Alive and kicking: China hydrocarbon demand

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China’s hydrocarbon demand is every bit as robust as its renewables industries. A more rapidly growing economy will mean higher demand for all energy sources.

  • Coal use reductions dependent on economic growth
  • Chinese LNG imports to converge with Japanese levels in next decade
  • Oil demand remains on upward trajectory

Despite China’s ongoing build out of new renewables, hydro dams and nuclear power plants, the country’s electricity system and heating remain heavily dependent on coal. New coal-fired generation capacity, although slowing, continues to be added to the system, and renewables do not always benefit from priority dispatch over other generation sources.

However, restrictions on coal-fired power generation have steadily been tightened. Under the Airborne Pollution Prevention and Control Action Plan 2013-17, no new coal-fired power plants were permitted in three areas: Beijing- Tianjin-Hebei, the Yangtze River Delta and what has recently been named the Guangdong-Hong Kong-Macao Greater Bay Area.

On the supply side, Beijing continues its attempts to rationalize and consolidate its giant coal industry, cutting the number of operating mines. By the end of 2020, the government expects to have a handful of very large coal conglomerates, although, as in the past, measures to control coal mining are likely to prove patchy, with closed mines liable to resume operations, if demand rises.

China’s rationalization of its coal industry does not necessarily mean lower coal output. Chinese coal consumption appeared to peak in 2013 at 1,969.1 million tons of oil equivalent, but having fallen to 1,887.6 million toe in 2016, it is estimated to have risen in 2017. Coal output in December hit a two-year high, according to the National Bureau of Statistics, owing to stronger than expected economic growth and cold weather, combined with a slowdown in the country’s northern coal-to-gas switching program, as a result of growing gas shortages and a lack of equipment for conversions.

The upturn in coal demand highlights the sensitivities that govern Chinese coal demand and production, and thus in a large part CO2 emissions. Chinese coal-fired power plant utilization is around 47%, representing massive spare generation capacity. Whether this rises depends on the balance between electricity demand growth and construction of other forms of power generation. Stronger economic growth, driven by rising industrial demand or, longer term, the export of power to neighboring countries, would be underpinned by coal generation and thus coal consumption.

Coal-to-gas switching

The backstop reliance on coal can be seen from the problems encountered by the country’s “2+26 cities” program instituted last year, which aims to convert millions of households and commercial buildings, such as schools and hospitals, from coal to gas heating, thereby significantly reducing air pollution. Under its 13th Five-Year Plan 2016– 2020, China aims to increase gas use in the energy mix to 10%, from 5.9% in 2015.

The additional gas demand this will create will be met only partially by higher domestic supply, leaving a widening supply gap to be met by imports, both pipeline and LNG. Again, lofty targets and zealous implementation have seen ambition run ahead of infrastructure. The 2+26 cities program has been scaled back as a result of inadequate gas transmission and import infrastructure connected to the northern provinces concerned, and a lack of equipment to carry out all of the conversions.

The origins of this plan were stringent reductions in particulate matter concentrations of at least 15% promulgated by the Ministry of Environmental Protection in August 2017 for the October-March period of 2017/18. The level of conversions prompted a sharp rise in LNG demand, with China’s northern LNG terminals operating at full throttle. Chinese LNG imports leaped 47% year on year in 2017 to 37.76 million mt.

The surge in gas demand revealed a number of insights:

  • ƒA limited response in terms of increased pipeline supplies, despite significant spare pipeline capacity from both Myanmar and Central Asia.
  • A lack of transmission capacity between southern LNG import terminals and northern demand centers.
  • A significant under-estimation of the amount of coal that needed to be replaced, re-enforcing other indications that Chinese coal use is higher than reported.
  • And, as shortfalls emerged, city gas was the priority, with LNG prices for trucking being allowed to rise sharply to record highs.

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