Faced with rising gas demand – albeit now rising at a slower pace - China has been seeking to boost domestic gas production to stem its growing dependency on imports. Given the ongoing trade war with the US, energy supply security will clearly have assumed an increased level of importance in Beijing.
There has certainly been progress over the past few years. Looking back to 2006, when gas imports to China began, production was just 60 bcma – and that was also the amount of gas that China consumed. Over the past 14 years domestic output has risen to 144 bcma, an increase of 142% over the 2006 level. The below chart above shows the steady progress that has been made in raising output.
But demand has risen faster than output. Where once Chinese gas demand was constrained by domestic production, now it is constrained only by affordability and the availability of import infrastructure. As a result, import dependency has risen from nothing in 2006 to an estimated 54% in 2019.
That absolute level of import dependency has led to concern within the Chinese government that the country is potentially at risk of its energy supplies being interdicted by hostile powers and hence there has been a renewed focus on increasing China’s domestic conventional and unconventional oil and gas production. President Xi himself gave instructions back in August 2018 to increase China’s energy security.
At the time China’s national oil and gas companies pledged to expand domestic oil and gas exploration and production and in particular to focus on natural gas (since it was in this sector that import dependency had risen most sharply in recent years). All the companies increased their risk appetite, expanding their investments at a faster pace in exploration rather than production and industry observers suggested that growth of 8% a year could be achieved over the next few years – in fact that looks to have been exceeded in 2019 where the latest output figures suggest a 9% increase over the 2018 volumes. CNPC announced that it would spend more money and speed up its investments in gas production and infrastructure such as underground storage. CNOOC, while denying any link to President Xi’s call for greater energy security, said that it would increase its domestic reserves and aim to raise them by 50% by 2025 while also stabilizing production at its major Bohai Bay fields. Last month it announced plans to spend $13 bn on its upstream capex to increase both oil and gas production. Sinopec has the weakest reserve position of the Chinese majors, with the company being the most aggressive in the development of shale gas – but it also has an ambition of securing a quarter of China’s gas market. While this is likely to be good for the three NOCs themselves, it will also flow down through the sector and benefit China’s oilfield service companies.
In the last six months more evidence has emerged of how well (or poorly) the Chinese majors are doing in their quest for Chinese energy security.
In the run-up to China’s 70th anniversary last October, PetroChina announced that it had discovered shale gas resources of 0.7 trillion cubic metres in the Sichuan Basin and additional oil resources of 2.7 billion barrels and was therefore responding to the President’s call for greater domestic output. ‘Resources’ of course are a long way from actual recoverable oil and gas that can be sold and the announcement certainly seemed timed to coincide with China’s anniversary celebrations. PetroChina does seem to have downgraded its shale gas production target and with total Chinese shale gas output likely to reach just 18 bcma in 2020 against the official target of 30 bcma, progress has been positive but hardly earth-shattering.
Sinopec said at the turn of the year that its aim was to secure a stronger position in the domestic gas market through its increased production. In a presentation it unveiled its target to secure 30% of the domestic market by 2045. In 2018 industry estimates suggest that Sinopec supplied 14% of the gas market through a combination of its own production and imports of LNG, which suggests it has some way to go to achieve its aim. That said, the establishment of the national pipeline company should over time be beneficial for Sinopec, although even more beneficial for CNOOC, as they will be able to access more of China’s national pipeline network. More broadly, Sinopec’s focus has switched towards increasing gas output as a proportion of its overall production in line with Beijing’s aim of a cleaner energy slate.
CNOOC is also touting its growth credentials. It substantially increased its capital expenditure in the gas sector and saw an 18% increase in domestic gas output in 3Q19 (although from a relatively low base, its gas output is still less than 10 bcma).
It is clear that China’s NOCs are responding to President Xi’s call for greater domestic output. Given the potential economic dislocation caused by the coronavirus and a greater willingness to employ clean coal technology in power generation, which we discussed in a previous blog, a combination of slower demand growth and higher production may begin to restrain the growth in China’s gas import dependency and go some way towards addressing President Xi’s concerns about China’s steadily growing energy import dependency.