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Chinese Step on Gas But Roadblocks Loom

Copyright © 2021 Energy Intelligence Group

China's national oil companies (NOCs) have heeded Beijing's call to help combat pollution, collectively hoisting their domestic gas production by 8.5% year on year to 3,209 billion cubic feet (11.75 billion cubic feet per day) in the first nine months of 2017. Still, they may miss longer-term growth targets, deterred by high production costs and regulatory uncertainties. The government has set an energy transformation plan in motion that envisages gas' share of the energy mix rising from 5.9% in 2015 to 8%-10% by 2020 and 15% by 2030 while coal's falls. The NOCs are expected to play a major role, securing international piped gas and LNG deals, and producing more gas at home. Their newfound enthusiasm for gas is doubtless inspired partly by Beijing, but it also coincides with a potentially terminal decline in domestic oil production. Oil output is widely thought to have peaked in 2015, at least until prices surge back to levels that make it economic to pump large amounts of money into mature fields. Gas output by China's Big Three -- Sinopec Group, China National Petroleum Corp. (CNPC) and China National Offshore Oil Corp. (CNOOC) -- as reported by their Hong Kong-listed subsidiaries accounted for 86.4% of national production over the nine months. The subsidiaries -- PetroChina, Sinopec Corp. and CNOOC Ltd. -- are believed to include most of their parents' domestic output. Total Chinese production rose 9.1% to almost 109 billion cubic meters (14.1 Bcf/d) from January to September, according to China's National Bureau of Statistics. That was a remarkable 9 Bcm increase over the year-earlier period after a meager 2 Bcm rise in 2016. Still, production in 2017 looks likely to miss the state-owned National Energy Administration's forecasts of a 24% leap to 170 Bcm. Full-year output could reach 145 Bcm if the first three quarters' growth is maintained, although production increases tend to slow in winter. Despite the increase, the trio still have a way to go before catching up with many of their Western peers, for which gas makes up over half their output. Gas accounted for 42% of domestic production at PetroChina in the third quarter, for 38% at Sinopec and for 14.5% at CNOOC. Nationally, gas made up 36%. Indeed, even if the Chinese firms maintain their gas focus over the next three years and increase annual production by 10 Bcm-15 Bcm/yr, the country is likely to miss 13th economic plan targets calling for output to increase from 135 Bcm in 2015 to 207 Bcm by 2020. London-based consultancy Energy Aspects forecasts production of 190 Bcm by 2020, while Sanford Bernstein analysts put it at 173 Bcm as NOCs overlook domestic plays in favour of cheaper imports of LNG, and piped Russian and Central Asian gas (WGI Nov.1'17). All three companies face constraints at home. A significant chunk of this year's incremental output comes from unconventional gas, in particular Sinopec's Fuling field in Chongqing in the southwest. Sinopec, China's top shale gas producer, is on track to increase capacity at the flagship field to 10 Bcm/yr by the end of 2017, but it is having trouble selling the gas because of competition from LNG and gas being sold by PetroChina, and lukewarm interest from utilities reluctant to spend money retrofitting furnaces to run on gas, not coal. As of mid-October, Fuling had produced 5 Bcm at most (WGI Oct.25'17). Location can be a problem. CNOOC increased its gas output by 13.75% in the first nine months of the year, but Finance Chief Xie Weizhi noted in a conference call after third-quarter results that its fields are badly placed to meet surging demand in northern China. "Most of our gas fields are in the South China Sea area, creating challenges for gas sales. There is a mismatch between our production and the sales market," Xie said. Geological constraints exist, too. Conventional gas fields are seen as having limited upside, and while China's shale potential is real, explorers reckon the country can't replicate a US-style shale revolution. BP, the only Western major with major Chinese shale interests, forecasts shale production at around 128 Bcm by 2035, by when demand is expected to exceed 600 Bcm/yr, but others are less optimistic. State-controlled pricing is another hurdle. Beijing's move to encourage gas use by slashing city-gate prices for non-residential consumers by almost 30% in November 2015 helped fuel demand in 2016, but deterred investment in production, which grew just 1.48% (WGI Nov.25'15). NOCs have since been allowed to increase gas prices in winter to avoid supply shortages and Beijing has introduced new production incentives, but uncertainties persist over government policy. These include plans to open third-party access to pipelines and LNG terminals, and to take midstream businesses away from the state firms. Maryelle Demongeot, Singapore Chinese NOCs' Domestic Gas Output (Bcf) Jan-Sep '17 Jan-Sep '16 %Chg. PetroChina 2,339.20 2,229.10 4.94 Sinopec 674.15 557.15 21.00 CNOOC 196.10 172.40 13.75 Total 3,209.45 2,958.65 8.48 (Bcm) NOCs Total 90.89 83.79 8.48 China Total 108.72 99.65 9.10 Sources: Company reports, China's National Bureau of Statistics

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