In 2019, China's natural gas storage and production trend was good, with both production and reserves achieving a double increase. The newly discovered natural gas reserves reached 1.4 trillion cubic meters, an increase of 68%; The natural gas production reached 174 billion cubic meters, an increase of 16.9 billion cubic meters, with an increase of over 10 billion cubic meters for three consecutive years.

In 2019, China launched a series of reform measures around key areas such as increasing oil and gas storage and production, reforming pipeline networks, and downstream urban gas, resulting in a generally stable operation of the natural gas industry. In 2019, natural gas consumption remained stable and slowed down, but still maintained a growth rate of around 9%. The trend of increasing domestic gas storage and production is good, with a significant decline in the growth rate of imported natural gas and a decrease in external dependence. The construction of the natural gas production, supply, storage and sales system has achieved significant results, with the formation of four major natural gas import channels and the improvement of gas storage and peak shaving capacity. China has been making continuous efforts to open up upstream exploration and development, frequently introducing policies to promote competition in the upstream industry; The establishment of the midstream national pipeline network company marks a crucial step in the reform of the oil and gas system; The intensification of downstream marketization has led to the trend of gas company restructuring and mergers and acquisitions.

Double increase in natural gas production and reserves

In 2019, the National Energy Administration formulated a "seven-year action plan" for increasing storage and production in the oil and gas industry. In May, a meeting was held to vigorously promote oil and gas exploration and development, emphasizing that "petroleum enterprises should implement the main responsibility of increasing storage and production". This is also the first time China has proposed a "Seven Year Action Plan" in the oil and gas exploration and development industry. Driven by policies, oil companies have increased their efforts in oil and gas exploration and development, organized active production in various oil and gas fields, and invested 332.1 billion yuan in upstream oil and gas exploration and development, an increase of 21.9%.

In 2019, the trend of increasing natural gas storage and production nationwide was good, with both production and reserves achieving a double increase. The newly discovered natural gas reserves reached 1.4 trillion cubic meters, an increase of 68% compared to the previous year. In 2019, the domestic natural gas production was 174 billion cubic meters, an increase of 16.9 billion cubic meters compared to the previous year, and an increase of over 10 billion cubic meters for three consecutive years, with a growth rate accelerated by 3.6 percentage points compared to the previous year. Shale gas, coalbed methane, and coal to gas production have increased comprehensively. Preliminary statistics show that in 2019, shale gas production reached 15 billion cubic meters, an increase of 37% compared to the previous year; The production of coalbed methane reached 7.5 billion cubic meters, an increase of 36% compared to the previous year; The production of coal to natural gas reached 3.7 billion cubic meters, an increase of 59% compared to the previous year.

The growth rate of imported natural gas has significantly declined

In 2019, China's natural gas imports maintained a rapid growth, but the growth rate significantly declined compared to 2018. The natural gas import volume was 132.2 billion cubic meters, with a growth rate of 6.5%, a decrease of 28.5 percentage points compared to the previous year. In 2019, the increase in China's natural gas import volume ended two consecutive years of rapid growth, falling from 32.3 billion cubic meters last year to 8.1 billion cubic meters. Thanks to the rapid increase in domestic gas storage and production, as well as the significant decline in import growth rate, China's dependence on natural gas for the first time has decreased, from 43.1% last year to 42.1%.

From the perspective of trade types, imported LNG continues to exceed pipeline gas. The imported pipeline gas reached 50.7 billion cubic meters, accounting for 38% of the total import volume, a decrease of 1.7%. The imported pipeline gas mainly consists of natural gas resources from Turkmenistan, as well as natural gas resources from countries such as Uzbekistan, Myanmar, and Kazakhstan. With the production of the China Russia East Line, it is the first time to import pipeline natural gas from Russia. The import volume of LNG was 81.6 billion cubic meters, an increase of 12.4%, accounting for 62% of the total import volume, an increase of 4 percentage points from the previous year. Among them, Australia is the largest source of LNG imports from China, accounting for approximately 50% of the total LNG imports.

The formation of four major natural gas import channels

On December 2, 2019, the northern section of the China Russia East Line was officially put into operation. The northern section of the China Russia East Line includes "one trunk and three branches", namely the Heihe Changling trunk line, Changling Changchun branch line, Mingshui Harbin branch line, and Daqing Harbin branch line. There are five distribution stations in Wudalianchi, Mingshui, Daqing, Zhaoyuan, and Changling in Jilin Province. After the northern section is put into operation for ventilation, it will first change the current situation of insufficient gas supply in the Northeast region and drive the development of related industries such as industry and transportation in the Northeast region.

From the perspective of ensuring national energy security, among the four major oil and gas strategic channels in northwest, northeast, southwest, and offshore China, Northeast China has always lacked a pipeline natural gas import channel. The completion of the China Russia East Line has filled this gap and enabled China's four major oil and gas strategic channels to transport both crude oil and natural gas.

From the perspective of flexibility in pipeline scheduling, on the basis of the overall flow of China's natural gas pipeline network from west to east, the production of the China Russia East Line has increased the flow of "north gas to south", further improving the layout of the natural gas pipeline network in the eastern region of China. It is interconnected with the Northeast Pipeline System, Shaanxi Beijing System, and West East Gas Transmission System, jointly forming a natural gas pipeline network pattern that runs north-south, spans east-west, and connects overseas.

Improved gas storage and peak shaving capacity

On October 19, 2016, the National Development and Reform Commission issued a notice on clarifying pricing policies related to gas storage peak shaving measures, further clarifying market-oriented reform measures for gas storage service prices and natural gas purchase and sales prices for gas storage facilities. On April 27, 2018, the National Development and Reform Commission and the National Energy Administration issued the "Opinions on Accelerating the Construction of Gas Storage Facilities and Improving the Market Mechanism for Gas Storage Peak shaving Auxiliary Services", which for the first time clarified the division of gas storage responsibilities and gas storage capacity indicators at the national policy level. Under a series of policy guidance, oil and gas companies are accelerating the construction of underground gas storage facilities. With the gradual production of Wen23 underground gas storage facilities and Ganghua underground gas storage facilities, China had 27 underground gas storage facilities in 2019, with a peak shaving gas supply capacity of over 10.2 billion cubic meters, a significant increase of 44% and a historic high.

It is worth mentioning that in 2019, the largest gas storage facility in central and eastern China, Wen 23 Gas Storage, was put into operation. Its designed maximum storage capacity was 10.421 billion cubic meters, and after completion, the working gas volume reached 4.093 billion cubic meters. The maximum daily gas injection capacity was 23.4 million cubic meters, and the maximum daily gas production capacity was 36.9 million cubic meters. On May 19, 2017, the first phase of the Wen 23 gas storage project officially began construction. On August 1, 2019, the first phase of the Wen 23 gas storage project completed all construction tasks ahead of schedule and entered the comprehensive gas injection stage. As of November 11th, the cumulative gas injection volume of Wen 23 gas storage facility was 3.04 billion cubic meters, with a gas injection volume exceeding 3 billion cubic meters in its first year of operation. This is still the first time in the development history of gas storage facilities in China. As of December 26th, the Wen 23 gas storage facility has cumulatively produced over 86 million cubic meters of gas, and it is expected to produce 240 million cubic meters of gas in the first production period.

Frequent upstream opening-up policies

In 2019, China made continuous efforts to open up upstream exploration and development, frequently introducing policies to promote the development of the upstream industry. In March, the National Development and Reform Commission announced that, in accordance with the Decision on Cancelling and Decentralizing a Batch of Administrative Licensing Matters issued by the State Council, the administrative licensing matter of "overall development plan approval for oil and gas (including coalbed methane) foreign cooperation projects" was cancelled and changed to filing. In November, the National Development and Reform Commission and the National Energy Administration issued the Interim Measures for the Filing and Supervision of Oil and Gas Development Projects. After the overall development plan for oil and gas foreign cooperation projects is changed from approval to filing, it will help further optimize the filing process for domestic self operated and foreign cooperation oil and gas (including coalbed methane) development projects, and further mobilize the enthusiasm of oil and gas enterprises.

In order to promote fair and orderly opening of the upstream market, on June 30th, the National Development and Reform Commission and the Ministry of Commerce issued the "Special Management Measures for Foreign Investment Access (Negative List) (2019 Edition)", which abolished the restriction of "exploration and development of oil and natural gas (including coalbed methane, oil shale, oil sands, shale gas, etc.) to joint ventures and cooperation". Equivalent to fully opening up the field of oil and gas exploration and development to foreign investors. Afterwards, foreign investors can not only continue to cooperate with oil companies or domestic companies with blocks, but also independently participate in bidding to obtain exploration and development blocks. The opening up of upstream fields such as oil and gas exploration and development will promote foreign oil companies to carry out oil and gas exploration and development in China, and promote market-oriented reform of the oil and gas industry.

On December 31st, the Ministry of Natural Resources issued the "Opinions on Several Issues to Promote the Reform of Mineral Resource Management (Trial)", which proposed the relaxation of oil and gas exploration and development and the implementation of the integrated system of oil and gas exploration and development. This will further open up China's oil and gas exploration and development industry, help promote the reform of natural resource asset property rights system and increase the intensity of oil and gas exploration and development. According to the opinion, domestic and foreign companies registered within the territory of the People's Republic of China with a net asset of no less than RMB 300 million are eligible to obtain oil and gas mining rights in accordance with regulations. In addition, based on the exploration and mining technology characteristics of oil and gas, which are different from non oil and gas minerals, the owner of oil and gas exploration rights can discover oil and gas resources that are available for exploitation and report them to the natural resources management department with registration authority before proceeding with exploitation.

A Key Step in Oil and Gas System Reform

On December 9, 2019, National Petroleum and Natural Gas Pipeline Network Group Co., Ltd. was officially established. Its main responsibilities include investment and construction of national oil and gas trunk pipelines and some gas storage and peak shaving facilities, interconnection of trunk pipelines and connection with social pipelines, forming a "national network". It is responsible for the pipeline transportation of crude oil, refined oil, and natural gas, and is responsible for the unified operation and scheduling of national oil and gas trunk pipeline networks. It regularly discloses the remaining pipeline transmission and storage capacity to the society, achieving fair access of infrastructure to all eligible users.

The establishment of a state-owned capital controlled and diversified oil and gas pipeline network company marks a crucial step in the operation mechanism of China's oil and gas pipeline network and the reform of the oil and gas industry. Firstly, the establishment of the National Oil and Gas Pipeline Network Company will help promote comprehensive interconnection of the oil and gas pipeline network, implement separation of transmission and distribution, and streamline oil and gas cost and price accounting. Secondly, the open opening of the pipeline network to third parties is conducive to more market-oriented oil and gas resources entering the transmission pipeline, making China's oil and gas supply entities increasingly diversified, and promoting the marketization of upstream exploration and development and import links. Finally, after the separation, independence, and listing of pipeline assets, more social capital will be introduced to increase investment in oil and gas pipelines, accelerate the pace of infrastructure construction, and further enhance China's oil and gas supply guarantee capacity. The establishment of the National Oil and Gas Pipeline Company has formed a market pattern of development and full competition in the upstream exploration and import links, as well as downstream sales links. This marks the basic establishment of a new "X+1+X" oil and gas market system in China, which includes multiple entities and channels for upstream oil and gas resources supply, efficient centralized pipeline network transportation in the middle, and full competition in the downstream sales market.

Optimization of natural gas consumption structure

In 2019, China's macroeconomic situation stabilized and slowed down, with a reduction in coal to gas projects under environmental protection policies. Some provinces implemented a two part electricity pricing policy, resulting in a significant slowdown in natural gas consumption growth. In 2019, the apparent consumption of natural gas in China was 306.7 billion cubic meters, an increase of 26.4 billion cubic meters, with a growth rate of 9.4%. The growth rate has significantly decreased compared to 2017 and 2018, and has fallen back to the single digit level.

From the perspective of consumption structure, urban gas and industrial gas are the main driving forces for the growth of natural gas consumption, with year-on-year growth of 12% and 10%, accounting for 35% and 36% of the overall consumption, respectively. The growth rate of electricity generation gas has significantly declined, while the growth rate of chemical gas has rebounded.

From a provincial perspective, natural gas consumption in three provinces including Jiangsu, Guangdong, and Sichuan exceeds 20 billion cubic meters, while natural gas consumption in ten provinces, autonomous regions, and municipalities including Shandong, Beijing, Hebei, Zhejiang, Xinjiang, Shaanxi, Henan, Shanghai, Tianjin, and Chongqing exceeds 10 billion cubic meters.

The scale advantage of gas companies is highlighted

In the downstream field, the Special Management Measures for Foreign Investment Access (Negative List) (2019 Edition), which came into effect on July 30, 2019, "lifted the restriction that gas and heat pipelines in cities with a population of over 500000 must be controlled by the Chinese side." Foreign businesses can independently operate urban gas businesses in China and no longer have to adopt joint ventures. Foreign funded enterprises have advantages in gas supply service standards, effective integration of global resources, technical specifications and management standards, while domestic urban gas enterprises have advantages in familiarity with the local market, understanding of customer needs, and gas franchise rights. The lifting of restrictions on foreign investment will promote market competition and enterprise cooperation between both parties, stimulate the vitality of the entire gas market, and drive investment in gas infrastructure and the upgrading of related facilities, which is conducive to accelerating the market-oriented reform of urban gas and forming a new market pattern in price formation mechanism, supply and demand structure, and industry norms.

The restructuring and merger of gas companies has become another characteristic in the downstream field in 2019. After experiencing the peak period of urban gas project acquisitions from 2012 to 2015, high-quality projects at the provincial, municipal, and county/district levels were almost completely divided up. In the past two years, there has been a resurgence of mergers and acquisitions in the downstream gas industry, especially in 2019, where gas enterprise restructuring and mergers and acquisitions occurred frequently. On August 15, 2019, China Petroleum Kunlun Gas Co., Ltd. acquired the equity of 17 gas companies under Jinhong Holdings Group Co., Ltd. for 1.655 billion yuan; On September 12th, Zhongyu Gas Holdings Co., Ltd. acquired the equity of three gas companies in Henan for 151 million yuan, namely 89.5% equity of Zhengzhou Yizhiquan, 10% equity of Puyang Tianrun Gas, and 100% equity of Fengyuan Natural Gas; On October 16th, Baichuan Energy Co., Ltd. acquired 100% equity of Zhuolu Dadi Gas Co., Ltd. and Suizhong Dadi Natural Gas Pipeline Co., Ltd. for 220 million yuan; On December 12th, China Resources Gas Group and Ningbo Xingguang Gas Group officially signed a joint venture contract to jointly operate the Ningbo Xingguang Gas project. This is another important prefecture level project of China Resources Gas, following projects in Tianjin, Chongqing, Zhengzhou, Chengdu, and other cities. Against the backdrop of increasingly strict regulation of the gas industry by the government and the entry of the gas industry into a low profit era, due to limited technological development and inability to reflect economies of scale, some small gas companies are facing operational difficulties and seeking sales or joint venture cooperation, creating opportunities for restructuring and mergers in the gas industry. The five major gas groups have advantages in industrial intensification and scale, and "big fish eat small fish" will be a trend in the short term. With the continuous deepening of natural gas marketization reform, urban gas enterprises in China will face more severe competition in the future. Through industry restructuring and mergers and acquisitions, more professional and concentrated gas enterprises can be formed, which can reduce costs, improve gas supply safety, and enhance service levels.

Source: China Petrochemical Magazine