China renews commitment to less coal, more natural gas

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China has renewed an ambitious commitment to displacing coal with natural gas-fired energy, plotting a course to revive a "golden age" for a petroleum product – even as Canada's ability to profit from Chinese demand remains unclear.

A joint directive issued by 13 Chinese government agencies last week specifies that natural gas should rise to roughly 10 per cent of total national energy use by 2020, and to 15 per cent by 2030 – and offers specific plans to achieve that.

China had previously discussed broader and less ambitious targets, and the country's growth in natural gas demand has slowed in recent years. Gas is currently just over 6 per cent of the total energy mix.

The new policy direction comes as U.S. natural gas exporting firms race to sign contracts with China, hoping to take advantage of a 100-day action plan between the two countries that emphasizes the potential of shipments of liquefied natural gas across the Pacific.

In China, meanwhile, national planners have in mind both Paris agreement carbon commitments and an ongoing desire to battle smog. "So no matter from the domestic or global perspective, China must try its best to reduce coal consumption," said Dong Xiucheng, deputy dean of the China University of Petroleum. "And we if cut coal consumption, we must have substitution."

If China succeeds, it will raise its natural gas demand from 210 billion cubic metres last year to about 360 billion in 2020, according to calculations by global resource consultancy Wood Mackenzie – an increase in four years equivalent to its total demand growth in the past 10.

Backed by China's powerful National Development Reform Commission, the Chinese directive released last week calls for strengthened Chinese pollution controls and a broad effort to encourage domestic use of natural gas. That includes building additional pipelines and shipping networks and pushing industry to run trucks, trains and ships on natural gas.

"Previous plans and policies were comparatively less detailed," said Prof. Dong. The detail involved in the directive, which points to a number of necessary changes in both public and private sectors, "shows that government will decisively push it forward, because it fits with the general development strategy of the nation."

Between 2000 and 2013, Chinese natural gas demand rose at an average annual rate of 16 per cent in what industry observers called a "golden age" of gas.

To meet the 10 per cent target, China would have to resume annual growth at that pace, said Lin Boqiang, dean of the China Institute for Studies in Energy Policy at Xiamen University.

But even in a time of surplus gas supplies that have depressed global prices, it's not clear the country will reach that target. It's equally unclear that countries with significant overseas gas supplies, like Canada and even the U.S., will find willing buyers.

"I don't believe it's possible," said Prof. Lin. Various levels of Chinese government wield enough authority and own enough companies that they "can create demand," he said.

"But where will the supply come from?"

It's a counter-intuitive argument, in a world awash with proposals to export natural gas. Qatar recently said it intends to raise its output by about 30 billion cubic metres a year in the next five to seven years. In the U.S., a flock of companies have proposed exporting over 200 billion cubic metres of gas per year, while a similar flurry of proposals from British Columbia amount to 238 billion cubic metres of annual exports – none of them yet built.

China stands to create enough demand to soak up large quantities of that gas.

The problem, Prof. Lin said, is cost, the same reason industry has already been loath to build in places like British Columbia's north coast. It takes a great deal of money to take natural gas, liquefy it at ultra-cold temperatures and send it across the ocean – especially in Canada, where no such facilities yet exist.

"LNG is just too expensive," particularly for use in generating electricity, the sector most important in replacing coal use, Prof. Lin said. "Even at this moment, with LNG so cheap, it's still more expensive than pipeline natural gas."

Pipeline gas has its own problems, too.

"It is impossible to lower the gas price to a level that is competitive to coal," said Huang Miaoru, senior consulting manager, China gas and LNG at Wood Mackenzie.

"That's why we are saying that we need policy support for coal to gas switching."

Such support could include subsidizing the capital cost of companies changing technology to burn gas instead of coal.

Still, even if Chinese government support succeeds in boosting gas demand – China's LNG imports were up 32.8 per cent last year — it's not clear who will profit.

"Eventually it will come down to economics," Ms. Huang said.

And Canadian costs are simply too high, relative to competitors in the Middle East, Australia and the U.S., said Wenran Jiang, director of the Canada-China Energy & Environment Forum.

"So how do we break that gap in order for China to get Canadian natural gas products?" he said.

Ottawa, he said, needs to get involved, making LNG a component of expected free-trade talks, with "innovative ideas that go beyond the market logic."

Those could include urging Chinese companies to become major investors, thereby giving them control of the supply chain, from gas well to power plant, and "bypassing the market price altogether," he said.

"We need an expert group to explore such ideas," he said. "Unless the government takes this up as a bigger policy idea, nothing happens."