In a file photo, employees work on a drill well at a Sinopec exploration site in the Longgang gas field in Lishan, Sichuan Province. (Liu Jin/AFP/Getty Images)In a file photo, employees work on a drill well at a Sinopec exploration site in the Longgang gas field in Lishan, Sichuan Province. (Liu Jin/AFP/Getty Images)

News Analysis

China Petroleum & Chemical Corp. announced plans to sell half of its stake in a major trans-China natural-gas pipeline, in a bid to raise capital and fund exploration as part of China’s ambitious goal to wean itself off of coal.

Sinopec, as the company is commonly called, is looking to divest 50 percent of its cross-country pipeline connecting gas fields in the western province of Sichuan to cities on the eastern seaboard. In a filing with the Hong Kong Stock Exchange last week, the state-owned natural gas giant did not specify timeline or targeted valuation of the sale.

Despite declining profits and a global natural gas glut, the asset sale will fund new projects in shale gas extraction as Sinopec looks to meet ambitious targets of doubling its gas production within five years. China is betting big on a shale gas boom to decrease dependency on coal and foreign gas imports.

So far, Sinopec has invested 62.6 billion yuan ($9.4 billion) to build the Sichuan-Shanghai gas pipeline. The 1,700 km project began operations in 2010 and transports up to 12 billion cubic meters of gas per year.

Hong Kong brokerage CLSA believed the gas pipeline could raise 20 billion yuan for Sinopec.

Global Gas Glut

China’s natural gas consumption grew at 3.3 percent last year, its slowest pace in 17 years, according to government data. That’s a far cry from the average annual growth rate of 15 percent between 2009 and 2014.

The global decline in gas prices—somewhat correlated to oil which has faced similar challenges since 2014—has not generated stronger demand. “We see massive quantities of LNG (liquid natural gas) exports coming online while, despite lower gas prices, demand continues to soften in traditional markets,” said International Energy Agency (IEA) Executive Director Fatih Birol in June. “These contradictory trends will both impact trade and keep spot gas prices under pressure.”

Despite obvious challenges, China is doubling down.

In its latest annual five-year forecast, the IEA sees global demand rising by 1.5 percent per year by 2021, 50 basis points lower than last year’s forecast.

Cheap coal, low oil prices, and weak global economic growth are several headwinds that dampened natural gas demand and created excess inventories.

Despite obvious challenges, China is doubling down.

Both Sinopec and China National Petroleum Corp. (PetroChina) are pushing ahead with billions of dollars’ worth of new investments in natural gas exploration and extraction, especially from shale formations.

According to data from PetroChina, China used around 200 billion cubic meters of gas in 2015, a quarter of which was imported. China has bold plans to decrease reliance on foreign gas imports as well as substitute a portion of its coal consumption with domestic natural gas. Its latest Five-Year Plan (2016-2020) called for replacement of coal use in all non-power generation sectors.

Shale Boom Dreams

With a global supply glut and China’s mandate to increase domestic shale production, Chinese gas imports could slow, which prompted some analysts and media to sound the alarm bells on foreign gas producers.

But not so fast.

On paper, China has huge shale reserves. But digging deeper, it’s difficult to envision China realizing its own shale boom any time soon.

The industry is dominated by three major state-owned entities: Sinopec, PetroChina, and CNOOC. The companies have invested around $15 billion in U.S. shale companies to access fracking technology, aiming to bring the know-how to China and create its own fracking boom.

By its very nature, hydraulic fracturing (fracking) is a high cost production. The process involves injecting high pressure water and chemicals to create fractures in deep rock formations to release natural gas and petroleum. In the U.S., critics have condemned fracking’s environmental impact on water quality and links to increased seismic activity. An “environmental tax” is implicit in U.S. drillers’ high costs—drillers typically pay 15 percent royalties to the land owner, plus local and state government taxes.

It’s even more challenging for China. Its shale gas lie far deeper underground and in more complex geological formations than U.S. deposits in the flatlands of North Dakota and Texas, which drove much of the recent American growth.

Experts estimate that Chinese gas wells would require almost twice the amount of water to crack open than at U.S. shale sites. That’s a tall order for a country facing annual droughts, with “less water per capita than Namibia or Swaziland, where land twice the size of New York City turns to desert every year,” Mother Jones magazine pointed out.

The challenges don’t stop there. Besides the high production costs, China’s shale resources are unevenly distributed. It does not have a single giant gas field; its various sites are remote from the demand centers on the nation’s eastern and southern coasts.

Lack of infrastructure, an underdeveloped pipeline network, and limited projection capabilities of service industries mean that even after extraction, Chinese gas companies face high costs of delivery. These challenges could cripple domestic producers’ ability to compete with foreign producers.

Beijing’s policy on natural gas has been to keep prices low for consumers at a detriment to producers.

The shale developments will further erode Chinese energy companies’ bottom lines which already have been squeezed by falling oil prices. Sinopec’s net income fell 30 percent last year to 32 billion yuan ($5 billion). Its larger rival PetroChina’s net income fell 66 percent from $19.2 billion in 2014 to $6.5 billion last year.

To date, Beijing’s policy on natural gas has been to keep prices low for consumers at a detriment to producers. That puts even more pressure on gas companies to lower costs of production.

On the ground, the drilling continues. A Wall Street Journal reporter visited Sinopec’s shale drilling site in Fuling District, near the city of Chongqing in Sichuan Province. The reporter was barred from interviewing local villagers about the impact of the drilling, but the plant manager disclosed that Sinopec gave a 1 percent stake to a local government entity to help curry favors from local politicians.

With the controversies of fracking and China’s heightened level of social unrest serving as backdrop, China’s blueprint for a new shale gas boom simply doesn’t instill confidence.

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Western idealists often portray China as a country that “can get things done,” be it investment in infrastructure or the expansion of renewable energy. What they often fail to ask is whether the done things will actually be useful.
This week, China announced it will increase total wind power capacity by 22 percent to 139 gigawatts (gw). This is right on track to achieve its ambitious target of 200 gw by 2020.
As a comparison, the United States has 74 gw installed at the end of 2015 and no ambitious plan to boost it to 200 anytime soon.  
China’s wind farms are under-performing— Michael Davidson, TheEnergyCollective

The main difference: The United States actually uses most of the installed capacity and China doesn’t.
“Comparing to the United States, which consistently has an edge in terms of utilization of its wind turbines, China’s wind farms are under-performing,” writes Michael Davidson at The EnergyCollective.
On the surface, there are two major problems which lead to windmills being built but not being used.
No Connection
The first reason is that they are not connected to the national power grid. According to Michael Davidson’s latest estimates, as much as 20 percent of total wind capacity wasn’t connected to the power grid in 2012, although there have been improvements since.
China has also indicated it will build more high power transition lines to transport the energy from the wind-rich but population poor region of North Eastern China to the energy consumption heavy population centers on the coast.
According to the China Wind Power Review and Outlook, installed capacity in three North-Eastern regions accounted for 50 percent of total installed capacity as of 2014, but those regions only consume 10 percent of the nation’s electricity.
(TheEnergyCollective)
“The electricity cannot be consumed locally and transmission is needed to send the wind electricity to the load centers in the east,” states the report. Some of the farms probably never will.
Until the wind energy can actually be transported to where it’s needed, the windmills will not only stand idle, but also be blasted by sand 24/7 because the North Easter regions not only have a lot of wind, but also a lot of sand.
In 2010, then vice minister of the Ministry of Industry and Information Technology Miao Wei said China should not build too many wind farms because the equipment will inevitably be damaged by the sand, according to the Beijing Times.
This wasteful investment is a direct result a completely warped incentive system

Too Much Power
But it gets worse. Even if the wind farms are connected to a grid, the grid operators didn’t use or “curtailed” as much as 20 percent of wind energy production in 2011 because they had to use energy from coal power plants instead.
“Grid operators make decisions a day ahead on which thermal plants to turn on, so if wind is significantly higher than forecasted 24 hours before, the difference may be curtailed to maintain grid stability,” writes Davidson.
(TheEnergyCollective)
MORE:The Cheapest Way to Scale Up Wind and Solar Energy? High-Tech Power LinesChina Wants a Massive Solar-Powered Space Laser
This wasteful investment is a direct result of a completely warped incentive system on the central and local government level, writes Mark DeWeaver in his book “Animal Spirits With Chinese Characteristics.”
“As the [central government] targets are for capacity rather than annual production, an incentive was created to build in the windiest locations regardless of their proximity to the existing transmission network or the economic feasibility of installing new power lines,” he writes.
Because local governments compete against each other on the capacity targets they went to work and built the capacity irrespective of economic feasibility. Even former vice minister Miao Wei said Chinese wind farms are mostly image projects with the sole purpose of making the local official look good.

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