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  • Writer's pictureScott Shields katy housto

Chinese aim to increase domestic production, but this will not decrease LNG imports

The EIA released today a report about Chinese natural gas supply. The Chinese continue to increase domestic natural gas production by utilizing incentives, but given its command economy, China has not yet developed the efficient use of a storage and pipeline network afforded by markets in the US. After numerous conversations with Chinese oil and gas executives, each has told me that rather than store significant volumes of gas on the system or underground in times of decreased use, such as shoulder months, the centralized government simply mandates production executives to slow production.

As you may know this policy presents two significant disadvantages. First, production revenues and growth are curtailed, and therefore efficient utilization of resources are probably not maximized. Second, gas reservoirs' health and longevity are not considered and their long-term UER (estimated ultimate recovery) volumes are possibly hindered.

That aside, using consultants and other sources the Chinese are copying components of the North American natural gas system and will likely incorporate more market-driven factors into the pipeline, storage and overall natural gas system which will serve to decrease LNG as a percent of total natural gas demand. Furthermore, their economic growth continues to slow, which will allow production and associated transportation and storage infrastructure a chance to catch up. But in the meantime China's seven-five plan has mandated the dramatic increase in use of natural gas as a percent of overall national energy use, and this alone could make it prohibitively difficult not to continue to increase imports of LNG, hopefully eventually from the US. Continue to read the article posted by EIA below:

U.S. Energy Information Administration, based on China National Bureau of Statistics and IHS Markit. Reposted by Scott Shields, Katy, Scott Shields Housto,

Rapid growth in China’s natural gas consumption has outpaced growth in its domestic natural gas production in recent years. China’s natural gas imports, both by pipeline and as liquefied natural gas (LNG), accounted for nearly half (45%) of China’s natural gas supply in 2018, an increase from 15% in 2010. To increase domestic production of natural gas, the Chinese government has introduced incentives for several forms of natural gas production.

Natural gas production has recently grown in China largely because of increased development in low-permeability formations in the form of tight gas, shale gas, and to a lesser extent, coalbed methane. In September 2018, the Chinese State Council set a target of 19.4 billion cubic feet per day (Bcf/d) for domestic natural gas production in 2020. In 2018, China’s domestic natural gas production averaged 15.0 Bcf/d.

In June 2019, the Chinese government introduced a subsidy program that established new incentives for production of natural gas from tight formations and extended existing subsidies for production from shale and coalbed methane resources. This subsidy is scheduled to be in effect through 2023. In addition to the changes in the subsidy program, the government allowed foreign companies to operate independently in the country’s oil and natural gas upstream sector.

📷Source: U.S. Energy Information Administration, based on China National Bureau of Statistics and IHS Markit

Production of tight gas, shale gas, and coalbed methane collectively accounted for 41% of China’s total domestic natural gas production in 2018. China has been developing tight gas from low-permeability formations since the 1970s, especially in the Ordos and Sichuan Basins. Tight gas production was negligible until 2010, when companies initiated an active drilling program that helped lower the drilling cost per vertical well and improve well productivity.

Shale gas development in China has focused on the Sichuan Basin: China National Petroleum Corporation’s (CNPC) subsidiary PetroChina operates two fields in the southern part of the basin and the China Petroleum and Chemical Corporation (Sinopec) operates one field in the eastern part of the basin. PetroChina and Sinopec have respectively committed to produce 1.16 Bcf/d and 0.97 Bcf/d of shale gas by 2020, which, if realized, would collectively double the country’s 2018 shale gas production level.

China’s coalbed methane development is concentrated in the Ordos and Qinshui Basins of Shanxi Province. These basins face significant challenges, including relatively low well productivity and relatively high production costs.

China also generates synthetic natural gas from coal, a source that accounted for 2% of China’s natural gas production in 2018. China’s synthetic gas projects involve gasifying coal into methane in coal-rich provinces, such as Inner Mongolia, Xinjiang, and Shanxi. In 2016, the Chinese government hoped to reach 1.64 Bcf/d of coal-to-gas production capacity by 2020. China’s coal-to-gas production was less than 0.3 Bcf/d in 2018 as stricter environmental mandates have slowed down plant construction and increased the cost of further developing coal-to-gas.

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