China’s gas producers ready to boost supply for Beijing’s war on air pollution

China’s natural gas producers are pulling out all stops to boost production, to address acute winter shortages. But the nation’s aspiration to substantially boost its appropriate storage capacity will take many years to accomplish, according to industry executives. 

Much of that production growth in cleaner-burning energy will come from “unconventional” sources, such as coal seam gas and shale gas, whose exploitation was made possible by technological breakthroughs. As these new projects enter mass production, the nation is poised to see exponential growth in unconventional gas output in the next few years.

The surge in demand coincides with Chinese government moves to ratchet up replacing coal with natural gas, to tackle chronic air pollution in major cities. 

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“China’s high gas demand growth is sustainable this year, because much of the supply to the industrial sector was curtailed last year, for the sake of ensuring winter residential heating demand was met,” AAG Energy Holding chairman Stephen Zou Xiangdong said in an interview. 

“But this suppressed consumption will come back, once the seasonal peak demand is over.”

AAG, which operates the country’s most commercially advanced coal seam gas project – “Panzhang” in partnership with China National Offshore Oil Corporation – plans to raise its total output, including that of its less advanced “Mabi” project, by 15 per cent to 723.3 million cubic metres this year. Output grew 16 per cent last year.  

Last week the company announced it will pay a maiden dividend of 2.48 HK cents (0.30 of a US cent) per share, after unveiling a 72 per cent surge in net profit to HK$183.2 million, thanks to higher gas output, a 9.2 per cent selling price rise of its mainstay project, and an operational structure revamp that has resulted in enhanced efficiency.

Wang Dongjin, vice-chairman of PetroChina, AAG’s partner in the Mabi project, said late last month it was aiming to boost unconventional gas output to 46 billion cubic metres (bcm) in 2020 from 32.3 bcm last year, at an average annual rate of 12.5 per cent. 

That is much faster than the 7.4 per cent output growth it is targeting for all forms of natural gas, including its mainstay conventional gas that accounted for two-thirds of total output. 

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Unconventional gas resources are produced using new methods made possible by technological advances such as horizontal and multilateral wells drilling and the pumping of fluids at high pressure to create cracks in rock formations to let the trapped gas out. 

PetroChina’s target for unconventional gas sources trapped in shale rock formations is to quadruple to 12 bcm in 2020 from last year, while collection of gas attached to coal seams will rise 122 per cent to 4 bcm. 

Wang said the company has boosted its project outlays, allowing that 2020 shale gas target to be doubled. 

PetroChina is now preparing its mid- to long-term gas development plan, and may raise its shale gas production by over 50 per cent in the decade to 2030, he added.  

The aggressive rises in shale and coal seam gas targets is considered a strong sign that over a decade of project investment and technical experimentation by the state-backed giant and its partners, is now set to bear fruit.  

The growth target for so-called “tight gas” – that which is locked in extremely impermeable and hard rocks – is a much more modest 9 per cent over the three years to 30 bcm in 2020. 

PetroChina’s production of this form of cleaner-burning energy first started to realise mass commercialisation around a decade ago, with the help of foreign partners, Shell and Total. 

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Rival China Petroleum & Chemical (Sinopec), which operates China’s largest shale gas project called “Fuling” in the southwestern Sichuan Basin, has completed its building of 10 bcm of output capacity, having hit over 6 bcm last year, vice-chairman Dai Houliang said last week. 

It’s preparing for another new project, which will “certainly have new capacity coming on stream by 2020,” he said, adding Sinopec’s newly proven shale gas reserves so far account for 70 per cent of the nation’s total.

However, for China to reach its goal of having gas storage capacity similar to that of advanced nations to help boost its winter supply, will requires many years of planning and execution, since re-injection of gas into decommissioned gas fields is the most practical solution for building large-scale storage, said AAG’s Zou. 

According to PetroChina, the combined capacity of China’s 13 large-scale underground gas storage facilities, 10 of which are operated by the company, amounts to just 3.3 per cent of total national consumption, well below the global average of 11.7 per cent.

Xinhua reported last month, that in 2016 the company set up a gas storage construction unit, and has eight projects under development in the southwest of the country, which are estimated to cost an eventual 21 billion yuan.