CHINA: LARGE HURDLES TO INCREASED GAS USE

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005304574
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 23
• Document Creation Date: June 23, 2015
• Document Release Date: September 10, 2009
• Case Number: F-2008-01057
• Publication Date: March 24, 1999

- EleClct7
C~JOT~oonJXX, 10-94
Intefligenc`i e? epd
Office of Transnational Issues
China: Large Hurdles to Increased Gas Use
(b)(1)
(b)(3)
24 March 1999
China is unlikely to meet its ambitious mid- to long-term targets for natural gas
production and consumption. Beijing has announced plans to raise gas use to 200
billion cubic meters (bcm) in 2020, about ten times current levels. Key impediments
to the sector's expansion are the country's modest gas resource base, minimal
transit pipeline infrastructure, and the absence of a clear gas development strategy:
? China's proved natural gas reserves are about 1,000 bcm-some 20
percent of US proved gas reserves-based on a review of geologic
information and Western industry estimates. These reserves are too
small to support production levels of much more than 40 bcm for 25
years-a ical oil and gas industry lanning period. Geologic
information indicates that prospects
for substantially increasing the reserve base are poor.
? Domestic long-distance gas transport infrastructure is virtually
nonexistent, and Beijing's plans for pipelines and the financing of gas
sector development remain vague.
Foreign participation in China's gas sector will remain modest over the next
decade unless Bejing creates a more favorable investment climate for the sector.
US and other foreign firms could provide technical assistance to raise recovery at
Chinese gasfields as well as access to project financing and foreign gas supplies:
? Measures needed to improve prospects for profitable operations
include raising gas prices, improving the legal system, and
streamlining bureaucratic procedures.
that these imports will supply enough gas to meet Chinese plans, however.
feedstock. High costs and long leadtimes to build infrastructure make it unlikely
Being could turn to liquefied natural gas (LNG) imports from Southeast Asia or
Australia and pipeline gas from Russia or Turkmenistan to help meet increasing
requirements driven by environmental concerns and the need for petrochemical
APPROVED FOR
RELEASE^DATE:
04-Sep-2009
 Even with increased imports and substantial foreign involvement that allow China
to meet its gas consumption targets, gas would provide only about 10 percent of
total primary energy five times its current share-in 2020, according to a CIA
estimate. Moreover, a substantial part of the country's gas may continue to be
allocated to petrochemicals instead of the energy sector:
? Because of its continued modest share of China's total energy,
increased gas usage alone is unlikely to substantially slow China's
CO2 emissions growth.
Indications that Being is moving beyond modest efforts to boost the gas sector and
is aggressively promoting a greater role for gas include:
? Actions to expedite contracting, financing, and construction of the
Guangdong LNG project, the first in China.
Specific objectives and detailed policy initiatives-rather than broad
generalizations-in the gas development plan which is scheduled to
be presented in mid-1999, followed by aggressive implementation of
these policies.
? Price reforms that give producers incentives to explore for and
develop new gas fields, and policies that encourage foreign
financing and equity participation in gas supply projects
 Primary Energy Shares, 1995
Note: Shares of coal and gas compared
to the US and OECD Aggregate.
OECD Aggregate
Total=872 million tons of oil equivalent
Total=4,135 million tons of oil equivalent
Source: IEA, 1997.
 Little Current Gas Use, But Growing Interest
China has the world's seventh-largest economy in GDP terms but has a fundamentally
different primary energy structure from that of the oil-and-gas-based OECD
economies. In the US, oil accounted for nearly 45 percent of primary energy in 1995,
with coal and gas providing about a quarter of primary energy each. By contrast,
China's economy is coal-based, with gas accounting for only about 2 percent of
primary energy that year (see chart on facing page)
Chinese officials, however, have ambitious plans to raise gas use to as much as 200
billion cubic meters (bcm) in 2020, about ten times current levels. Skyrocketing net
oil imports (crude plus product)-which nearly quadrupled to about 678,000 b/d
between 1995 and 1997, according to official Chinese statistics-and environmental
problems associated with coal use have contributed to the increased interest in gas:
40 percent of the country's land area
is "affected" by acid rain, and the World Bank estimates that acid rain
caused by burning high-sulfur coal in southern China has led to a 3
percent productivity drop in forestry and agriculture, according to press
reports. These losses concern the country's leaders, because of the
importance they attach to food self-sufficiency.
? The Chinese Government publicly acknowledged in March 1998 that
many of China's cities-in particular Beijing-fail by wide margins to
meet either international or Chinese air quality standards. Chinese
press reports note that Beijing is one of the world's 10 most polluted
cities.
Major Hurdles to Increased Gas Use
China will have to overcome a limited resource base and a lack of infrastructure to
transport gas to consumption centers if it is to raise domestic natural gas consumption
substantially.
 Gas Development Policy Adrif
China has lacked a clear focal point to coordinate national gas development, such as
Russia's Gazprom, which has hobbled efforts to substantially raise the role of gas in
the energy sector because of the long leadtimes and substantial capital expenditures
associated with large gas exploration and development or infrastructure projects.
Recent reporting indicates that the State
Development Planning Commission (SDPC) may be assuming this leadership role.
The SDPC is scheduled to issue Beijing's formal gas development policy-including
exploration, development, distribution, pricing, and pipeline and liquefied natural gas
(LNG) imports-in mid-1999,
--]Chinese officials are looking for insights on issues such as: the organization and
relations between upstream and downstream firms in the US, the role of government
in price regulation, dealing with pipeline monopolies, how regulatory power is shared
between various levels of government, and US policies regarding foreign companies
and investors in the gas sector.
The planned SDPC policy effort suggests that Beijing has quietly changed its plans
from early 1997, when it announced that the newly formed China National Star
Petroleum Corporation (CNSPC) was to focus on developing the country's gas
resources, according to press reports.
CNSPC never really extricated itself from wrangling over issues such as what acreage
it would control, and the firm remains a marginal player in China's oil and gas sector
relative to the China National Petroleum Corporation (CNPC) and China National
Petrochemicals Corporation (Sinopec) groups and China National Offshore OR
Corporation (CNOOC).
CNPC was historically responsible for oil and gas development onshore and in
offshore waters less than five meters deep, but its officials acknowledge that the
romnnny centrated on finding oil instead of gas
 Modest Resource Base
We estimate China's proved gas reserves are about 1,000 bcm, based on a review of
the limited geologic acid engiiieeringinformation available about Chinese gasfields 1
This estimate is about 20 percent of US proved reserves of 4,800 bcm, and a small
fraction of Russia's estimated proved reserves of about 50,000 bcm:
? Most Western industry estimates put the country's reserves at
approximately 1,200 bcm, but they do not appear to take into account
production problems in Sichuan, which accounts for one-third of the
country's total gas output.
Chinese data show about 60
percent of Sichuan's gasfields are producing at less than half their peak
rate, mainly because of early water encroachment in the fractured
carbonate reservoirs of many fields. The rising water production
suggests that production problems are likely to worsen, which will cut
ultimate recovery
Western estimates are substantially less than some of the claims announced by
Chinese experts. Chinese estimates commonly appear to use a broad definition of
reserves that includes some gas that Western firms probably would class as
resources:2
? Claims of 2,300 bcm for "verified reserves" in Chinese press reports
appear unrealisticallhi h when judged by Western industry reserve
concepts
Some Western oil and gas resource experts estimate that China has 4,600-7,400 bcm
of undiscovered ultimately recoverable gas. Such estimates have large uncertainties
because they are based on methods. such as geologic analogy or mathematical
extrapolation. Moreover, they usually do not indicate the assumptions-such as
prices, production costs, available technology, and time-under which the postulated
gas accumulations would be commercially viable:
1 1 cubic meter = 35.3147 cubic feet.
2 There is no universally accepted definition of "reserves" among Western oil and gas
companies, but it commonly refers to discovered oil and gas that is expected to be
commercially producible using currently available technology under current economic
conditions. Resources are reserves plus estimated undiscovered or subeconomic oil and gas
that is believed to be recoverable at some point in the future.
 uch of the undiscovered gas
is in the remote, poorly-explored Tarim Basin. Industry press reports
indicate that exploration in the Tarim has yielded disappointing results,
however.
Poorly Developed Domestic Gas Infrastructure
Even if additional gas resources are discovered, lack ot-oomestic gas infrastructure-
in particular, the dearth of long-distance transit pipelines-will remain a formidable
obstacle to additional gas use. Except for a 780-km pipeline from the Yacheng 13
field in the South China Sea to Hong Kong and an 860-km pipeline from the Ordos
Basin in north-central China to Beijing-inaugurated in September 1997-China's
gas pipeline system consists of geographically isolated, local grids that commonly
serve major metropolitan areas (see map on page 18). Sichuan has the most
comprehensive system, but the 4,000-km system does not extend outside the
province:
To place China's 1,640 km of transit pipelines in perspective, Russia
had about 140,000 km of transit pipelines in 1995, according to the
International Energy Agency (IEAI and the US had 424,000 km of
transmission pipelines, according to industry periodicals.
? Chinese periodicals claim about 8,000 km of unspecified "gas
pipelines" in 1997. This is only 0.4 percent of the more than 2 million
km of gathering, transmission, and distribution pipelines that the US
had in 1993, according to the lEA
'Chinese officials in early 1998 signed a pre-feasibility study with a Western
independent energy firm for a pipeline from western to eastern China, which would be
the country's first long-distance east west pipeline,
China National Petroleum Corporation Group (CNPC)
president Ma Fucai asserted in early 1999 that construction of the 24-inch (610 mm),
$400 million, 700-km-long segment from Chongqing to Wuhan will start by the end
of 1999, with a target completion date of 2002:
? The Chongqing-Wuhan pipeline is part of an ambitious plan for a
3,400-km-long, 10-bcm pipeline network that ultimately would
connect distant fields in Xinjiang to eastern China at a cost of $3
 Improving the Foreign Investment Climate
Foreign companies could speed China's gas development if Beijing creates a
favorable investment climate. US and other foreign firms could provide technical
assistance leading to higher recovery factors at Chinese gasfields, as well as access to
project financing and foreign gas supplies. Leading international oil and gas firms
have extensive experience in LNG projects; and Western major and independent firms
are generally regarded as world leaders in production engineering, particularly in
complex reservoirs. This expertise could help raise China's gas production, provided
the reservoirs have not been damaged irreparably by poor Chinese production
practices
International oil and gas companies and financial institutions will limit involvement
in the country's gas sector, however, until Beijing improves the investment climate.
Low state-set gas prices have long been-and remain-an obstacle to gas sector
development, according to a Sino-UK study. The study states that current prices do
not cover operational costs, and press reports quote domestic gas prices of $75 per
1,000 cubic meters well below international prices of $100 per 1,000 cubic meters:
makes gas production and transportation uneconomic
China's tax policy
Foreign investors also face China's developing-and increasingly complex-legal
system and difficulty obtaining equal treatment on issues such as market access,
according to Embassy Beijing legal enforcement
mechanisms remain weak and that judges commonly have limited legal training.
Measures such as raising prices and streamlining bureaucratic procedures would make
China's gas sector more attractive to foreign investors, but would require Beijing to
make hard political choices in the short run:
? Beijing has kept gas prices low to support gas-based fertilizer plants, and raising
gas prices would lead to higher fertilizer costs. To placate farmers, whose
incomes have stagnated in recent years, Beijing may have to raise fertilizer
subsidies. In addition, substantially higher food prices could lead to urban
discontent, possibly forcing Beijing to consider costly food subsidies.
? Higher-priced gas could force some enterprises to close down which would fuel
labor dissatisfaction and reduce support for enterprise reform.
 volumes of commercial gas are discovered in the Tarim Basin.
? The network's capacity is modest by international transit pipeline
standards, and the overall plan assumes large
Regardless of progress on the Chongqing-Wuhan pipeline, it is unlikely that the
domestic Chinese energy sector will build many large-diameter transit pipelines in the
next few years. Beijing lacks a clear gas development strategy, and the country's
largest two oil and gas fums-CNPC and China National Petrochemicals Corporation
Group (Sinopec)-face a growing cash flow problem and rising investment
requirements for domestic and international oilfield exploration and development
projects:
? A 56-inch (1,422 mm) gas pipeline from the Junggar or Tarim Basin in
Xinjiang to Zhengzhou, Henan would cost about $3.5 billion to build,
and a 30-inch (762 mm), 25-bcm pipeline from Chengdu, Sichuan to
Shanghai would cost about $5.3 billion, using Western cost estimates,
If CNPC and Sinopec cannot afford to finance such pipelines, they could turn to
Beijing for direct government funding or attempt to attract foreign investors. A major
gas development policy announcement planned for this summer,
will provide an indication of whether Beijing is willing to provide
the large amount of funds required, and of the role China sees for foreign investors:
? China's new leaders probably are less inclined to provide full state
funding for costly projects than in the past, because of increased
emphasis on return on investment and lowered expectations for energy
demand growth. Beijing may provide partial funding or financial
guarantees to attract foreign funds, however.
? Foreign investors will remain reluctant to provide large amounts of
capital to finance Chinese pipelines until they calculate that they can
make a profit in an undeveloped market. Obstacles to foreign direct
investment include an evolving but poorly developed legal system,
bureaucratic red tape, unclear tariff arrangements, requirements to
source materials locally, and lack of market-based pricing
Constraints on Gas Productio
Even with the production problems in Sichuan and limited pipeline infrastructure,
China's gas sector has a good chance of meeting its 2000 production target of 25 bcm
and a reasonable chance of attaining its 2005 production target of 30 bcm. In addition
 to increased production from the Shaan-gan-ning field in the Ordos Basin, a
substantial part of the additional production is likely to come from offshore fields in
the South China Sea and East China Sea, which can use existing gas pipelines.
Growing amounts of associated gas from aging oilfields in eastern China could help
boost gas output, provided it is not reinjected to increase oil production.
There is much more uncertainty about China's gas production after 2005, but we
judge that the sector will be hard pressed to meet even the lower production levels in
Beijing's announced forecasts
Table 1: Projected China Gas Production 2010 to 2020
billion cubic meters (bcm)/year.
Year
Chinese
Officials
30-35
NA
35-40
58-150
40-50
China's modest resource base will be a substantial constraint on the country's gas
production after 2005 unless large new fields are discovered and brought on stream,
or Beijing pursues a gas production policy that sacrifices long-term production to
meet near-term targets. China will have to find and develop several large new fields in
order to produce much more than 40 bcm because higher production levels would not
be sustainable for more than a few years without these new reserves. Even if the gas
sector is able to finance and build the infrastructure needed to produce and transport
90 bcm of domestic gas in 2010-more than 4 times current levels-production at
this level for 25 years requires at least 2,250 bcm of proved reserves, about twice our
estimate of China's reserves:3
3 This simplified calculation assumes no reserve growth or new discoveries, and instantaneous
production ramp-up and decline-a highly improbable situation for a country. It is presented
solely to illustrate the constraints that the reserve base places on gas production potential, and
is not a production forecast.
 Coalbed methane is methane-the major component in processed natural gas-that is
extracted from coal seams and can be used like natural gas. China claims 35,000 bcm
of coalbed methane resources, according to press reports, about 30 times Western
industry estimates of the country's proved conventional gas reserves:
? The fraction of China's coalbed methane resource base that can be recovered
economically will depend on the recovery technology used and the quality and
accessibility of the coalbed in question, according to Western industry experts.
Despite this resource endowment and a highly publicized joint venture signing with a
major Western oil company for a coalbed methane project, coalbed methane probably
will remain a primarily local resource for the foreseeable future. Although coalbed
methane could become an important energy source for regions in China lacking
access to conventional gas, it is unlikely to substantially affect the primary energy
picture until well into the next century:
? Beijing announced a coalbed methane production target of 10 bcm for 2010, 8
toll percent of China's announced gas consumption objectives and about 20
times current coalbed methane consumption levels
As with conventional gas, China's coalbed methane development will be hampered
by lack of infrastructure to move it to consumers. Much of the country's coalbed
methane is located far from consumption centers, and will require building either
transit pipelines or for "gas by wire" powerplants and transmission lines to supply
end users. Moreover, unresolved bureaucratic issues are likely to slow initial joint
development projects with foreign firms,
Western oil company executives were concerned that
disputes over participation and local government meddling in exploration
projects had not been resolved.
 ? Coalbed methane could be a locally important energy resource, but it
will not fundamentally change China's gas supply picture through
Imported Gas Not a Panacea'
Beijing is investigating several gas import proposals, but liquefied natural gas (LNG)
and pipeline gas supplies are unlikely to make a substantial contribution to China's
gas supply for at least another five years because of bureaucratic and economic
hurdles and long construction leadtimes.
LNG Projects Moving Off the Fence
Beijing took a major policy step in late October 1998 when Premier Zhu Rongji told
Australian officials that the State Council had approved LNG imports, according to
press reports. The announcement clears the way for negotiations on China's first
LNG project, a proposed LNG terminal and power plant to be built in Guangdong
Province with a target completion date of 2005. Potential LNG suppliers include
Australia, Indonesia, and Malaysi
? The Chinese side has to deliver a final feasibility study-including an
assessment of the project's economic viability, a financing plan, and
proposed joint venture partners-by April 1999, according to industry
press reports.
? The history of previous capital-intensive energy projects in China
suggests that final negotiations on the initial project could be
prolonged
NG could supply the
equivalent of as much as 17 bcm of imports in 2010. This projection would require
3or 4 typical LNG import facilities, and is highly optimistic because investors
probably will want to see how smoothly the Guangdong project proceeds before
committing substantial funds on additional projects. Approval for additional LNG
projects could also be slowed by Chinese political considerations. Gas sector
advocates had faced longstandin o position from former Premier Li Peng, a strong
supporter of the coal sector, but others also oppose
foreign-backed LNG projects:
Secret
 LNG Economics in China
If the Guangdong liquefied natural gas (LNG) project receives final approval in the
next few years, it probably would work to the project's economic advantage because
most gas industry observers expect that LNG supplies will be abundant over the short
term. Because several LNG projects without committed end users are aggressively
seeking purchasers, the project's backers probably would not have to directly fund a
costly LNG liquefaction facility in the supplier's country, and would only have to pay
for a regasification plant in China. Therefore, the project could avoid several billions
of dollars in capital costs generally associated with LNG projects:
? Beijing reportedly is demanding a delivered price of no more than $2.65 per
million British thermal units (Btu) (equivalent to $98/1,000 cubic meters)-
compared to typical LNG prices of about $4/million Btu ($149/1,000 cubic
meters) five years ago-according to industry press reports.
? Assuming a typical plant, an LNG regasification terminal would have a capacity
of 3-5 million metric tons (mmt) a year (equivalent to 4.3-7.1 bcm/year), and cost
$500 million-$1 billion each.
? Press reports and industry periodicals indicate that an LNG project can cost $2.5-
7.7 billion, depending on whether a new liquefaction plant is needed.
 ? Raising gas prices-which a Sino-UK study considers essential to
finance projects and curb wasteful consumption-will be difficult for
Beijing, which has kept gas prices low in part to hold fertilizer prices
down, according to press reports.
? As growing numbers of workers lose jobs in the coal sector as part of
state-owned enterprise reform Beijing plans to lay off some 400,000
coal miners in 1999, according to press reports-Premier Zhu will find
it difficult to rally support for projects that opponents can portray as
taking jobs away from Chinese workers.
Even if LNG regasification becomes an established type of energy project in China,
LNG probably will remain a largely local energy source. Regasification could be
economically viable near large urban centers along the coast, especially if it is part of
a power project which would provide an early cash stream for the project. Regasified
LNG probably will not be supplied to interior parts of China via new dedicated
pipelines, however. The only cases where regasification and transport to distant
markets have been commercially successful are where a transit pipeline system
already exists:
? LNG imports probably will be limited to southern China because of
the deep ports needed for LNG carriers, according to the Western oil
company study.
Gas Import Pipeline Projects
Several gas pipeline projects of 25-30 bcm each from Russia and Central Asia to
China are under discussion, although many industry experts have stated that only the
3,500-km pipeline from Russia's Kovyktinskoye field in East Siberia to China has a
good chance of coming on stream in the next 15 years. Moscow and Beijing signed a
memorandum of understanding (MOU) for the pipeline in June 1997, according to
industry press reports, followed five months later by another MOU signing at
theYeltsin-Jiang summit 4 Some Western industry observers question the feasibility
of the $10 billion project, however, given the economic and political turmoil in
Russia, and uncertainty over whether Kovyktinskoye has enough gas to support the
project:
4 A memorandum of understanding (MOU) typically is signed at the early stages of a project,
and usually indicates continuing interest in the project by the involved parties. MOUs rarely
have binding terms, and therefore are poor indicators whether the project will proceed.
 Selected Proposed and Existing Natural Gas Pipelines to China
scow
A
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Kyr B ~, ll Mongolia
Iran
Tarim % ~ %%
Afg. Tal~ Basin -Z- %N
Beijin
Pakistan Basin
Basin
Ch in a -' ?Zhangthou
Shaan gan-ning
Chengdu
Nepal -BkUtIn-
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Kazak
hstan
%
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7ashken
Indian
Ocean
Proposed pipeline route
Sichuan
Basin
/ 1Jmte
g
i'~^,i CKom
Hong Kong
SAR.
('3 South
Yacheng China
atnam Sea
Brunei
Malays
North
Pacific
Ocean
Boundary representation is
not necessary authoritative.
Yamal Y
Peninsula
s/ Urengay
Russia
1 6
Xokntkoye
~kltltututak
:Skpul
SO_ ? a
Philippines
 ? Variants of the project extend the pipeline to supply markets in South
Korea and Japan, but some Western
oil industry executives judge the additional legs are uneconomic.
These spurs would also cut China's share of the gas to only 10 bcm,
according to press reports.
The second high-profile proposal is an $8-12 billion, 6,700-km-long, 30-bcm pipeline
from Turkmenistan across China, with a possible 1,300-km extension to Japan.
Articles on efforts to promote this scheme keep appearing in the oil industry press,
but, like the gas pipeline from East Siberia to China-rarely discuss financing or
project economics:
? The pipeline failed initial feasibility studies, according to industry
press reports in late 1998. A second feasibility study will be finished
in mid to late 1999, according to other industry press reports.
Other proposed gas pipelines from Russia and the Central Asian states to China are
unlikely to come on stream until well into the next century because they involve even
longer distances or less-established resources than the two "front-runner" projects.
These proposals-which will cost more than $10 billion each-include:
? A pipeline from West Siberia to either Xinjiang or Irkutsk and then to
the Beijing area.
? A pipeline from the Yakutsk region, which is more than 1,000 km
northeast of Kovyktinskoye.
 Table 2.: Projected Chinese Gas Consumption 2010 to 2020
billion cubic meters (bcm)/year
Chinese Western
Year Officials Experts CIA
2010 60-120 33-47 40-80
Conventional gas 30-35
Coalbed methane 5-10
LNG 5-10
Pipeline imports 0-25
2015 NA 62-110 50-95
Conventional gas 35-40
Coalbed methane 5-15
LNG 10-15
Pipeline imports 0-25
2020 88-200 99-127 85-135
Conventional gas 40-50
Coalbed methane 10-15
LNG 10-20
Pipeline imports 25-50
 A pipeline from western Kazakhstan to Xinjiang and then east across China, a
distance comparable to the Turkmenistan-China proposal.
? A pipeline from undeveloped fields on the Yamal Peninsula to China
and possibly on to Japan. The "first phase" of the pipeline would cost
$15 billion, according to press reports.
China's Gas Consumption 2010 to 2020
Combining our projections of Chinese gas production and imports, we estimate that
China's gas consumption will rise from 40-80 bcm in 2010 to 85-135 bcm in 2020.
We assume that by 2020 there is only modest growth in reserves, three to six LNG
projects, and one or two major international gas transit pipelines to China. Our
estimate ranges are in the lower to middle part of ranges cited by Chinese officials,
largely because of less optimistic assumptions for gas production:
? The range in gas consumption forecasts provided by Chinese officials
probably is caused by the variety of organizations generating the
estimates. Some of these entities may not have an in-depth
understanding of what is required to profitably find, develop, and
deliver gas.
Long March Ahead for Gas
China's limited gas resources and transit pipeline and import infrastructure, and lack
of a clear gas development plan are large obstacles to supplying the immense volumes
of gas needed to displace substantial amounts of coal:
? It takes some 600 bcm of gas to substitute for 1 billion tons of coal on
an energy-equivalent basis. This volume-50 to 60 percent of China's
likely proved reserves is comparable to annual US gas consumption,
or about five times the volume of gas exported outside the former
Soviet Union by Russia, the world's largest gas exporter, in 1998.
? A Western oil industry consulting firm estimates that it will cost about
$90 billion in exploration, development, and pipelines alone for China
to meet a consumption level of 97 bcm in 2015, according to industry
press.
 Coal and Gas Cost Comparisons
Chinese officials regularly state that gas is more expensive than coal in order to help
justify coal's large share of the country's primary energy production. Some observers
postulate that when the real costs of coal-including subsidies to producers and
consumers, transportation costs, and external costs such as environmental damage and
rail congestion-are factored in, coal's cost advantage shrinks substantially,
Western gas and electric power experts note that
capital costs for gas-fired power plants-assuming LNG facilities are not needed-are
less than for coal-fired plants of comparable size, and that the plants themselves can
be built in about half the time needed for a coal-fired plant, according to industry
press.
Gas costs $75 to $88 per 1,000 cubic
meters compare with international prices of $100/1,000 cubic meters), according to
press reports, but there are wide variations among end users, according to aF
study. Recent coal price information is not readily available, but oil and gas industry
experts use $35/ton when calculating the economics of powerplant configurations,
an estimate close to the average value of $32/ton for
coal exports in mid-1998, according to official Chinese statistics:
? Using these figures, gas costs $2.03-2.38 per million British thermal units (Btu),
about twice coal's $1.15/million Btu_
? Even where gas may have a local price advantage, it is unclear where it will be
able to retain its edge if Beijing moves to raise domestic gas prices, which
Chinese oil and gas sector officials admit is necessary to fund additional domestic
production.
 Chinese officials understand that natural gas has the potential to reduce urban air
pollution and cut greenhouse gas emissions, but Beijing has not indicated that it is
willing--or able to provide the massive funding that would be needed to meet its
gas use targets, and shows little inclination to divert much money from economic
development to gas sector projects. Even though China's Agenda 21, the country's
official environmental blueprint, acknowledges the environmental costs from coal and
cites increased gas use as one way to improve urban air quality, Chinese officials have
consistently told they will not sacrifice economic development to
reduce greenhouse gas emissions:
Because of resource, infrastructure, and policy constraints, gas is unlikely to displace
a substantial amount of coal in China's overall energy mix for the foreseeable future.
The Chinese leadership probably still views coal as a plentiful and inexpensive-to-
produce energy source that will remain essential to China's economic growth for a
long time:5
Zhu reportedly told members of the Chinese Academy of Sciences in
August 1998 that "We cannot talk about the energy policy without
reference to China's reality. China's reality is coal ... If we do not
produce coal, our economy will collapse," according to Chinese press
reports.
Petrochemicals Higher Priority Than Energy
Beijing may not take full advantage of the potential of gas to displace coal as an
energy source because the country's leadership places a higher priority on agricultural
self-sufficiency and economic development than on the environment. As a result,
petrochemicals will remain an important competitor to the energy sector for additional
 gas use in China over the next few decades 6 Beijing repeatedly has declared
petrochemicals one of China's "pillar" industries of the national economy, and
China's leadership-regardless of their views on agricultural self-sufficiency-may
have decided that without transit pipelines from northwestern and central China to
eastern consuming centers, fertilizer and petrochemical production is better than
shutting in or flaring off gas'
? More than 35 percent of China's 1995 gas consumption was for
petrochemicals-including fertilizer-according to IEA data. Within
the petrochemical sector, more than half was used for feedstock.
? In *September 1997, Chinese press reports announced plans to use gas
produced in Xinjiang to make that region the country's largest
fertilizer production base. A month later, then Premier Li stated that
fertilizer production was the most important use for gas, according to
other press reports.
? In mid-1998, Chinese industry officials still regarded gas as an
important input to the petrochemical sector, with year 2020
requirements projected at 32 bcm, according to press reports
Modest Environmental Benefits
Because natural gas would provide only 5 to 10 percent of China's primary energy in
2020, additional gas use is unlikely to substantially slow
the growth of the country's CO2 emissions! Increased gas use could have a
noticeable effect at the local level, however, in reducing nitrogen and sulfur
emissions:
? China's carbon emissions would rise from 820 million metric tons
(mmt) in 1995 to 1,400-2,400 mmt in 2020, according to projections
by the IEA, the World Bank, The
range in estimates is caused by different assumptions about GDP
growth rate and primary energy shares.
6 Natural gas is used worldwide as an alternative to crude oil for petrochemical feedstock and
process fuel
7 "Pillar industries" are sectors such as automobiles, metallurgy, energy and chemicals
production, and telecommunications that Beijing considers crucial to the nation's economic
development. Beijing supports these industries with targeted investment and protection from
outside competition.
8 Primary energy measures energy input regardless of its ultimate end use (e.g. petrochemical
feedstock, transportation, and power generation).F---]
 Upside Wild Cards
The Chinese could invest substantially more in gas use and development than we
project if any of the following events occur:
Higher Pipeline Construction Priority Beijing could add oil and gas pipeline
construction-particularly, long-distance transit pipelines-to the infrastructure
sectors that it is boosting investment in to try to jump-start the econom
Killer Smog An air pollution crisis at a major city such as Beijing, Shanghai,
Chongqing, or Guangzhou, leading to a large number of deaths, could catalyze the
Chinese leadership to push for additional gas substitution and allocate additional
funds to build the infrastructure needed to support increased gas use. An
environmental catastrophe could also be a driver for price reforms that would
encourage domestic gas development by either indigenous or foreign firms.
Leadership Turnover A rapid change in China's leadership could bring to power a
generation of policymakers who are more willing to pay the economic and social costs
associated with substantially higher gas use. These leaders may also be more willing
to use gas in the energy sector instead of as petrochemical feedstock. An aggressively
nationalistic group of younger leaders, however, could choose to continue using
substantial amounts of gas for feedstock as part of a strategy to boost the country's
commercial standing.
Sustained Oil Price Rise A sustained, substantial world oil price rise would make
gas projects more competitive in the battle to obtain international financing. Some of
the planned gas projects-both domestic and international-that are unfinanceable at
$10-15/bbl would be more attractive at higher prices.
Alternative Vehicle Fuel Policy Tax and other policies strongly favoring compressed
natural gas (CNG) or liquefied petroleum gas (LPG) for vehicle fuel-well
established technologies-would create a large new market for natural gas in China,
particularly in urban areas. One million cars using compressed natural gas (CNG)
would consume about 1.2 bcm/year.
? There are more than 5,500 municipal and fleet vehicles now using CNG or LPG in
China,
 ? On an energy-equivalent basis, 1 bcm of gas reduces carbon emissions
by 0.5 mmt compared to an energy-equivalent amount of coal.
Therefore, even in an optimistic case where China raises gas
consumption to 200 bcm in 2020-178 bcm above 1998's level-and
all of the additional gas displaces coal in the energy sector, carbon
emissions would drop by about 89 mint, or 4 to 6 percent of projected
carbon output.
Development Milestones
If Beijing is to stand any chance of meeting its long-term gas targets, it must move
beyond its current modest efforts to boost the gas sector. Indications that China is
aggressively promoting a greater role for gas include:
? Actions to expedite contracting, financing, and construction of the
Guangdong LNG project.
? Specific objectives and detailed policy initiatives-rather than broad
generalizations-in the gas development plan which is scheduled to be
presented in mid-1999.
? Price reforms that give producers incentives to explore for and develop
new gas fields, and policies that encourage foreign financing and
equity participation in gas supply projects