China unveils pipelines strategy

20 July, Week 28, Issue 652

The National Development and Reform Commission (NDRC) and National Energy Administration (NEA) unveiled ambitious plans last week to expand and upgrade China’s oil and gas pipeline network over the next decade.

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The network should reach a total length of 169,000 km by 2020, they said in a joint statement. This would comprise 32,000 km of pipelines for crude oil, 33,000 km for refined oil and 104,000 km for natural gas. China currently has 112,000 km of oil and gas pipelines.

And by 2025, the network should reach a total length of 240,000 km, of which natural gas pipelines will comprise 123,000 km, according to the new goal.

The target envisages all Chinese cities with a population of at least 1 million people being connected by a pipeline for refined fuel by that date, while those with more than 500,000 residents will have access to gas pipelines.

The project will support Beijing’s target of increasing gas’ share of China’s energy mix to 10% by the end of 2020, from around 6.5% currently. The move could also support the share prices of Chinese gas distributors, which have already surged around 30% on average so far this year.

Sector confidence

While confidence in the distributors is again partly driven by Beijing’s push to increase the use of natural gas, the NDRC’s recent clarification that returns for China’s downstream sector will be capped at a slightly higher level than many had feared has also supported their stock. Distributors will be allowed to make a 7% profit, rather than 6%, the NDRC said last month.

A booming housing market is also helping distributors not only generate revenue from supplying gas to residential users but from installation fees. A pick-up in industrial activity in China has, meanwhile, pushed up gas consumption from that sector.

Analysts are concerned, however, that China’s housing market might run out of steam and whether Beijing’s plans to revert to a more neutral monetary policy will have an impact on industrial activity.

The country’s dire urban air pollution position, though, should in the longer term support Chinese demand for gas. And while having gas account for 10% of China’s energy mix is the right move for Beijing, it is still be far below the current global average of 25%.

One analyst at PetroChina, the country’s biggest energy producer, also predicted early this week that China’s total gas demand growth could hit a new record in 2017, with consumption surging by 30 bcm.

“We estimate China could consume 28-30 bcm more than last year, mainly on the back of preferential policies,” the deputy director of PetroChina’s planning and engineering institute, Han Jingkuan, told Interfax.

If correct, the range of demand growth that PetroChina predicts would exceed the previous record demand increase of 23.7 bcm seen in 2011 and would equal annual growth of 13.6-14.6% based on China’s apparent gas consumption of 205.8 bcm in 2016.

Additional benefits

Beijing’s new pipeline construction target will also support flows of crude and refined oil – both foreign and domestically produced – from remote border regions to prosperous inland cities, the NEA and NDRC said.

In particular, imports from countries through which China’s ambitious One Belt, One Road (OBOR) project will run will be boosted by the construction of more pipelines, they said, highlighting projects in Russia, Myanmar and Central Asian countries. Further import projects will be initiated, they added.

Beijing believes that improving its oil and gas networks will boost energy security, stimulate investment, support the wider economy and help wean China off its dependence on coal.

Although the country’s consumption of dirtier coal continues to fall, it still accounts for more than 60% of China’s energy mix. While China’s coal consumption shrank 4.7% in 2016 compared to a year earlier, its crude consumption expanded 5.5% and its gas consumption jumped 8%.

Edited by

Andrew Kemp

Editor

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