01.10.2016 Author: Dmitry Bokarev

China’s Gas Prospects

452342341231One of the most prominent trends observed in the modern hydrocarbons market is that countries involved attempt to reduce their environmental risk while maintaining their energy consumption. This means that priority will be given to more “environmentally friendly” energy sources in the future.

According to experts, coal combustion, which is one of the most significant factors in global warming, inflicts the greatest damage on the environment. Moreover, during the process of coal combustion, a large amount of substances that harm human health are emitted into the atmosphere. Currently, coal accounts for 30% of the total volume of hydrocarbons consumed by humankind. Many see the reduction of the extraction and consumption of this fossil fuel as the first important step in protecting Earth’s environment.

Coal is a high-quality source of energy, cheaper than oil and gas. It will continue to be of great importance to the Chinese industry and power industry for a long time. However, China has faced serious environmental problems in recent years and decided to reduce its level of coal consumption. This measure is part of the comprehensive environmental protection program developed by the Chinese authorities in 2013. The process will take many years, however it has been started. By 2017, the most industrially developed districts of China plan to reduce consumption of coal by 85 million tons, and the use of coal in the Chinese power industry should be decreased from the current 63% to 56% by 2020.

One of the ways to achieve this is increasing the use of natural gas. The share of gas used in the Chinese power industry should be increased from 8% to 12% by 2020.

China is a gas producer, but since 2007 its consumption has started to exceed its production. In 2015, China produced 132 billion cubic meters of gas but it consumed 190 billion cubic meters. The 60 billion cubic meters required were delivered from abroad via gas pipelines and tankers as LNG.

Both methods have their disadvantages. Now, as the opposition between the USA and China for the influence in the Asia-Pacific region has become more acute, China’s opponents may use its gas channels as leverage.

Despite the fact that China has been the third world’s largest consumer of LNG after Japan and South Korea since 2014, China gets most of its gas via pipelines from Central Asia and Myanmar. China buys gas from Central Asia (Kazakhstan, Turkmenistan, Uzbekistan) via the Turkmenistan-Uzbekistan-Kazakhstan-China pipeline, which has successfully operated since 2009.

Turkmenistan is a major supplier of pipeline gas (and gas in general) to China. In 2015, China bought about 35 billion cubic meters of gas from Turkmenistan, which accounted for more than a half of Chinese gas imports. It should be noted that after Gazprom refused to buy gas from Turkmenistan, China became its major buyer and therefore could set the price.

The Turkmenistan-China gas pipeline seems to be the perfect gas source for China, however, it has a big disadvantage. The gas pipeline passes through several states that have faced unrest several times over the last years. In addition, it passes through the Xinjiang Uyghur Autonomous Region in the territory of China, which is famous for its separatist spirit. Should the stability in the region be violated, all gas supply to China from Central Asia may be under threat.

In that case, China would still have access to the gas from the pipeline in Myanmar, however, its own gas stocks are not significant. A considerable amount of gas delivered to China via this gas pipeline is shipped in tankers from the Middle East to Myanmar ports, and Myanmar acts as a transit country.

This means that should any problems arise with the Turkmenistan-China gas pipeline, China will get significantly less gas and pay much more for it.

Another of China’s gas delivery sources is by sea in the form of LNG. The major LNG suppliers to China are Qatar, Australia, Malaysia, Indonesia, etc. This gas delivery method is much more expensive, slower and, more to the point, hazardous. First, the actual transportation of liquefied gas by sea has its risks even without interference from outside parties. The key point is that sea shipping routes can be blocked in case of any conflict. All it would take to stop LNG deliveries to China from its main supplier – Qatar – is block the narrow Strait of Hormuz. Let’s not forget about the Strait of Malacca – China’s sore spot. These two straits are the two major vulnerable spots in the hydrocarbons shipping route from the Middle East to China, Japan, and South Korea. China has put a lot of effort into securing this route in order not to be dependent on the Strait of Malacca and develop transit through Myanmar. However, China’s potential opponents may try to block this small country off from the sea.

In this case, Australia may become the major LNG supplier to China. In fact, this is what Australia is aspiring to. According to a statement made by the Australian Prime Minister Malcolm Turnbull in Spring 2016, Australia intends to increase its LNG exports up to 75 million tons by 2020. The main target markets are China, Japan, and South Korea.

However, China should rely on Australia with caution, as Australia is a long-standing partner and ally of the USA. Australia, as well as America, is anxious about China strengthening its position and influence in the Asia-Pacific Region, and it opposes China’s activities in the East China and South China Seas. Australia participates in the Malabar joint naval forces training undertaken by the USA, India and Japan, and cooperates with America in many other spheres. Thus, in the event of further deterioration of China-US relations, the supply of Australian gas to China may be in doubt.

The following conclusion can be made: the sources currently used by China to obtain gas are not reliable. All supplies may be at risk in the event of various conflicts and social disruptions.

China needs to diversify its imports in order to provide itself with secure energy resources such as natural gas. The most advantageous partner of China in terms of territory is Russia. It is perhaps the only country that China may obtain a large quantity of energy resources from directly without the need for transit through other states. A gas supply agreement for 30 years between Russia and China was signed in Spring 2014. For this purpose, the decision was made to construct the Power of Siberia gas pipeline, which should start operation in 2019, as well as the Power of Siberia-2.

In light of the challenging situation in the Asia-Pacific region and the complicated relations China has with other countries, the importance of Russian energy resources may increase manifold in the coming years, just as relations between China and Russia may improve in general.

Dmitry Bokarev, political observer, exclusively for the online magazine “New Eastern Outlook”.