IEEJ: October 2005

Current Status and Development Forecast of Natural Gas Supplyand Demand in China

Hang Jingkuan
Vice chief engineer of CPPEICURRICULUM VITAE
Mr.Han Jingkuan, senior engineer and deputy chief engineer of PetroChina
Planning & Engineering Institute, male, age of 42. Mr. Han graduated fromPetroleum processing department of Daqing petroleum university in 1987,and obtain master degree in oil and gas engineering from Petroleum
university (Beijing). Mr.Han has participated in hundreds of Front End
Engineering Design, design and scientific study projects in the fields of oiland gas gathering, storage and processing, some of them have been
implemented and achieved good economic and social results.
The projects Mr.Han participated have won many awards, including 1
national excellent design award of third class, 1 excellent engineering award
of second class of ministerial level and 3 excellent engineering award of
third class of ministerial level, 3 excellent engineering consulting awards offirst class and 3 excellent engineering consulting awards of second classfrom oil and gas branch of China consulting association, 10 engineering
design and scientific research awards of division level.
Mr. Han has released 7 technical papers in various magazines and 3 technicalbooks. He has been invited to participate and host many review meeting ofvarious projects and standards. He has hold posts in various organizations,like member of standardization committee of PetroChina exploration andproduction company, member of standardization committee of oil and gas
transportation and storage, member of committee on publish of articles
related to study results on oil and gas production facilities, member of Chinatransportation association, and member of expert panel under committee ofregistered survey design engineer in oil and gas sector.

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IEEJ: October 2005

Following decades of development of gas Industry in China, there are 6 huge gas supply
fields, including Chuanyu gas field, Shanganning gas field, Tarim gas field, Qinghai gas
field, South Sea gas field and East Sea gas field, with estimated recoverable gas reserve of
10-15×1012m3.

In 2004, gas production in China, mainly from the above 6 gas fields, hit 408×108m3; gas
consumption reach 360×108m3，accounting for about 3% of primary energy consumption.
Until the end of 2004, gas pipeline of 25000km has been built, forming gas pipeline grids
from Southwest to Middle South, from Northwest to North and across Yangtze RiverDelta. Especially after the operation of the West to East Gas Pipeline, gas industry in
China has been in development phase instead of start-up phase, signaling that gas will befully utilized in China and gas industry has entered a new era.

1 Analysis of energy supply and demand in China

1.1

Current status of energy supply

Production of primary energy in China hit 18.46×108tce in 2004, rising by 15.2%
compared with 2003, among them, coal, oil, gas production and power generated reached19.56×108t，1.75×108t，398×108m3 and 2.187×1012KWh respectively，up by 17.3%,2.9%, 16.7% and 14.5% respectively，ranked as No.1, No.5, No.17 and No.3 in the worldrespectively.

In general, there are abundant energy resources in China, however, per capita energy
resource is very low. For example, coal proven reserve in China, per capita of which isabout half of world average, is one of richest in the world; per capita of oil and gas is only
one tenth of world average.

With the rapid development of China’s economy, energy demand in China grows
continually while domestic production capacity can not keep the pace with the demand,therefore, energy shortage occurred as supply can not meet demand.

Breakdown of energy production in China is shown in table 1.
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IEEJ: October 2005

Table 1 Energy production in ChinaProportion （%）

Energy production
Year（104tce）

Coal

Oil

Gas

Hydropower

2000

106988

66.6

21.8

3.4

8.2

2001

120900

68.6

19.4

3.3

8.7

2002

138369

71.2

17.3

3.1

8.4

2003

16030074.2

15.2

2.97.72004

184600

75.6

13.5

3.0

7.9

1.2 Current status of energy consumption
With the booming economic development of China and increasing growth rate, energy
consumption in China grows continually. Since 1996, primary energy consumption has
increased by about 5% annually, about three times of world average.

In 2003, China became second-largest oil consumption country (after the United State). In
2004, energy consumption was 19.7×108tce，up by 15.2% compared with last year,
among them, coal, oil, gas，hydropower consumption and nuclear power reached 18.7×108t, 2.9×108t, 360×108m3 and 3280×108kwh and 501×108kwh respectively, up by
14.4%,16.8%,18%,15.6% and 15.6% respectively.
Energy consumption contributed to GDP growth of 10×104 Yuan is 1.58tce, up by 5.3%,
equivalent to 4 times of that in US and 12 times of that in Japan. China’s dependence onenergy imports stood at 6%. Coal is still the dominant energy in China’s energy mix,
shown in table 2.

Table 2

Energy consumption in China
Proportion （%）

Energy consumption
Year（104tce）

CoalOilGas

Hydropower

2000

13029766.1

24.62.5

6.8

2001134914

65.3

24.3

2.7

7.7

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IEEJ: October 2005
2002

148222

65.6

24.0

2.6

7.8

2003

167800

67.1

22.7

2.8

7.4

2004

197000

67.7

22.7

2.6

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1.3 Analysis of balance between energy supply and demand
Based on current status of energy supply and market demand, with rapid development ofChina’s economy, it is estimated that domestic energy resource will not satisfy thedomestic market demand in the long term, higher dependence on energy import isinevitable, making the participation of development of oil and gas fields in foreigncountry a must. Therefore, how to guarantee long term stable energy supply become astrategic issue concerning safe, stable, sustainable and rapid economic development in thefuture.

In 2003, China became second-largest oil consumption country, with net oil import of9112×104t; in 2004, imported oil exceeded 1×108t and reached 1.2272×108t, withdependence on oil imports rose to about 40%; in first half of 2005, oil imported reached6342×104t, up by 3.9%. In 2004, dependence on energy imports was 6%.

According to medium and long term energy development strategy of China, it is estimatedthat energy demand in China will reach 30×108tce in 2020, and dependence on oil imports
will stand at about 60%, making China become the first largest oil import country in theworld, with oil import exceeding the total of net import by members of OECD in thepacific, including Japan, Korea, Australia and New Zealand. It is estimated that China
will import gas to satisfy 40%－50% of domestic demand in 2020.

1.4 Characteristics of energy consumption
The pattern of China’s energy consumption, with coal as dominant fuel, will not bechanged in near term. In the future two decades, energy consumption will have following
characteristics probably:(1) The pattern of energy consumption, with coal as dominant fuel, will not be changed,
however, the proportion of coal in energy mix will drop gradually.

4IEEJ: October 2005

(2) Demand of crude and product oil will rise stably, causing the simultaneous increase ofoil imports. In 2003, China has replaced Japan as second-largest oil importing country; in2004, oil imports of China reached 1.2272×108t.
(3) Significant change in energy mix is the rapid growth of clean and excellent energy
demand, especially those of gas, power and oil.
(4) While optimizing the energy mix, improvement of economic benefit due to energy
consumption efficiency should be paid great attention and environmental issue beaddressed.

2. Current status of gas supply and demand
2.1 Current status of availability of gas reserve and gas production
According to results of third round of assessment on oil and gas resource, gas in place ofChina amounted to 47×1012m3，accounting for 11% of world total of 436×1012m3,among them, onshore gas in place was 30×1012m3，accounting for 64% of national total.
At present, proved recoverable gas in place of China is 14×1012m3，accounting for 8% ofworld total of 175.78×1012m3. Natural gas reserves are mainly located at 6 huge gas
fields, including Shanganning, Tarim, Sichuan, Qinghai, East Sea and Ying-qiong basin
gas field etc.

Until the end of 2004, there are 4.38×1012m3 of proved gas reserve and 2.77×1012m3 ofproved recoverable gas reserve, excluding resource and recoverable reserve of solution
gas of oil fields of 11678 × 108m3 and 3807 × 108m3. China National Petroleum
Corporation (CNPC) owned proved gas reserve of 20942×108m3，accounting for 75.5%
of national total, with Sinopec, CNOOC and local companies accounting for 15.1%, 9.0%
and 0.4% respectively.
In 2004, gas production reached 408×108m3，up by 19.7% compared with last year,including 285.29×108m3 of CNPC，56.91×108m3 of Sinopec, 48.88×108m3 of CNOOC
and 16.62×108m3 of others, mainly from 6 huge gas fields.

2.2 Current status of gas consumption
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Gas consumption amounted to 360×108m3 in China in 2004, accounting for 2.6% ofprimary energy consumption. Chemical industry consumed 33% of national total,industrial fuel 26%, city gas 29%, power generation 12%. The capacity of ammonia andmethanol production, with gas as feedstock, accounted for 20% and 25% of national total.
In China, rate of gasification, with natural gas as city gas, is 15%; capacity of gas-fired
power generation only accounted for 1% of national total installed capacity. Natural gas
utilization has been diversified gradually instead of being used in chemical industry
mainly in the past.

Gas utilization is subject to availability of gas resource, gas pipeline and gas market
traditionally, with the characteristics of localized consumption. Since the operation of
Shaanxi-Beijing gas pipeline in 1997, the construction and operation of Seninglan
pipeline, the West to East Pipeline and the Zhongwu pipeline in recent years, gas has beendelivered via long distance pipelines from the regions, with gas resource, to gas market.
Until the end of 2004, gas pipelines of more than 25000km had been built, setting up gas
pipeline grids from Southwest to Middle South, from Northwest to North and acrossYangtze River Delta.

3 Forecast of development of gas industry in China
3.1 Estimate of gas reserve and production
It is estimated that accumulated proved gas reserve in 2020, will reach 10×1012m3 in2020 following the accelerating investment on gas exploration. Based on estimateddevelopment potential of available reserve, proved unavailable reserve, newly added
proved reserve and solution gas of oil field, considering gas resource, market demand andplanning of pipeline construction, it is estimated that prior to 2010, by developing proved
reserve, gas production in China will reach 846×108m3 in 2010. After 2010, byaccelerating the development of newly added proved reserve, gas production will hit 1277
×108m3 in 2020, detail is outlined in table 3.

Table 3 Estimated gas production in China（108m3）
Gas

2010

620152020

IEEJ: October 2005
Available reserve

206

130

62490

500

520

Newly added proved reserve

50300

550

Subtotal

746

930

1132

Solution gas959595

Coalbed gas

525508461050

1277

Gas from gas Proved unavailable reserve
reservoir

Total

3.2 Estimated gas consumption
Based on results of analysis by the means of energy elasticity coefficient, gas customers
analysis and industrial planning and statistic, it is estimated that gas demand will be 1068
×108m3，1535×108m3 and 2107×108m3 in 2010, 2015 and 2020 respectively. Theregions, with huge gas consumption, include Beijing, Tianjin, Hebei, Shandong, Shanxi,
coastal area in Southeast region, Northeast region and Yangtze River Delta. It is estimatedthat the proportion of gas for power generation and that of city gas will rise gradually,reaching 32.3% and 29.7% respectively in 2010.

3.3 Balance between gas supply and demand
According to assessment on potential of gas resource and estimation of future market
demand, it is concluded that gap between gas supply and demand will be 222×108m3，
485 × 108m3 and 830 ×108m3 in 2010, 2015 and 2020 respectively. In 2020, theproportion of gas in primary energy will rise from 3% to 10%, making natural gas become
third largest energy (after coal and oil). Balance between gas supply and demand in China
is shown in table 4.

Table 4

Balance between gas supply and demand in China（108m3）

7IEEJ: October 2005

Domestic gas
production
Gas demand
Gap between supply
and demand

2010

2015

2020

846

1050

1277

1068

1535

2107

-222-485-830

4 Proposals on development of gas industry
4.1 Accelerating the exploration and development of domestic gas reserve to ensure thestable gas supply
At present, the proportion of gas in primary energy is less than 3%, lower than averagerate in Asia of 8% and far less that average rate in Europe and US. There is great potential
for development of domestic energy resource, so the exploration and development of domesticgas reserve should be accelerated to ensure stable increase of gas reserve in 6 huge gas fields while
increasing investment on exploration of offshore area to discover new reserve in East Sea, South Seaand Bohai Bay etc., securing the stable supply of domestic gas supply.

4.2 Enhancing international cooperation to play an active role in upstream activities
abroad and participate global gas trade
China, Japan and Korea, as energy consuming countries in Northeast Asia, have great
potential in market development, meanwhile, neighboring Russia, Middle Asia andMiddle East, have abundant gas resource, therefore, China, Japan and Korea, can takeadvantage of their excellent geographical positions, with the countries with rich gas
reserve in their neighbors, to achieve mutual benefit.

As a result, it is suggested that China, Japan and Korea should enhance cooperation in thefollowing fields:• To participate upstream activities of neighboring countries to get share of gas being
developed.
• To enhance cooperation with neighboring countries to push forward the development ofgas pipeline projects to import gas from Russia and Middle Asia, setting up gas pipeline
grid across Northeast Asia.
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• China, Japan and Korea should coordinate with each other to engage in global LNG
trade to minimize the price and transportation cost of LNG.

4.3 The construction of pipeline and associated facilities should be one of priority of gas
industry development
Following four decades of development of gas pipeline industry in China, until the end of2004, the pipelines of more than 24000km, 4 underground storages, with working gas of
15.77×108m3, have been built. At present, gas pipeline industry has developed veryrapidly, however, it still lags far behind developed countries, with the features of unevendevelopment of pipelines in various regions, less number of pipeline and storage facilities,
no national gas pipeline grid in place.

China should learn experiences of US to accelerate the pace of building pipelines toimport gas from neighboring countries, to set up gas pipeline grid from West to East andfrom North to South, to construct connection pipelines and underground storages tocoordinate gas supply and make gas supply flexible, to accelerate the pace of LNG importfrom coastal area and build coastal gas pipeline grid to satisfy the demand of clean energy
in the coastal area.

4.4 Developing gas industry should follow the sustainable energy development strategy,
with energy conservation as priority, diversified structure, environmental friendly andmarket developing.

In view of huge population, limited energy resource and industrialization process being
carried out in China, the following methods are recommended:• Efficiency of energy utilization should be improved by adopting advanced technologies.
• To implement preferential taxation policy to encourage China’s petroleum corporations
to participate the development of foreign gas fields in an effort to diversify the gas supply
channel.
• To encourage gas utilization by introducing relevant policies and laws while limiting theusage of fuel causing high pollution to increase the competitiveness of gas indirectly,
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IEEJ: October 2005

advocating using gas to replace oil in some sectors and gas-fired power generation andpushing forward the sustainable development of energy, environment and economy.
• To set up modern supervisory mechanism for gas industry and framework of gas laws
and regulations to push forward the healthy and orderly development of gas market.

Contact: report@tky.ieej.or.jp

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