230 BCM by 2015. However, the Energy Plan anticipates that annual Chinese domestic natural gas production will only increase from 94.8 BCM in 2010 to 156.5 BCM by 2015. Notably, this means that China will need to import at least 73.5 BCM of natural gas annually (or 32% of its annual consumption) by 2015 to meet domestic demand. Furthermore, the NDRC also predicts that China will import 93.5 BCM of natural gas annually or 40% of its estimated annual consumption of natural gas by 2015 in order to hedge against the risk of shortfalls in domestic production.
CHINA'S NATURAL GAS AND LNG IMPORTATION INFRASTRUCTURE
China has developed a strategy of importing natural gas through four main channels, being (1) the Central Asian Gas Pipeline in its northwest region which brings natural gas to China from Turkmenistan, Uzbekistan, and Kazakhstan, (2) the Sino-Russian Pipeline in its northeast region which brings natural gas to China from Russia, (3) the Sino-Myanmar Pipeline in the southwest region which brings natural gas to China from Myanmar, and (4) overseas shipments importing LNG from international markets into China.
Towards this end, the speed at which China has increased, and continues to increase, its LNG importation capacity is substantial. China only began importing overseas LNG in 2006. By the end of 2012, however, China had completed construction and commenced operation of six LNG import terminals on its eastern and southern coastlines with annual LNG receiving capacity of 18.8 million tonnes or 26 BCM. Of these six LNG import terminals, four terminals are operated by CNOOC, being (1) Dapeng LNG terminal of Guangdong province, (2) Putian LNG terminal of Fujian province, (3) Yangshan LNG terminal of Shanghai, and (4) Ningbo LNG terminal of Zhejiang province, and two terminals are operated by CNPC, namely (1) Rudong LNG terminal of Jiangsu province and (2) Dalian LNG terminal of Liaoning province.
Furthermore, China is on pace to increase its annual LNG importation capacity by an extra 28.2 million tonnes by 2015 thanks to completion of phase II of the Rudong LNG terminal as well as the construction of eight additional LNG terminals. Of these eight additional LNG terminals, three terminals will be operated by Sinopec, being (1) Tianjin LNG terminal, (2) Qindao LNG terminal of Shandong province, and (3) Beihai LNG terminal of Guangxi province, four terminals will be operated by CNOOC, namely (1) Hainan LNG terminal of Hainan province, (2) Zhuhai LNG terminal, (3) Shenzhen LNG terminal of Guangdong province, and (4) Tianjin LNG floating terminal, and one terminal, namely Caofeidian LNG terminal of Hebei province, will be operated by CNPC.
THE DEVELOPMENT OF SHALE GAS RESERVES IN CHINA
With reserves estimated at approximately 1,115 trillion cubic feet by the U.S. Energy Information Administration, in March 2012, China issued its plan for shale gas development during 2011 to 2015 (the Shale Gas Plan). The Shale Gas Plan recognized that China is falling behind North America in terms of shale gas development, and set goals for shale gas reserve assessments and the advancement of technical expertise, with a long-term goal of producing 60 to 100 BCM of shale gas by 2020. While the Shale Gas Plan may boost shale gas production in China – and as a result reduce China's demand for LNG imports from approximately 2016 and beyond – a number of challenges have given rise to a healthy skepticism regarding the economic viability of shale gas production in China without a meaningful technological breakthrough, including difficult geological formations, water scarcity, the location of shale gas reserves in highly populated areas, and a lack of key supporting infrastructure. On the other hand, should the Shale Gas Plan indeed significantly magnify shale gas production in China, a variety of different opportunities will present themselves to Canadian natural gas companies, including both producers and service providers.
The swift and significant expansion of China's LNG import infrastructure presents Canadian natural gas producers with a large new – and potentially long-term – market for their natural gas production. However, in order to position itself to satisfy this growing Chinese demand, Canada's natural gas industry must develop the requisite LNG export infrastructure and associated supply contracts in a similarly expedited manner. Given the global competition for China's LNG market and possibility of increasing Chinese domestic shale gas production, the costs of complacency could be great.