The rapid expansion of China’s national gas pipeline network and LNG import infrastructure in the past decade have improved gas utilisation rates in all areas, from fuelling vehicles and heating households to powering the nation’s rapid industrialisation.
In the 1990s – a period of sustained double-digit economic growth – gas in China was primarily used by the chemical industry to produce methanol and fertilisers. Some 49% of gas supply in 2001 was consumed by the chemical industry, while 23%, 18% and 4% was used as fuel for households, industry and power generation, respectively, according to Natural Gas Industry, a monthly periodical owned by China National Petroleum Corp. (CNPC).
Under Beijing’s gas pricing regime in 2005, gas used as chemical feedstock was cheaper than gas destined for residential and industrial consumption. The average wellhead price of gas used for manufacturing fertilisers was RMB 0.73 ($0.12) per cubic metre (cm), while the average wellhead price of residential and industrial gas was set at RMB 0.79/cm and RMB 1.08/cm, respectively.
“The cheap price boosted gas chemical-making capacity over the period in some cities near large gas fields,” Li Lingxuan, an analyst with Zhuochuang Information, told Interfax.
Household and industry gas consumption has only taken off in recent years, after the central government raised wellhead prices by an average of 25% in June 2010. The price for manufacturing fertilisers was hiked to an average of RMB 0.86/cm, while residential and industrial gas prices rose to RMB 1.02/cm and RMB 1.36/cm, respectively.
However, redirecting gas for residential, industrial and power generation had become a priority as far back as 2007 when — with support from the National Development and Reform Commission (NDRC), China’s state economic planner — the country’s gas utilisation made its first substantial leap forward. The NDRC capped the expansion of gas-to-chemical capacity and encouraged the use of gas in other areas.
By the end of 2009, the amount of gas used as feedstock for chemical and fertiliser manufacturing had declined to 25.7% of total annual supplies while gas directed to households, industry and power generators rose to 30.6%, 33.4% and 10.3% of the total, respectively, according to the CNPC periodical.
Construction of the first West-East Gas Pipeline (WEP), which entered operations in October 2004, and five LNG terminals, accelerated the expansion of east China’s urban gas distribution network. The second WEP launched in June last year. The WEP network carries Central Asian gas to China’s eastern seaboard and had sent 175.1 bcm of gas as of 17 August.
China’s gas pipeline network spanned a total of 50,000 km at the end of 2011 and was linked to five operational LNG terminals with a combined receiving capacity of 15.8 million tons per annum, Xu Yongfa, head of CNPC’s Economics & Technology Research Institute, said in February. The country intends to put another five terminals into operation by 2015.
Household gas use accounted for more than two-thirds of total consumption in 2011 and its share is expected to rise over the next several years with the construction of the third WEP and additional infrastructure, Li forecast.
However, the share of gas used for power generation remains low by international standards. Only 22% of China’s gas consumption was used for power generation in 2011, a figure dwarfed by the 2008 rates for Japan (59.6%), South Korea (44.6%) and the United States (31.2%).
Aiming to increase the use of gas in the power sector, the NDRC released a blueprint in November 2011 for building 1,000 gas-fired distributed energy projects during the 12th Five-Year Plan period, which runs from 2011 to 2015. Beijing is aiming for 12 bcm of gas to be used for power generation by the end of the period.
Regulated and capped electricity prices are the biggest hurdle facing the gas-to-power sector in China, said Lin Boqiang, director of the China Centre for Economics Research at Xiamen University. Gas power plants receive low prices for the electricity they sell to grids during peak seasons of power consumption, Lin told Interfax.
High fuel costs for gas power plants mean they are more expensive to run than hydropower and thermal power stations, which largely relegates their usage to peak consumption seasons.
“The on-grid price in peak period is 0.5 to 1 times higher than during non-peak periods, while in some developed countries the peak price is three times higher than the ‘valley’ price,” Lin said, noting that preferential on-grid pricing for gas power is necessary to encourage power producers. Lin believes gas-fired power could account for 30% of the total annual consumption over the next few years.