China makes the most of its gas [NGW Magazine]

China’s gas production in 2020 is likely to maintain the strong growth momentum seen in the past two years, as the country’s top officials plan on a greater reliance on domestic resources to ease a reliance on foreign imports.

China’s three state-owned oil and gas groups have stepped up development of the fuel, including shale gas projects in southwest China, since China’s president, Xi Jinping, ordered them two years ago to intensify exploration activities to strengthen national energy security.

And with China and the US becoming increasingly embattled, PetroChina, Sinopec and Cnooc will likely be encouraged to double down on domestic production. More domestic output means less room in China’s gas supply mix for imports – with negative consequencews for its central Asian and other pipeline suppliers at the high end of the cost stack.

Chinese gas output in May grew by 12.7% year-on-year to 15.9bn m³, maintaining momentum from the previous month’s 14.3% year-on-year increase, which was the highest growth rate since October 2017. Production from January to May reached 78.8bn m³ and was up by 10.1% from the same five-month period of 2019, representing an acceleration from last year’s overall growth of 9.8% over 2018.

China’s monthly gas output has so far averaged 15.8bn m³ this year, which would imply an annualised rate of about 189bn m³. That projection would be up by around 9.4% year-on-year and bring China much closer to its official 2020 target of 200bn m³ than anyone would have thought possible when the goal was set nearly two years ago.

China’s NOCs have delivered this year’s production increase in spite of the sharp fall in oil prices that saw Brent touch a 21-year low of $16/barrel in April. There were concerns earlier in the year that associated gas output from ageing oilfields such as Xinjiang, Dagang, Liaohe and Zhonguan would suffer in the wake of capital expenditure cuts announced by China’s NOCs, but Brent’s rebound to above $40/b and strong Chinese oil demand has helped ease these fears a little.

Domestic gas output growth looks broadly resilient going forward this year. Ongoing gas supply security concerns mean that output from oilfields with high percentages of associated gas will be prioritised by China’s majors.

In its Gas 2020 report published on June 10, the International Energy Agency (IEA) forecast China’s annual gas output to grow by 54bn m³ by 2025 “thanks in part to continued policy support for domestic production.” This would exceed the 46.5bn m³ increase achieved over the five years from 2015 to 2019.

Shale driver

Domestic gas production growth is being largely driven by unconventional gas output, which was already starting to surpass expectations by the end of last year. China produced around 15.4bn m³ of shale gas in 2019, according to NGW calculations, up from 10.8bn m³ in 2018 and 9.0bn m³ in 2017.

Energy consultancy Wood Mackenzie had not expected China’s shale gas output to reach an annual 15.0bn m³ until 2020. The IEA, meanwhile, had estimated in last year’s edition of its Gas report that data from China National Petroleum Corp. – the parent of PetroChina – and Sinopec meant combined output would fall just short of 15bn m³ in 2019 and hit 19bn m³ by 2020.

Of last year’s total shale volumes, 8.03bn m³ came from China’s largest gas producer PetroChina, which was an 88% increase from 2018. PetroChina said in January it is targeting shale gas output of 11.0bn m³ this year.

Sinopec meanwhile produced 7.35bn m³ with 6.33 bn m³ contributed by the Fuling shale gas field in Chongqing municipality.

Virtually all of China’s extracted shale gas last year came from the Sichuan Basin in southwest China, which holds around four fifths of China’s technically recoverable shale gas resources. Output has been rising as Sinopec and CNPC’s own oilfield service companies gain more experience drilling and extracting gas from the complex geology of the mountainous Sichuan Basin.

Continued growth in shale gas and other dry gas production, including tight gas, will be somewhat dependent on how China sets its domestic gas pricing in response to Covid-19 and any pricing liberalisation this year.

But China appears to be largely maintaining its production growth in line with previous forecasts, which means that the space for pipeline imports from central Asia and Myanmar will be squeezed by the pandemic-induced slowdown in domestic gas demand growth.

Capex cuts

That said, there will be some impact on Chinese associated gas production as the NOCs reduce their capital spending budgets this year. China’s state-owned energy giants all announced cuts for 2020 to conserve cash, with PetroChina slashing capex by around 30% to renminbi 200 bn ($28.2bn} while Sinopec will cut by 20-25% across the value chain.

Offshore-focused Cnooc lowered its capex plan for 2020 to renminbi 75-85bn, after originally budgeting renminbi 85-95bn, but with minimal capex cuts for domestic upstream activities. The company’s capex reduction is less aggressive thanks to its net cash position and lower production costs than PetroChina and Sinopec.

Higher spending by China’s NOCs on exploration and production (E&P) has been important for offsetting natural declines at ageing fields in recent years, where output has gone up by an annual average of 20% in 2017-2019.

The Chinese majors cut 2020 spending budgets against earlier plans because domestic oil products are linked to international crude prices, and the latter had fallen below China’s full-cycle oil production costs – estimated to be around $35/b. With oil prices back above this, a major decrease in China’s crude output this year is unlikely, which should preserve associated gas production.

In any case, gas production growth in China is mostly insulated from potential drops in crude output. State-owned producers will seek to maintain output from fields with high gas shares, given the government’s target of ensuring gas supply security and the need to uphold social stability by keeping field workers employed.

Chinese majors have stressed their ambition to increase gas output in 2020 as well as the fact that they overcame previous supply crunches, such as the one in the winter of 2017-2018 that saw severe shortages nationwide.

Sinopec explicitly reiterated at the end of March that it was planning to increase gas production for 2020, while PetroChina said in its first-quarter earnings briefing at the end of April that it aimed to boost gas production by 5% this year from 2019.

The long-term outlook for Chinese gas production also looks upbeat following supportive policies aimed at increasing market participation and competition in the upstream segment.

New entrants upstream

New “opinions” from the natural resources ministry (MNR) for opening up China’s upstream sector took effect on May 1, marking the latest move by Beijing to rejuvenate it.

The opinions will play a long-term role in opening the upstream to all companies – including foreign players – so that China can improve energy security.

The opinions included allowing all companies registered in China with net assets of more than remnimbi 300mn to bid for licences to explore and producer oil and gas. This will effectively end the three NOCs’ decades-long monopoly upstream; and also the local player, Yanchang Petroleumm which is backed by the Shaanxi provincial government.

The new guidelines address a longstanding view among some experts in Beijing’s policymaking circle that oil and gas output has underwhelmed because of the inefficient and risk-averse three-way monopoly in the Chinese energy industry.

The MNR’s new policy means IOCs and other foreign companies will be allowed to explore for and produce oil and gas in the country by themselves for the first time, opening up the industry on a large scale to firms other than the NOCs as Beijing looks to boost domestic energy supplies.