China's voracious energy appetite has already helped drive crude oil to record levels and now the country threatens to do the same to natural gas as it strives to replace dirty coal with the cleaner-burning fuel.
A senior Chinese energy researcher said this week that his country will accelerate its move away from coal because of rising prices and environmental concerns. The report from Zhou Dadi, director of the Energy Research Institute, did not set a specific target for reducing China's overwhelming dependence on coal for generating energy, with the comparatively dirty commodity accounting for nearly 70 per cent of overall production.
But with natural gas accounting for just 3 per cent of energy production, there is tremendous scope for growth in Chinese consumption, National Bank Financial says.
Environmental worries will push China toward natural gas, the bank said in a note, adding that sulphur dioxide emissions have soared so much that rain falling in parts of the country is nearly as acidic as vinegar. “The switch will need to come,” assistant chief economist Stéfane Marion said in an interview.
For the moment, Chinese consumption of natural gas is far below that of the Western industrialized world. In 2003, the country used just 1.1 trillion cubic feet of gas, a fraction of the 22.4 trillion cubic feet consumed in the United States or the 16.4 trillion cubic feet in Europe. Imports of gas are minimal, with facilities for liquefied natural gas (LNG) shipments still largely in the planning phase.
Yet, that situation parallels closely the story of China in the oil market, where the country moved from being a small net exporter in the 1990s to a large-scale buyer this decade. The surge in oil use has been one of the pistons driving oil prices to record levels over the past two years, with new demand in China being added on top of the West's already high, and still growing, consumption.
Mr. Marion said he believes China eventually will have the same effect on the natural gas market as it has on that of crude oil, as it draws in supplies from across the globe.
Supplies of natural gas in North America are strained at the moment as companies struggle to keep up with demand. As a result, there has been a flurry of talk and deal making over boosting overseas imports of liquefied natural gas, and forging a global market that would connect this continent's demand with stranded supplies in Africa and Asia.
If that happens, gas prices would likely ease toward the end of the decade as LNG imports ramped up. That is, unless that gas heads elsewhere. “China could throw a wrench in that scenario,” Mr. Marion said.
Citigroup analyst Kyle Cooper said he does not believe that China will have much influence on natural gas prices, since many countries still burn off gas while pumping oil, meaning there is ample supply outside of North America for all comers. And he said China's lack of LNG facilities means that it cannot seriously compete with North America for that kind of supply, with the likely result that it will depend on domestic or other nearby sources of natural gas.
But there are signs that China is growing more serious about creating an LNG option, with reports earlier this month that the central government is forcing several state-owned oil firms to co-operate in building the costly facilities.
Beijing has ordered that only one LNG terminal can be constructed in each province, meaning that six of 18 planned projects would likely be shelved. China has 25-year contracts with Australia and Indonesia dating from 2002, but state oil company officials are questioning whether mainland consumers could afford free market prices for LNG, according to the South China Morning Post.
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