CHINA GAS DEMAND
Rising incomes, rapid urbanisation and concerns over the toxic smog that enshrouds many of China's cities is driving the country away from coal and oil and towards natural gas.
Gas usage has risen almost sevenfold over the past 13 years to 168bn cubic metres (bcm) and China is now the third-largest consumer in the world after the US and Russia.
Further increases are expected. China's power, industrial and transport sectors are forecast to drive demand to 315bcm by 2019, according to the International Energy Agency, the wealthy nations' energy watchdog, and the Chinese government has set its sights even higher.
But uncertainty remains about the pace of growth going into the next decade.
"Natural gas demand in China has potential to grow much more rapidly than it is now. However, there is still a lot standing in its way," says Anne-Sophie Corbeau, senior IEA gas analyst. "In some ways we are less optimistic about the Chinese."
The expansion of China's gas sector is a huge logistical and capital investment challenge. Supply availability and delivery infrastructure, pricing levels, and government policy and funding to promote natural gas over other fuels are other factors dictating the speed at which the switch occurs.
The Chinese government anticipates boosting the share of natural gas as part of total energy consumption from the current level of 4 per cent to about 8 per cent by the end of 2015, and 10 per cent by 2020, to control the plumes of black clouds resulting from the country's heavy coal use.
But China's ability to construct the vast infrastructure network needed to produce, import and transport enough gas to meet demand and reach these targets is under scrutiny.
"There is a lot of Chinese pent-up demand, particularly over the last decade, but infrastructure and the availability of supply has always been a constraint," says Michael Stoppard, gas strategist at IHS. "They really haven't been able to develop the gas quickly enough."
Pipelines have been at the top of the agenda. After a decade of negotiations China struck a $400bn gas supply deal with Russia in May as part of a longer term strategy to raise natural gas imports via pipeline and liquefied natural gas (LNG). China is also connected to pipeline corridors in central Asia and Myanmar. But they will all take years to ramp up to their full potential, says Ella Chou, at the Brookings Institution's China Center.
Believed to hold the world's largest reserves of shale gas, China hopes to replicate the US production boom in the form of tight gas as well as coal-bed methane and coal-to-gas conversion. But unlike the US shale industry, China does not have thousands of independent, oil and gas sector entrepreneurs competing aggressively with one another to organically expand production.
China is reliant on state-owned companies that right now lack in development experience. Exploration rights, geological surveys, the adaptation of drilling and exploration technologies to suit the country and even pulling together the relevant statistics have all proved to be tough.
In fact, China has halved its target for shale gas it expects to produce by 2020 to 30bcm, according to Reuters, after early exploration efforts to unlock the unconventional fuel proved challenging.
The country became a net gas importer in 2007, and import dependency reached 32 per cent last year. Aside from questions also over how quickly China could increase indigenous production and whether it could contract sufficient imports by pipeline, there are also problems with LNG because of a shortage of storage facilities.
Thierry Bros, a senior analyst at Société Générale in Paris, adds: "On top of its already long-term contracted gas [deals with] Turkmenistan, Myanmar, Russia, and LNG deals with the Qataris, Australians and Canadians, the ability of the Chinese to continue to grow domestic production – conventional and unconventional – quickly will dictate the needs of extra uncontracted gas that could be at a lower cost."
Ultimately, demand for gas will be determined by price, analysts say, as China has many alternatives to imported gas that are cost competitive. The single biggest competitor is coal transported via transmission lines to the coastal regions.
Until 2006, growth in Chinese consumption was met entirely by relatively low-cost domestic gas supply. However, the country has added higher-priced imports to the mix, the cost of which has risen considerably alongside the price of oil.
"Policy makers often have to strike a balance between providing affordable gas supplies to encourage gas penetration and setting a price that will serve as an incentive for more domestic production and higher imports," Michael Chen at the Oxford Institute for Energy Studies says in a report.
Manufacturers, already paying relatively high prices, want to stay competitive in the global market, while Chinese households want to keep their costs low. But without even higher prices the national oil companies will continue to face significant financial losses, disincentivising them from investing in exploration and production, and developing unconventional reserves.
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GAZPROM - The parties discussed relevant issues related to bilateral cooperation, including the Baltic LNG project. Emphasis was placed on the priority measures aimed at developing a joint design concept (pre-FEED).
BHGE - U.S. Rig Count is up 11 rigs from last week to 1,063, with oil rigs up 8 to 869, gas rigs up 4 to 193, and miscellaneous rigs down 1 to 1. Canada Rig Count is up 13 rigs from last week to 195, with oil rigs up 8 to 127 and gas rigs up 5 to 68.
REUTERS - Brent crude futures had risen $1.02 cents, or 1.3 percent, to $81.28 a barrel by 0637 GMT. The contract dropped 3.4 percent on Thursday following sharp falls in equity markets and indications that supply concerns have been overblown. U.S. West Texas Intermediate (WTI) crude futures were up 80 cents, or 1.1 percent, at $71.77 a barrel, after a 3 percent fall in the previous session. WTI is on track for a 3.5 percent drop this week.
EIA - Brent crude oil spot prices averaged $79 per barrel (b) in September, up $6/b from August. EIA expects Brent spot prices will average $74/b in 2018 and $75/b in 2019. EIA expects West Texas Intermediate (WTI) crude oil prices will average about $6/b lower than Brent prices in 2018 and in 2019.