China searches for solution after being hit by natural gas shortage

Cabs wait in long lines for gas in Xi'an, capital of Northwest China's Shaanxi Province in December 2017. Photo: VCG

This winter, the supply of natural gas in China is more acute than ever before.

"It was a mess when the natural gas pipeline pressure suddenly plummeted on November 21 - just in the first week of northern China's winter heating season," an unnamed executive from a gas company based in North China's Hebei Province told domestic financial news publication Caixin Weekly.

The drop in pipeline pressure was due to a national supply shortage, which prompted the local government in Hebei to initiate the first round of cleaner fuel supply cuts among factories on November 27.

One week later, Hebei issued an orange alert warning for gas shortages, the second most critical level on a four-tier scale. This meant that the province began facing a gas supply shortfall of between 10 and 20 percent from its current needs.

Also in November, the China National Petroleum Corporation (CNPC), one of the country's "big three" oil organizations, issued a notice, warning domestic enterprises about a dramatic decline in natural gas supply from Central Asia. The company also told downstream enterprises that natural gas sales would be cut by about 10 million cubic meters in northern regions from November 21.

Although the supply of natural gas from Central Asian countries rebounded to 110 million cubic meters a day in late December - as high as it was in the same period of December 2016 - after the Chinese government sent representatives to those nations for negotiation purposes, there is still a gap between the amount actually being supplied and the contracted number, the Caixin report noted.

"Such inadequate [natural gas] supply from foreign sources, as well as the nation's push to switch from coal to natural gas for both residential heating and industrial processes - which has led to a larger-than-expected rise in demand - has exacerbated the supply-demand imbalance this winter and sparked widespread public complaints," an anonymous industry insider from the energy sector told Caixin Weekly over the weekend.

"But the central government's policy direction is accurate and [has been] successful, as we have seen cleaner skies and improved air quality this winter," he added.

Shortfall in Central Asia

"In fact, [domestic supply] shortage on a large scale can be avoided if foreign supply sources run perfectly," said a CNPC staff member, who prefers to remain anonymous.

So far, imports from the China-Central Asia natural gas pipeline have accounted for about 40 percent of China's total natural imports, with three Central Asian countries, namely Turkmenistan, Uzbekistan and Kazakhstan, acting as the country's major sources for gas imports.

But since October, natural gas transmitted through the pipeline has posted sharp declines, with the start of the heating season in mid-November further pushing the energy shortage issue to the surface.

For example, natural gas imports from Turkmenistan slid for three consecutive months from September, according to data from China Customs.

Furthermore, in early December, the amount of natural gas imported from Turkmenistan averaged at 35 million cubic meters per day, half the targeted amount of 71 million cubic meters in daily supply, it noted.

An industry insider said that the sudden plunge in gas supply from neighboring sources highlighted the possibility that the Central Asian countries may consider switching to energy cooperation with European nations. Turkmenistan's reported negotiations with European countries over gas supply provided a clue, according to the Caixin report.

The decline may also be a bargaining strategy employed by the Central Asian countries, as global oil prices are in a period of meltdown, which does not favor suppliers' interests, experts noted. Temporarily reducing supply may tilt the bargaining scale to the Central Asian side.

The CNPC was unprepared to handle such an unexpected and large-scale gas supply cut, despite an earlier meeting with the Central Asian countries in September, whereby all countries agreed to pump up the total daily supply to 130 million cubic meters during the winter season - but those gas producers failed to deliver.

The State-owned oil giant, which is commissioned by the Chinese government, also sent representatives to the three Central Asian countries in December to negotiate the matter.

After negotiation, natural gas supplies from the three nations surged.

In late December, a total of 110 million cubic meters of natural gas started being transmitted via the pipeline every day, but this amount was still "significantly lower" than the contracted 130 million cubic meters.

Switch to natural gas

In addition to the reduction in supply from foreign sources, China's push to combat air pollution is another reason behind the gas shortage, as authorities this year have ordered millions of households to convert from using coal for heating as well as companies to replace coal-fired plants with gas or electricity.

The campaign has in turn driven up the demand for natural gas at a faster-than-expected rate, even during the traditional weak demand season, although the country has already taken note of a potential demand increase and has been purchasing spot liquefied natural gas (LNG) since summer, according to Yao Qiang, a professor at Tsinghua University.

During the first 10 months of 2017, China's gas consumption jumped 18.7 percent year-on-year, which eclipsed 2016's whole-year growth rate of 6.6 percent, according to data from the National Energy Administration.

Now, that rate is estimated to reach 20 percent if the government does not impose a cap on natural gas usage.

"The year 2017 marks the latest year since a government curb on air pollution in 2013, when 10 measures were implemented. And as factories rushed to turn to natural gas to meet coal-cutting targets last year, the demand for natural gas thus remained robust the whole year, including during the summer season," Yao explained.

Despite an increase in both domestic output and imports, China was estimated to suffer a natural gas shortage of 10 billion cubic meters last year as the surge in demand in 2017 was "all-round," which not only refers to high demand from industries such as the chemical and electricity industries, but also from civilians, Yao was quoted as saying in the report.

To avoid such gas shortfalls in the future, experts have suggested that the country should diversify its sources of gas imports, while also scaling up investment in gas storage houses so that the substance can be imported at a relatively cheap price in low seasons and sold at a relatively high price when demand soars.

Li Yao, the CEO of consulting firm Siya Energy, said that the China-Russia gas pipeline, which is scheduled to go into operation at the end of 2019, may not be a viable supplement to the China-Central Asia pipeline due to difficulties in price negotiations and costs.

Li suggested that building coastal LNG terminals would be a better supplement, as they are more flexible for gas imports and more economically viable than gas pipelines in terms of transportation costs.

"In peak summer times, spot LNG could meet market demand. In winter seasons, the country's demand for natural gas could be met by domestic output, long-term pipeline imports as well as long-term LNG sales and purchase agreements," Yao noted.

This story is based on an article published by Caixin Weekly.

Newspaper headline: Supply setback