The Oil and the Glory

A sign that China is headed for an ever-so-slightly tidier future

China is becoming cleaner — ever so slightly. This is because of fresh signs of a surge of Chinese natural gas demand over the next dozen years, which is likely to tamp down the burning of coal, according to Wood Mackenzie, the energy research and consulting firm.   This does not suggest that China — ...

AFP/Getty Images
AFP/Getty Images

China is becoming cleaner — ever so slightly. This is because of fresh signs of a surge of Chinese natural gas demand over the next dozen years, which is likely to tamp down the burning of coal, according to Wood Mackenzie, the energy research and consulting firm.  

This does not suggest that China — the largest source of greenhouse gases on the planet — is suddenly going pollution-free. But the trend is tidier, WoodMac concludes in a report to be issued shortly. The Edinburgh-based firm released a teaser on the report, and I spoke with two of its three authors today.

Until now, WoodMac estimated that Chinese annual natural gas demand would almost triple — to about 350 billion cubic meters in 2020 from about 130 billion cubic meters last year. The firm’s new estimate is that Chinese annual gas demand will rise to 500 billion cubic meters by 2025, a 42 percent increase from its previous estimate.

Noel Tomnay, who heads WoodMac’s global gas team, attributes the shift to a few factors: Greater Chinese intolerance of coal fumes, and increasing personal wealth, which allows Chinese citizens to pay more for cleaner natural gas-fired electricity, particularly in coastal areas; plus a desire by provincial officials for greater energy security when they are less and less sure about the reliability of coal and nuclear power. Tomnay told me:

Our view of China demand is probably higher than anything you’ll find from [the International Energy Agency), from BP, from Exxon. We are very bullish on China gas demand. Our view of China gas just keeps getting bigger.

According to the forecast, gas demand in China’s electricity sector alone rises almost six-fold, to 160 cubic meters a year in 2025 from 28 billion cubic meters now. Tomnay:

They are seeing the infrastructure for delivering the coal getting creaky, they are starting to get twitchy about some of the nuclear availability, and they like the idea of having a local fuel that they control.

Yet coal is not going away. As a proportion of overall Chinese energy consumption, gas will make up 9.5 percent in 2025, more than double the current 4 percent but still nowhere near coal’s 70 percent share last year. The trend is simply in a cleaner direction (last year, researchers at Lawrence Berkeley Labs forecast that by 2050, coal would drop to about 30 percent of China’s total energy consumption).

Along with the projected surge in Chinese gas consumption, the report’s authors conclude that U.S. gas producers — eager to export in the form of liquefied natural gas, with U.S. gas trading at $2.16 per 1,000 cubic feet, compared with as much as $20 in Asia — will confront difficult competition in the Pacific region. If you follow the report’s logic, relatively few U.S. producers will manage to export their gas.

Eight U.S. producers have applied for LNG export rights, and one has been approved — a terminal at Sabine Pass in Louisiana, from which Cheniere Energy will export about 22 billion cubic meters of LNG a year. But political opposition to such exports has arisen. Last week, the Energy Department announced that it won’t decide on the others until late summer, when a comprehensive report on the implications of exports is finished, Reuters reports.

The WoodMac report suggests that the longer it takes to get U.S. LNG exports moving, the less chance they will have to compete in Asia. After 2018, U.S. it will meet an increasingly crowded market, the firm says. In all, the firm says that if the U.S. can export 50 billion cubic meters of LNG a year — or half of projected new Pacific demand by 2022 — "it would be doing very well indeed."

Meaning, a little over just one more terminal the size of Sabine Pass.

I asked the WoodMac analysts specifically about Alaska, where the gas equivalent of 6 billion barrels of oil has been stranded on the North Slope for lack of transportation and a sure market. BP, ConocoPhillips and ExxonMobil are negotiating with state officials to export the gas to Asia in the form of LNG from the port of Valdez.

Amber McCullagh, a Houston-based analyst for WoodMac, said the costs of the Alaska LNG infrastructure will be "on the high side," and that, when all the pieces are in place, it is not likely to deliver LNG to the market before 2020. "As a result, it is going to require a continued high price in Asia to be competitive," McCullagh said. The trouble is that Asian prices are unlikely to remain as high, she said.

Much of this gas may end up staying home and meeting greater U.S. gas demand from industry and new power plants. For these U.S. producers, the good news, McCullagh said, is that U.S. natural gas prices are likely to rise.

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