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China wants to use more gas. Its own reserves look potentially massive. And there are plenty of foreign players knocking on the door of the world's largest potential energy market to get a piece of any import action. But major problems remain to be resolved if the country's gas market is really to take off, as a recent report makes clear. Even then, gas is likely to make only a modest dent in China's overall energy needs.

Lack of infrastructure is the key obstacle facing would-be developers of the Chinese natural gas sector, according to a wide-ranging assessment of the country's energy scene from the Paris based International Energy Agency*. At the same time, continued tension between broader energy policy options provides a further layer of complication. The agency sees two central viewpoints contending within the country's energy policy establishment. One seeks to restore the self-sufficiency lost when the country became a net oil importer in 1993. The other puts more emphasis on seeking reliable and secure energy imports. The resulting tension makes for 'policy drift'.

The IEA model for China's energy system (set out in its 1998 World Energy Outlook) assumes policy reforms will continue over the long term, with deregulation steadily introducing more market elements. But the agency warns problems in transforming state owned institutions - which still dominate the economy and energy - into market oriented organisations, plus bottlenecks in many critical sectors, could dampen the basic growth assumptions underpinning its projections for the Chinese energy system to 2020 (see table).

Although fuel shifts are likely to occur, the IEA projections make clear solid fuels will retain their dominance of overall primary energy demand, mainly for power generation, despite a drop in share of about 10 percentage points (see pie charts). Solid fuels see significant falls in the industrial, residential and commercial sectors. Oil, gas, nuclear and hydro all grow faster than the market as a whole. Even so, in power generation the near three-quarters share of solid fuels in 1995 (coal 70%) is only expected to come down to about two thirds by 2020 (coal 62%). While gas-fired generation puts on a massive volume increase - from just 2 TWh in 1995 to 123 TWh in 2020 - its percentage share, a mere 0.2% in 1995, is still only 3.2% at the end of the period. And although the gas share of the overall energy pie doubles, this still only takes it from 2% to 4%.

Natural gas production grew strongly in the 1960s and 1970s after discovery of large fields in Sichuan Province. In 1990, China National Petroleum Corp (CNPC) estimated Chinese reserves at about 60 trillion m3, mainly in Sichuan. But natgas remains a marginal fuel in the vast Chinese energy system, used mostly as feedstock for the fertiliser industry (also chemicals), and, with its current 2% share of overall energy demand, makes a poor showing against a world average of 23.6%. Production remains low relative to reserves and proven reserves of something over 1.5 trillion m3 are less than 4% of the estimated potential total.

Among China's many unexplored areas, both onshore and offshore, longer term hopes have to date centred largely on the remote and inhospitable Tarim basin in the huge Xinjiang Uygur Autonomous Region in the northwest of the country. But exploration and development have proved slow, the report notes, with not very encouraging initial results for foreign companies at work there. Estimates of the basin's potential still vary from as little as a few billion barrels to upwards of 80bn, it says, adding: "Chinese reserve estimates remain extremely uncertain in general."

Offshore, the South China Sea also appears to hold huge hydrocrabons potential but again resources remain little known to date. The IEA notes some experts believe natural gas comprises the largest component of the area's resources, with the US Geological Survey estimating some 266 trillion ft3. But estimates vary widely. The area's potential has also spawned numerous territorial disputes involving China, Vietnam, Chinese Taipei, Malaysia, the Philippines and Malaysia. This has blocked exploration and development in the contested areas and the agency reckons there will have to be much more in the way of peace and stability before any serious exploration and development in the most promising parts of the South China Sea can start.

On production, the report notes China's current Five Year Plan sees annual natgas production, 22.3bn m3 in 1997, rising to 25bn m3 this year and 30bn m3 by 2005, with official targets suggesting 72bn m3 in 2010 and 95bn m3 in 2020. Such an acceleration, "if it comes", would support Beijing's drive to switch to cleaner fuels on environmental and climate change grounds - China is set to become the world's largest greenhouse gas producer by 2020 - and to tap domestic natgas to substitute for both coal and imported oil. The country also has coalbed methane reserves estimated at some 30,000-35,000bn m3, almost equal to natural gas and ranking third in the world.

LNG imports are expected to play a role. The IEA sees these coming primarily from Indonesia but also the Middle East. Among potential pipeline imports, it notes CNPC's entry into Kazakhstan laid down a Chinese marker in Central Asia, with potential oil and gas lines from there to the Chinese market dubbed the 'Energy Silk Route'. Russia is also keen to tap China's demand potential, with pipeline proposals from both east and west Siberia. However, at present the agency sees problems of cost and financing rendering all these uneconomic in relation to alternatives, including development of China's own reserves and LNG imports.

Looming as a critical issue for any kind of increased gas use in China, though, is its present poor gas infrastructure. Development of a comprehensive transportation and distribution network is a necessity but pipeline construction and downstream projects lag behind upstream progress. The agency notes China aims to develop a national grid able to transport 150bn m3/yr. Several new lines, including one from Xinjiang's Shanshan field to Urumqi and another from Shaanxi to Beijing, are already in operation. Preliminary studies are under way on construction of a national gasline system, with a main line delivering gas from west to east and to associated local networks. China also intends to develop gathering centres and storage capacity of 15-17bn m3. The IEA reckons a fully fledged fuel switching policy in China could boost gas demand to 95bn m3/yr as early as 2010 and to 140bn m3/yr in 2020, with 75bn m3 going to power generation, 30bn m3 to the chemical sector, and 35bn m3 used as city fuel. On the transport front, compressed natural gas (CNG), as well as LNG, are under consideration as cleaner fuels. However, the key element in all these switches would be massive infrastructure requirements for trunk pipelines, storage, city distribution grids (to the extent they are not already there for coal gas) and the necessary LNG and CNG facilities.

"Central planning and industrial policy are needed to promote natural gas development," says the report. "Planners need to focus on building a reliable and efficient natural gas system, gas-fuelled power generation, industrial use and distribution for residential use." Largely because of the infrastructure obstacles and insufficient market development, the IEA says its scenario holds increased gas production to only about half official Chinese forecasts.

On the broader energy front, it sees a 'command economy' bias accompanying the restored self-sufficiency strand of policy as going far to explain why Beijing has moved slowly to reform its energy sector compared with other parts of the economy. Nevertheless, despite the policy direction debate, China has moved quickly to forge credible links with international energy markets, it stresses. Faced with mounting environmental problems and starkly rising oil imports, China could well decide to accelerate building up its domestic gas delivery system and its gas imports in a "grand national switch" towards clean burning fuels, it adds.

Indeed, in recent months there have been signs of significant movement both on the pipeline construction and LNG import fronts. Also, just this week the Chinese government underlined the crucial need for infrastructure in its natural resource rich western regions with announcement of a 'Go West' strategy to concentrate at least 60% of new fixed asset investment there. However, the grand switch is not the IEA's current scenario and, given the huge overall dominance of coal it seems clear natgas is likely to remain a bit player on the broad energy stage, albeit an increasingly significant one, for some time to come.

China gas - seeking a great leap forward