Chapter Four

The Natural Gas Industry

Historically, natural gas has not been a major fuel in China, but it offers a very attractive alternative to coal and could relieve reliance on imported oil. Gas currently accounts for less than 3 percent of total energy usage in China, compared to a world average of 24 percent and an Asia-wide average of 8.8 percent. Beijing is trying to boost its production and consumption, but government officials complain that the sector is hampered by the lack of an effective regulatory framework.⁹⁷
Beijing’s goal for gas is 8 to 10 percent of the nation’s total energy consumption by 2020.⁹⁸ This will involve an increase in domestic production and imports, either by pipeline or in the form of liquefied natural gas (LNG). LNG is natural gas that has been cooled to approximately 260 degrees Fahrenheit. LNG has a 610:1 volumetric advantage over its natural state and is much easier to ship and store. The import issue is complicated by the fact that in its natural form, gas can be piped only a limited distance without being liquefied. Furthermore, for liquefaction to be economical, the gas deposit must be 3 to 5 tcm in size.⁹⁹
Natural gas is being sought both from its own reserves and in the form of liquefied natural gas from offshore and overseas sources. It is cheaper than either coal or oil and will ease the nation’s reliance on those fuels while protecting the environment—natural gas is a relatively clean-burning fuel. If the suspected large reserves of natural gas are discovered in western and northwestern China, its use will ease reliance on foreign sources of energy.¹⁰⁰ Current estimates, however, project that by 2005, natural gas demands will exceed domestic supplies, and China will have to import the fuel.¹⁰¹
Given Beijing’s domestic reserves and the environmental benefits of using gas, China has embarked on a major expansion of its gas infrastructure. The largest onshore source of natural gas comes from the Changqing Oilfield in the Ordos Basin, which extends through almost 400,000 square kilometers (km2) of Shaanxi, Gansu, and Shanxi provinces, as well as the Inner Mongolia and Ningxia Hui Autonomous Regions. Two pipelines from this vast field—estimated to offer reserves of more than one tcm—currently transport gas to 15 cities, including Beijing.¹⁰²
Total gas reserves onshore are estimated at 38 tcm, with proved reserves both on- and offshore of 2.56 tcm in 2000, a 58 percent increase over 1990 estimated reserves.¹⁰³ These are located in 69 different areas, the largest reserves in western and northwestern China, with major maritime sources in the East and northern South China Seas and in the Bohai.¹⁰⁴
China would like to pursue what one observer has called the Pan-Asian Continental Oil Bridge, a network of oil and natural gas pipelines stretching from the Middle East, Southwest and Central Asia, Russia, and Southeast Asia to China.¹⁰⁵ However, the high degree of international political cooperation necessary for such a hyper-project is not likely to prevail in the foreseeable future; some proposals envision a grid extending from Southwest Asia to Japan, and from Indonesia to Russia.¹⁰⁶
Even the western location of the major Chinese fields will require vast investments in pipeline infrastructure to convey the natural gas to eastern cities, which will remain the major market, despite Beijing’s continuing efforts to direct future economic development to western provinces.¹⁰⁷ China is planning to build a pipeline 4,200 km long from gas deposits in western Xinjiang Province to Shanghai.
CNPC is seeking foreign investment in the project, with an estimated cost of $4.8 to $7 billion. ExxonMobil, BP, Shell, and the Russian company Gazprom reportedly bid for a stake in the pipeline, which is supposed to be in operation, with a transmission capacity of 12 bcm of gas, by 2003 or 2004. BP withdrew from the bidding process, perhaps because of a “lack of confidence in adequate financial return.”¹⁰⁸ Several Japanese firms withdrew from the project for similar reasons.¹⁰⁹
The contract has been awarded to a consortium composed of PetroChina, Shell, and Gazprom, with the two foreign companies holding 45 percent of the project, estimated at $18 billion, which probably includes development of the gasfields, construction of the pipeline, and development of associated infrastructure, including marketing.¹¹⁰ Construction of the first section of the pipeline, 900 km in Shaanxi Province, supposedly began in August 2002.¹¹¹ Pipeline segments are also reported under construction in Zhejiang Province.¹¹² The Shell bid reportedly also includes the opportunity to operate one of the major fields, which would be a significant expansion of foreign involvement in China’s energy infrastructure.¹¹³
The hope in Beijing is that these western fields will be able largely to support all the needs of China’s eastern economy.¹¹⁴ The pipeline is being touted under the three-part motto of “substitute oil with gas,” “generate electricity with gas,” and “city gasification.”¹¹⁵ At a more prosaic level, the Shanghai city government is planning to allocate this natural gas among electricity generation (50 percent), civil usage (40 percent), and for chemical industrial products (10 percent).¹¹⁶
This ambitious pipeline project raises socio-political questions similar to those associated with the mammoth Three Gorges Dam. Beijing apparently believes that developing energy fields in the barren, economically disadvantaged northwestern provinces will enable their populations to benefit from China’s growing economy. That theory may be undercut by the historic fact that areas used as suppliers of raw materials rarely benefit significantly from having their wealth removed; more likely is that the economic benefits from new energy fields in the northwest will accrue to China’s economically modernized eastern provinces. This will do little either to better balance the nation’s wealth, or to relax significantly the uneasy socio-political-economic situation in Xinjiang and possibly other economically disadvantaged provinces.
Another proposed project would link the Russian gas grid in Siberia to China and possibly South Korea via a pipeline from Irkutsk. The cost of the project has been estimated at $10 billion, and a feasibility study is ongoing. Russian participation in pipeline construction in China will reportedly make Gazprom “Russia’s largest trade and economic establishment in the Chinese capital,” where it has opened a “permanent office.”¹¹⁷
Expansion of China’s gas infrastructure has the potential to create huge opportunities for foreign investment, as partners are being sought for both upstream and downstream gas projects. Enron and CNPC were planning to link Chongqing to Wuhan in central China with a 470-mile pipeline that would have an annual capacity of 3 bcm.¹¹⁸ This pipeline was scheduled for completion in late 2002 but, despite Sichuan Province’s large, proven gas reserves, is in jeopardy as the result of the collapse of the Enron Corporation, which held a 45 percent share of the pipeline.¹¹⁹
Shell is undertaking a study on developing the infrastructure to market production from the Changbei gasfield in the northwestern province of Shanxi, following a contract with CNPC to develop the field jointly, with estimated reserves of 2.5 tcf. BP Amoco’s decision to purchase 20 percent of the stock offered in the PetroChina IPO has been seen as part of a larger strategic alliance with CNPC, which will likely lead in more substantial BP Amoco investments in China. BP Amoco controls the Kovykta gasfield in Siberia, the output of which could be exported to China, through its interest in the Russian firm Sidanco.
Other major natural gas projects in the offing include a northwest China to Shandong Province pipeline project,¹²⁰ and a huge LNG project in Guangdong. Imported LNG will be used primarily in coastal areas, and the Guangdong project is scheduled for completion in 2005, with an eventual capacity of 5 tcm per year; associated with this undertaking is construction of six 320-megawatt gas-fired power plants, and conversion of existing oil-fired plants with a capacity of 1.8 gigawatts to LNG. A feasibility study of a similar project in Fujian is under way.¹²¹
The Guangdong project originally drew interest from companies in Australia, Indonesia, Iran, Malaysia, Qatar, Russia, and Yemen, while investments in the gasfields in question have already been made by Dutch Shell, French TotalFina, ExxonMobil, and Australia LNG. In April 2002, Beijing narrowed the competition to companies from Australia, Indonesia, and Qatar.¹²² China’s goal is to obtain 3 million tons of LNG annually by 2005, and 5 million tons by 2008, for the Guangdong operation.¹²³
Australia was awarded this contract to supply 3 million tons of LNG annually for 25 years to Guangdong Province.¹²⁴ This $13.5 billion arrangement will also allow CNOOC to “develop natural gas in Australia” as partner in a joint venture with Australia Natural Gas.¹²⁵
Coastal China also will benefit from offshore production increases, such as the Yacheng field, which began production in 1996 and supplies 0.1 tcf per year for use in south China and Hong Kong. In January 2000, China granted preliminary approval to a project for an LNG regasification terminal at Shenzhen in Guangdong Province. Foreign firms will hold only a minority stake in the project.
Forecasts of significantly increased availability of offshore LNG assets are based on CNOOC determination to focus on natural gas as its “core business,” as well as on three additional projects.¹²⁶ The first of these is a plan to convey 2.4 bcm of natural gas annually from two fields in the northern South China Sea, Dongfang and Ledong, to Hainan Island.¹²⁷
Second is the annual transfer of 400 million cubic meters from the Bonan field in the Bohai to Shandong Province, while third is an ambitious plan to ship 3 to 4 bcm of natural gas from the Chunxiao and Xihu fields in the East China Sea to Shanghai and Ningbo. This last project is currently on hold, as the China companies in the proposed joint venture, CNOOC and Sinopec, try to reach a satisfactory agreement with their foreign partners, Shell and Unocal.¹²⁸ Shanghai, meanwhile, is pressing ahead with plans for the extensive infrastructure that will be required to focus its energy source on natural gas, infrastructure that will include the power-generation industry.¹²⁹
An interesting aspect of Beijing’s drive to increase natural gas supplies is an apparent effort, akin to that being pursued with respect to oil, to encourage its major energy companies to secure resources located in foreign countries. CNOOC has signed agreements with Chevron and Australia LNG to establish a joint venture to exploit fields in Western Australia. The CNOOC goal is to arrange for the conveyance of liquid natural gas to China from Australia’s Northwest Shelf Gas Project, which involves BP, Shell, Chevron, and three other foreign companies.
CNOOC reportedly is also investigating investments in LNG resources in Iran, Malaysia, Qatar, Yemen, and Russia. A major investment has also been made in Indonesia’s energy infrastructure.¹³⁰ Most recently, Beijing and Tehran signed a series of agreements that grant Sinopec the right to explore for oil in a 4,700-km2 area south of Tehran, to upgrade Chinese-built refineries in Iran, and to build an oil terminal port on the Caspian Sea.¹³¹
Despite its drive to secure overseas supplies of oil, and significant experimentation with alternative sources of energy, Beijing has chosen natural gas as the future path to reducing dependence on coal, with its environmental and economic disadvantages, and on oil, with its strategic drawback of increasing reliance on foreign sources. Furthermore, locating natural gas and developing the infrastructure necessary to take advantage of it as an energy mainstay is emerging as a leading vehicle for foreign investment and opening of a core feature of China’s expanding economy.

Endnotes

⁹⁷Peng Sen, Vice Minister of the Economic Restructuring Office of the State Council, quoted in “China Needs to Establish Downstream Gas Sector Regulatory Framework,” Xinhua, April 10, 2002, in Alexander’s 7, no. 9 (May 3, 2002), and Chen Li, a “senior official” in the same office, in “Chinese Experts Call for Establishment of Gas Market Watchdog,” China Daily, April 9, 2002, in Alexander’s7, no. 9 (May 3, 2002). Also see “The Bulls Are Back,” Petroleum Economist 67, no. 11 (November 2000), 38–39. [BACK]

⁹⁸The 8 percent figure is cited in “China’s Modernization May Be Slowed Down by Oil Shortage,” People’s Daily, in Alexander’s 6, no. 15 (August 14, 2001); Mai Tian, “Sinopec, PetroChina Reach Agreement on Pipeline Project,” China Daily, October 6, 2001, in FBIS-CPP20011006000032, reports the goal as 10 percent. [BACK]

⁹⁹Author’s interview of geologist, at the East-West Center, Honolulu (November 1999). [BACK]

¹⁰⁰See, for instance, “Sinopec Looks to Boost its Ability in the Natural Gas Arena,” People’s Daily,in Alexander’s 6, no. 18 (September 25, 2001); “Chinese Cities to Benefit From West-East Natural Gas Transmission Project,” Star, in Alexander’s6, no. 20 (October 24, 2001). Liquefication of natural gas is required for ease of shipping and because current technology limits the distance over which unliquefied gas can be piped. [BACK]

¹⁰¹“China to Require Natural Gas Imports From 2005,” Interfax Information Services, B.V., January 29, 2003, in Alexander’s 8, no. 4 (February 20, 2003). [BACK]

¹⁰²“Gas Reserves of Changqing Oilfield Equal 1 Trillion Cubic Meters,” Xinhua, November 25, 2001, in FBIS-CPP20011125000030. [BACK]

¹⁰³Announced by Qiu Zhongjian, director-general of the China Petroleum Society, in “China Expects to Discover More Reserves of Natural Gas in Next 10 Years,” Xinhua, September 6, 2001, in FBIS-CPP20010906000097, who listed three primary areas of expansion, all in western China: the Tarim Basin, Ordos Zone, and Qaidam Zone; the Sichuan Province also is promising. [BACK]

¹⁰⁴Government report cited in “China Boosts Natural Gas Industry,” Asia Pulse, in Alexander’s 7, no. 2 (January 28, 2002). [BACK]

¹⁰⁵Gaye Christoffersen, “Prospects and Problems for Northeast Asian Energy Cooperation,” IREX/Huang Hsing Foundation Hsueh Chun-tu Lecture Series, accessed at <asia-1@info.irex.org>. [BACK]

¹⁰⁶See Mark J. Valencia, “Energy and Insecurity in Asia,” Survival 39, no. 3 (Autumn 1997), 85–106, for a discussion of some of these schemes, especially the map on page 88. “ASEAN Plans Pan-Asian Pipeline,” Dow Jones, in Alexander’s 6, no. 10 (June 1, 2001), discusses a proposal to build a pipeline system that would also include India. [BACK]

¹⁰⁷See Zhu Rongji, “Government Work Report at the Opening of the Fifth Session of the Ninth National People’s Congress,” March 5, 2002, in FBIS-CPP20020305000078. [BACK]

¹⁰⁸“PRC’s Gas Pipeline Project to Begin ‘In a Short Time’,” Xinhua, September 6, 2001, in FBIS-CPP 20010906000154, cites a $4.8 billion estimate, while “China to Build E-Pipeline for Natural Gas Transmission Project,” Xinhua, September 21, 2001, in FBIS-CPP20010921000086, cites $5.3 billion; “Another Gas Field Found in China’s Far Northwest,” AsiaPort, in Alexander’s 6, no. 20 (October 24, 2001), gives a $7 billion dollar estimate. Different reports give 2003 or 2004 as the completion date, although Liang Yu simply reports that construction has “been put off” (“East-West Gas Pipeline Project Delayed,” China Daily (Business Weekly Supplement), October 9, 2001, in FBIS-CPP20011010000007). [BACK]

¹⁰⁹“Nissho Iwai Withdraws from China Gas Project,” Kyodo News, in Alexander’s 6, no. 20 (October 24, 2001), reported “similar moves by five other Japanese trading houses and means no Japanese businesses will be involved in the pipeline project.” [BACK]

¹¹⁰“PetroChina and Shell Group Sign Gas Pipeline Interim Pact,” Platts, in Alexander’s 7, no. 4 (February 21, 2002). Also see “PetroChina and Shell/Gazprom Sign Gas Trunkline Deal,” Reuters, in Alexander’s 7, no. 2 (January 23, 2002), for the report that BP was awarded a subsidiary contract “to build China’s first LNG terminal in Guangdong.” This would expand Shell’s already impressive investment of more than $5 billion in China’s energy sector (“Shell’s Investment in China,” Xinhua, March 26, 2002, in FBIS-CPP20020326000166). [BACK]

¹¹¹“900-KM Section of West-East Gas Pipeline Completed at the End of August,” Xinhua, September 23, 2002, in VIC, “Asia-Pacific Daily News Summary” (September 25, 2002). Completion of this section is not supported by other reporting, but “Gansu to Start Laying Gas Pipeline,” Xinhua, February 25, 2003, in FBIS-CPP20030225000145, reported a March 1 start date for a section of the pipeline in Gansu Province. [BACK]

¹¹²“Zhejiang Province Builds Facilities to Increase Use of Natural Gas,” Xinhua, January 1, 2003, in Alexander’s 8, no. 2 (January 24, 2003). [BACK]

¹¹³“Shell to Operate China’s Leading Gas Field,” Reuters, May 31, 2002, in Alexander’s 7, no. 13 (June 27, 2002). [BACK]

¹¹⁴“Xinjiang Says to Supply Gas to Shanghai for 30 Years,” Xinhua, September 24, 2001, in FBIS-CPP20010924000013, includes the estimate by an unidentified analyst that the Tarim Basin will “be able to provide gas to energy-deficient Shanghai for more than 30 years.” This estimate is suspiciously optimistic, however, since it is attributed to the “general manager of the Talimu Oil Field Company (Liao Yongyuan)” quoted in “Talimu Oil Field Could Supply Natural Gas to Shanghai for 30 Years,” AsiaPort, in Alexander’s 6, no. 20 (October 24, 2001). [BACK]

¹¹⁵“Section of West-East Natural Gas Transmission Project Launched,” AsiaPort, in Alexander’s 7, no. 5 (March 6, 2002), reports the beginning of a section of this project. Other associated construction efforts are reported in “China Starts Building Gas Pipeline from Xinjiang to Shanghai,” Reuters, in Alexander’s 7, no. 5 (March 6, 2002). [BACK]

¹¹⁶“Shanghai Would Promote Employment of Natural Gas,” AsiaPort, in Alexander’s 7, no. 6 (March 21, 2002). [BACK]

¹¹⁷“Russian GazProm Gas Company Opens Office in Beijing,” ITAR–TASS, December 26, 2001, in FBIS-CEP20011226000350. “Russia and China to Set Up Joint Gas Project Enterprises,” ITAR-TASS, in Alexander’s 6, no. 18 (September 25, 2001), reported that this agreement included more far-ranging Russian participation in China’s developing natural gas infrastructure, a “full-scale strategic partnership.” [BACK]

¹¹⁸“PetroChina Signs Gas Deal with Chinese Cities,” Reuters, in Alexander’s 7, no. 4 (February 21, 2002), reports “no date has yet been set for the start of construction.” [BACK]

¹¹⁹“Important Gas Reserves Discovered in Sichuan Province,” Xinhua (January 8, 2003), in FBIS-CPP20030108000138, reports that fields containing 150 billion cubic meters have now been discovered in Sichuan. Also see “Collapse of Enron Complicates China Pipeline Project,” Reuters, in Alexander’s 7, no. 3 (February 6, 2002). [BACK]

¹²⁰Xie Ye, “Gas Projects to Power Country’s Market Growth,” China Daily, March 20, 2002, in FBIS-CPP20020320000039. [BACK]

¹²¹“China Boosts Natural Gas Industry”; “CNOOC to Build China’s Second-Longest Gas Pipeline,” Neftegaz.RU, December 23, 2002, in Alexander’s 8, no. 2 (January 24, 2003), reports plans to build “China’s second-longest natural gas pipeline” from Jiangsu and Zhejiang with Guandong, although with a start date of 2005 at the earliest. [BACK]

¹²²Zhao Renfeng, “Indonesia Confident of Success in Guangdong Natural Gas Bid,” China Daily (Business Weekly Supplement), April 2, 2002, in FBIS-CPP20020402000057. [BACK]

¹²³Xie Ye, “Bidding Under Way for First Chinese LNG Project,” China Daily, November 10, 2001, in FBIS-CPP20011110000056. The BBC reported in December 2001 that the project’s feasibility study was scheduled for completion in June 2002, with construction to begin by the end of the year; “China Opens Bidding for Guangdong LNG Supply Contract,” in Alexander’s 6, no. 24 (December 19, 2001). Natural gas is normally measured in cubic feet or cubic meters; LNG is usually measured in tons. [BACK]

¹²⁴Xie Ye, “Hong Kong to Buy One Third of Imported LNG,” China Daily, August 13, 2002, in FBIS-CPP20020813000013. [BACK]

¹²⁵“Australia Wins Bidding to Supply LNG to China,” Xinhua, August 8, 2002, in FBIS-CPP20020808000021. [BACK]

¹²⁶“China’s Offshore Oil Giant CNOOC Unveils 2002 Development Strategy,” Xinhua, January 18, 2002, in FBIS-CPP20020118000098. [BACK]

¹²⁷“CNOOC Begins Gas Terminal Construction in Hainan,” Reuters, in Alexander’s 7, no. 3 (February 6, 2002). [BACK]

¹²⁸In “CNOOC and Sinopec to Develop Gas Field in East China Sea,” Gulf News Online, in Alexander’s 7, no. 2 (January 23, 2002), the Chinese companies threaten to develop the offshore fields “with or without foreign help,” and while a March 20, 2002, article reports that “by 2004, natural gas from the Chunxiao Gas Field Group will be piped ashore,” it is doubtful that Shanghai will receive significant amounts of natural gas from this project without foreign participation, given Chinese companies’ dependence on foreign investment and participation in the offshore energy sector. (See “China Taps Natural Gas Reserves in East China Sea,” Xinhua, March 20, 2002, in FBIS-CPP20020320000165.) [BACK]

¹²⁹See “Siemens Aims to Set Up Joint Venture with Shanghai Electric,” Reuters, in Alexander’s 7, no. 3 (February 6, 2002). [BACK]

¹³⁰Xie Ye, “CNOOC Seeks to Buy Overseas Gas Fields,” China Daily (Business Weekly Supplement) in FBIS-CPP20011127000104. Probably more authoritative is “Indonesian and Chinese Firms Sign Major Energy Deals,” Associated Press, September 26, 2002, in Alexander’s 7, no. 20 (October 15, 2002), which quotes Indonesian and Chinese officials reporting that their national companies signed six memoranda of understanding “worth hundreds of millions of dollars to cooperate in [Indonesia’s] oil, mining and power sectors.” Details are in Johannes Simbolon, “RI, China Firms Sign Major Deals on Energy,” The Jakarta Post, September 26, 2002, in FBIS-SEP20020926000002. [BACK]

¹³¹“Iran to Allow Chinese Oil Giant to Explore Near Tehran,” Iranian News Agency, January 13, 2001, in FBIS-IAP20010113000002. “Iran is Working to Attract Investment from India and China,” AFP, in Alexander’s 7, no. 23 (November 27, 2002), also notes that “Iran holds an estimated 18 percent of the world’s natural gas reserves.” [BACK]