Rising Production, Consumption Show China is Gaining Ground in Its Natural Gas Goals [Gas Expert Insights]

Rising Production, Consumption Show China is Gaining Ground in Its Natural Gas Goals [Gas Expert Insights]

China’s latest Natural Gas Development Report shows the nation made gains last year in efforts to restructure its natural gas market, increasing domestic production and consumption; boosting imports of liquefied natural gas; adopting technologies to boost domestic exploration and production and cut emissions; and reforming pipeline transmission tariffs.[1] The new tariffs are likely to help grow natural gas supplies, reduce end-user costs and increase consumption. The world’s top importer of natural gas now supplies about 60 percent of its demand with domestic supplies, thanks in part to reforms aimed at increasing domestic supplies and consumption. As the world takes on many challenges from climate change and energy transition, China’s use and views of natural gas in its energy mix are critically important.  In this blog, the authors explore these key takeaways from the 2023-2024 report.

Industry and city-gas drove China’s natural gas consumption in 2023

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In 2023, China consumed 394.5 billion cubic meters (bcm) of gas, a year-on-year increase of 7.6 percent. Industry and city gas, which includes residential and transport use, accounted for most of the incremental demand growth of 28.2 bcm. While industry was the largest contributor to this growth (12.3 bcm) and the largest sectoral consumer, city gas was the fastest-growing sector (Table 1). Its double-digit increase was partly due to the “explosive growth” of heavy-duty trucks powered by LNG.[2] Indeed, 152,000 LNG-powered heavy-duty trucks were sold in 2023, a year-on-year increase of 307 percent.[3] This growth continued in the first half of 2024, with sales of LNG-fueled heavy-duty trucks surging by 104 percent year-on-year. These sales contributed to an 8.7 percent year-on-year increase in China’s natural gas consumption to 210.8 bcm in the first half of 2024.[4] Sales continued to grow year-on-year in July but fell in August due to the increase in LNG prices, the narrowing of oil and gas price differentials and the absence of new policy support.[5]

More than 40 percent of Chinese domestic gas production was from unconventional sources in 2023

In 2023, China produced 232.4 bcm domestically, an increase of 12.3 bcm or 5.6 percent over 2022. Domestic output met some 59 percent of China’s total demand, keeping import dependence at 41 percent, unchanged from last year.  According to the report, 43 percent of domestic gas production, 97 bcm, was from unconventional sources (Figure 1).

China has been investing heavily in domestic oil and gas exploration, development and production (E&P) since 2019, partly due to Chinese leader Xi Jinping’s July 2018 instruction to China’s national oil companies (NOCs) to increase domestic E&P.[6] In 2019, the three major NOCs released their first ever seven-year plans to intensify E&P in 2019-2025.[7] Xi subsequently announced that China must reduce dependence on imported oil and gas.[8]  Chinese NOCs have implemented this strategy with significantly higher capital investment in domestic E&P. The three major NOCs collectively increased their domestic gas production by 43 percent in 2018-2023, setting new production records last year.[9]

China’s LNG imports rose by over 12 percent

China continues to import more LNG than pipeline gas (Figure 2). In 2023, 59 percent of China’s natural gas imports of 165.5 bcm were LNG and 41 percent were pipeline gas. The country’s LNG imports rebounded by growing 12.3 percent, and China replaced Japan as the world’s largest LNG importer on an annual basis.[10] However, China LNG imports remained below their peak of 108.9 bcm (or 79.5MT) in 2021.

Australia, Qatar, Russia, and Turkmenistan supplied nearly three-quarters of China’s natural gas imports.[11] New long-term supply contracts signed by Chinese buyers and growth in China’s regasification capacity indicate that China’s LNG imports will probably continue to grow. Chinese imports increased by over 14 percent during the first half of 2024.[12]

China made technological breakthroughs to promote natural gas production and consumption

The report highlighted a number of technological breakthroughs consistent with China’s emphasis on independent research, design and production of key equipment to counter the perceived risk of potential Western technology export bans directed at China.[13] Four new technologies are worth noting. The first two aim to facilitate energy transition and emission reduction, while the second two aim to explore and develop oil and gas either in deepwater settings or deep-seated reservoirs:

1. Simultaneous power generation using geothermal energy from hot water, encountered in deep oil and gas development wells
2. Power generation by using pressure differentiation from natural gas.[14]  This is claimed to be a net zero emission technology.   
3. Independently developed “Hai-Jing” system[15] to reduce noise levels to conduct high-resolution 3D seismic surveys in ultra-deepwater (>3,000m) areas such as the South China Sea.
4. Automated rigs for ultra-deep (>12,000m) drilling, deployed in the Tarim Basin in western China.

Pipeline transmission tariff reform moves forward

On January 1, 2024, China implemented a new pipeline transmission tariff system for inter-provincial pipelines operated by PipeChina, which controls more than 60 percent of the country’s oil and natural gas pipelines.[16] The new system replaces 20 tariffs with one each for four zones:  Northwest, Northeast, Southwest, and Central and East.[17] It aims to further the objective for which Beijing established PipeChina in 2019 – the creation of a unified national pipeline network to increase supplies, lower end-user costs and boost consumption.[18]

Although the new system has reduced tariffs across China, some pipelines now have higher tariffs while others have lower ones (Figure 3).[19] The Northwest is the zone with the lowest tariff, probably because it is a strategic import channel for natural gas from Central Asia. The second lowest tariff is for the Northeast, which is a strategic import channel for Russian gas. The highest tariff is for the Southwest; it only contains the China-Myanmar pipeline, the tariff for which has declined by 15 percent. Several pipelines in the Central and East, the country’s main natural gas consumption center and a transit zone, now have higher tariffs.

The new system is likely to lead to an increase in China’s natural gas supply and consumption. The zonal tariffs should make it easier for downstream companies to shop around for cost-competitive supplies because it is easier to compare prices.[20] This, in turn, should lead to lower upstream costs as producing companies compete against each other to secure customers.[21]