China Braces For Second Winter Gas Squeeze

China’s plans to avoid another natural gas crisis next winter may depend on how deeply U.S. tariffs cut into its economy, experts say.

The effect of tariffs on industrial production is one of several unpredictable factors that will weigh on demand for the cleaner-burning fuel as the government tries to guard against winter shortages for the second year in a row.

Last December, many homes and schools in the smog-bound northeast were left in the cold after the government banned coal-fired heating before new gas networks could be completed in time.

The National Development and Reform Commission (NDRC) soon relented and allowed coal burning to resume, but the scramble for gas led to shortages and drove prices to record highs.

The NDRC planning agency has tried to tackle the problems by promoting more gas storage, more receiving terminals for imports of liquefied natural gas (LNG) and clearer guidelines for scrapping coal-fired boilers in the absence of adequate gas supplies.

“Last year’s shortage of natural gas in northern China showed the country’s shortcomings in production, supply, storage and sales of such energy,” said an NDRC spokesman in April, as quoted by the official English-language China Daily last month.

The paper cited a report by the China Electric Planning and Engineering Institute, concluding that seasonal differences in gas consumption were “aggravated” by encouraging fuel conversions for households and industrial enterprises at the same time.

Vice Minister of Finance Liu Wei said that future replacements of coal-fired boilers must secure a “matching supply source” of gas before proceeding, Reuters reported, citing the ruling Chinese Communist Party’s flagship paper People’s Daily.

But the pace of gas demand will also be influenced by forces that may pull in opposite directions, according to Ling Xiao, chairman of Kunlun Energy, the Hong Kong-listed distributor of China National Petroleum Corp. (CNPC) subsidiary PetroChina.

In remarks reported by the South China Morning Post, Ling said on Aug. 29 that it was “almost certain mainland China will once again face a tight gas supply this winter.”

Ling’s comments followed mixed assurances by a PetroChina official in July, reported by China Securities Journal.

The company was “fully prepared this year” to deal with last winter’s equipment problems with pipeline gas from Central Asia that contributed to the crisis, according to the official.

“Gas supplies are still expected to be tight this winter, but the situation should be better than last year,” the official said.

Ling’s more recent remarks suggest there are still unsettled issues in preparing for the winter gas squeeze.

Local governments “will have to balance residential heating needs with industrial users’ gas demands,” he said.

During last winter’s heating crisis, the NDRC ordered local governments to prioritize gas supplies for households, forcing some industrial enterprises to close or cut back.

On March 1, before the end of the last heating season, the NDRC said that “gas for nonresidential use should be reduced when necessary” to meet household demand.

Lack of clear instructions

Ling’s comments suggest that distributors and local officials may lack clear instructions for the coming heating season this year.

Ling said the trade war with Washington “could result in a slowdown in China’s manufacturing sector,” which would both reduce gas demand and weaken the ability of industrial users to pay for the higher-priced but cleaner fuel.

But the impact of slowing demand would be “largely offset” by the central government’s anti-pollution push, he said.

Despite last winter’s problems, the cabinet-level State Council announced in July that it would expand its seasonal smog-fighting program from 28 northern cities to 82 by limiting some steel, aluminum and cement production, and promoting more conversions to gas.

Last February, the Ministry of Environmental Protection (MEP) said plans called for switching 4 million more households and industrial plants from coal to gas or electricity this year, Reuters reported at the time.

While the impact of tariffs and production curbs may reduce demand and relieve shortages, the net effect of new gas conversions is unclear.

The government may also be tempted to spur industrial production with stimulus policies to keep economic growth from slipping, further complicating the outlook for gas demand.

The unsettled issues raise the question of how the government should prepare for a second season of potential shortages beyond the steps it has already taken.

Partial solutions

Philip Andrews-Speed, a China energy expert at the National University of Singapore, said that the government’s strategies must go beyond partial solutions.

“The underlying problem is how to ensure that the supply chain infrastructure and the contractual arrangements are in place from well head to burner tip,” Andrews-Speed said by email.

“If we see another surge in the conversion of coal-fired appliances, it is almost certain that there will be unsatisfied demand, unless end-user prices are raised sufficiently to cut off this demand, which is unlikely,” he said.

So far, the government’s policies have stopped short of fully deregulating gas prices and allowing market forces to reconcile supply and demand.

In May, the NDRC announced a partial reform for wholesale pricing of pipeline gas that allows “city gate” rates for residential use to rise by up to 20 percent over set levels.

The adequacy of the adjusted price cap may be tested if a gas crunch is repeated this year, triggering competition for supplies.

“Local governments will have to decide which sector deserves preferential treatment,” Andrews-Speed said, “In the past, this has usually been the households, assuming that the distribution pipelines and boilers are in place and the gas supply is provided.”

“However, as we know from last year and earlier experience, putting in place the end-user infrastructure for a given quantity of gas consumption is quicker and easier for industry than for households,” he said. “So, once again, the households may go cold.”

Double-digit imports

As the government has pursued its winter gas policies, China has relied on double-digit increases in imports to meet its growing demand for gas.

Last year, China’s gas consumption rose 17 percent, according to CNPC. But domestic production failed to keep pace as output rose at just half that rate, the National Bureau of Statistics (NBS) said.

This year, apparent demand climbed 16.8 percent from a year earlier in the first half, the National Energy Administration (NEA) reported, while domestic production increased 4.6 percent, according to NBS data.

In the first eight months of this year, domestic gas output gained slightly but growth remained at only 5.9 percent.

Last year, combined imports of pipeline gas and LNG soared 26.9 percent, the General Administration of Customs (GAC) said. This year through August, gas imports are up 34.8 percent, Reuters said.

On Sept. 5, the State Council issued a new guideline for promoting gas sector development, but provisions reported by Xinhua were general and vague.

“The country should effectively solve the problem of unbalanced and insufficient development of the sector to deal with the natural gas shortage and production capacity, realize balanced supply and demand, make facilities safe and efficient, and improve the market-oriented mechanism,” the guideline said.

Among other things, “the country should accurately forecast natural gas demand,” said the government, according to Xinhua.

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