Development in China has come at a price. During its rapid industrialisation, the country has come to utilise large amounts of coal for power generation, industrial boilers and domestic heating. Not much attention was paid to controlling soot and dust emissions, and still less to emissions of sulphur dioxide and nitrogen oxides – not to mention highly-toxic arsenic, mercury and cadmium.
By contrast, natural gas is a cleaner fuel. It can be rendered nearly free of sulphur and other pollutants with relative ease. And for those who would link climate change to carbon dioxide releases, natural gas also produces less carbon dioxide per unit of energy released.
It is not surprising, therefore, that in the first decade of the twenty-first century, many great cities in China – as well as in the rest of the world – are queuing up to import natural gas. Just as Delhi needs to get away from burning charcoal and cow dung, Istanbul from nasty Thracian lignite, Beijing needs to stop burning high-sulphur coal.
Pollution in Beijing is now being reduced by supplanting the use of coal with natural gas from north China’s resource-rich Ordos Basin. Cleaning up the air in notoriously polluted major provincial centres like Taiyuan and Chongqing has become a priority for improving public health. And with the 2008 Olympics approaching, promoting “blue skies” in Beijing has become an urgent national issue.
Japan, South Korea and Taiwan already account for nearly 80% of all traded liquefied natural gas (LNG). For its part, mainland China has been constrained in natural gas imports by the high cost of LNG. China has been looking for more cost-effective ways of boosting gas utilisation.
The country has not yet invested in many expensive LNG reception facilities. Price permitting, both east China’s Shanghai-Pudong area and north China’s Tianjin-Beijing complex would have been natural candidates for receiving LNG. In contrast to the Japanese and Koreans, the Chinese government has proved sensitive to the long-term consequences of purchasing expensive energy. Part of the problem is trying to wean a customer base with relatively low purchasing power away from cheap coal. They also need much new investment to bring their basic infrastructure for the transmission and distribution of natural gas in line with potential new demand.
Natural gas currently accounts for about 2% of total energy consumption in China. From small beginnings, domestic gas production has developed rapidly during the past decade, reaching 50 billion cubic metres in 2005. The country’s known domestic gas reserves amount to about 1.5 trillion cubic metres, located mainly in western China’s Sichuan province, Bohai Bay, north-central China (northern Shaanxi province, the Ordos Basin) and the northwest’s Tarim Basin.
However, it is estimated that demand will rise at an average of nearly 5.5% yearly, to 59 billion cubic metres by 2010 and 107 billion cubic metres by the year 2020. And PetroChina have come up with still higher demand figures. Although China expects to increase domestic production and build a second west-east line from Xinjiang to Guangdong province, much new gas will need to be imported, provided it can be delivered at a reasonable cost.
In 2004, China announced a relatively low natural gas purchase price for Shanghai from the internal west-east natural gas pipeline. This was meant to encourage market development in the Shanghai area by making gas prices attractive for both domestic and industrial consumers. However, the move appears to have persuaded some multinational companies to withdraw from further investment in regional pipelines, and to adopt a “wait and see” attitude regarding LNG regasification projects in nearby Zhejiang province. Meanwhile, PetroChina has formally opened the 4,200 kilometre west-east gas pipeline from the far west’s Tarim Basin to Shanghai. The 1,660 kilometre eastern sector, from Shaanxi province to Shanghai, had already begun pumping at an annual rate of 1.5 billion cubic metres since October 2003. Total capacity in 2005-2006 rose to 12 billion cubic metres, although local market development is expected to take some time.
On the other hand, China has not entirely given up on LNG imports. Two consortia with China National Offshore Oil Corporation (CNOOC) as lead contractor have committed to LNG purchases. British Petroleum (BP) will build the country’s first LNG import terminal near Guangdong. The gas will be supplied from Australia’s North West Shelf LNG terminal, expected to begin operation in the first half of 2007. This first plant is expected to serve power plants and allied installations in south China’s Shenzhen – Pearl River Delta region. The regasification plant is expected to enter service with initial imports of 4 billion cubic metres, rising to 7 billion by 2008. Given the higher purchasing power of the southern industrial zones and the Hong Kong – Shenzhen area, a level of tolerance for current higher natural gas prices may be expected.
The second LNG terminal is under construction in Zhangzhou, in Fujian province farther up the coast, which is scheduled for completion in late 2007. However, with a smaller industrial hinterland, the Fujian project does not fit the same pattern. It will be supplied with 3.6 billion cubic metres starting in 2007 by the Tangguh partners, an Indonesia based consortium led by BP, including among others BG (formerly British Gas). The plan is to supply two new power plants: Songyu II (1800 MW) in Xiamen and Nanpu (1800 MW) in Quanzhou, as well as five major coastal cities: Fuzhou, Xiamen, Quanzhou, Zhangzhou and Putian. In an interesting – if not ground breaking – development, the Chinese side is taking equity in the two LNG exporting consortia. The supply contracts had been signed before the price surges of 2004-2005 and applicable gas prices for these two projects have not appeared in the public domain.
Importing Russian gas
China is also actively seeking ways to import natural gas from Russia by pipeline. For a while it seemed the probable source of the gas would have been the Kovykta gas field north of Angarsk, in southeast Siberia, with reserves of 2 trillion cubic metres. According to a Russian interagency task force master plan, however, gas from Kovykta will not be exported to Asia. According to the gas production and distribution scenarios studied by the same task force, the maximum amount of natural gas that can be exported to China and Korea by 2030 is no more than 25 billion cubic metres.
These decisions are not consistent with the resolutions adopted at the Sino-Russian summit in Beijing in March 2006, where Russian president Vladimir Putin promised that Russia would deliver 68 billion cubic metres of natural gas, using two separate routes. The first of these would carry about 30 billion cubic metres of western Siberian gas through the Republic of Altai into Xinjiang province, for local use and for pumping into the west-east natural gas pipeline system. Environmental activists and gas engineers alike have pointed out that this route would cross into protected uplands and be both expensive and ecologically undesirable. The other difficulty involves, as ever, the price. For China, drawing gas from western Siberia would amount to competing with western Europe. It is unlikely they would agree to pay European prices for the gas.
The second Russia-China route would go through the Russian far east. The potential gas pipeline trajectory begins at Angarsk, crossing the frontier near Manzhouli into Daqing, splitting at Shenyang with spurs to Beijing and Dalian, the latter for an undersea connection to South Korea. At 4,900 kilometres in total length, this is a long line and an expensive project, with an estimated price-tag of about US$12 billion and an annual capacity of 30 billion cubic metres; one-third of it destined for South Korea.
An alternative route, shorter by some 1,500 kilometres, would have run through the territory of the Republic of Mongolia. This line is technically feasible and significantly cheaper to construct. Negotiations were undertaken in 1998 involving the five possible partners: Russia, Mongolia, China, Korea and Japan. The Russians proposed to sell some of the gas to Mongolia, who are desperate to reduce air pollution in the capital, Ulan Bataar. These negotiations have failed. China has expressed concerns over political risks and possible transit fees.
Therefore, it is not entirely clear when the Russians will have the necessary gas available for export to east Asia. It is also not clear what prices they would charge for the gas, when the time comes. The delays in decision-making appear to be not only related to uncertainty regarding the reserves to be mobilised, but also about the magnitude of investments required for field development and the funding of the necessary pipelines and other infrastructure.
It is a situation that finds parallels in prospects for the east Siberian crude oil pipeline project, where they appear to be short of the extra oil to export. The Russians have been using cheap Kazakh and Turkmen gas to supply subsidized domestic customers. They export gas, mostly drawn from northwestern Siberia to Europe at over US$230 per 1,000 cubic metres. The question must be: do they have any extra gas to export to China, whether from the overcommitted resources of western Siberia and central Asia or from the as yet undeveloped resources of central and eastern Siberia?
Rifat Kandiyoti is a Professor of Chemical Engineering, Imperial College London
Homepage photo by Daniel Ullrich