Chinese President Hu Jintao’s Dec. 12-14 trip to Kazakhstan and Turkmenistan culminated with the inauguration of the Central Asia Natural Gas Pipeline, which will ship natural gas from Turkmenistan to China. To meet its growing energy needs, China must seek foreign sources of energy that it can access by land. The pipeline to Central Asia does just this, albeit at the possible price of eventual Russian ire. Still, STRATFOR sources say China is unlikely to reach its loftiest goals of having natural gas provide 10 percent of the country’s energy by 2020.
Chinese President Hu Jintao visited Kazakhstan and Turkmenistan from Dec. 12 through Dec. 14, with his trip culminating in the inauguration of the 4,350-mile Central Asia Natural Gas Pipeline, which will ship 13 billion cubic meters (bcm) in 2010 (and up to 30 bcm 2012-2013) from Turkmenistan, through Uzbekistan and Kazakhstan, to China. Once in China, the Turkmen natural gas will travel to booming urban centers to fuel China’s rapid economic growth and surging demand. The pipeline helps China meet two of its national energy strategy goals: providing foreign natural gas supplies as China’s consumption increases; and acquiring natural gas imports through multiple land routes so as not to depend wholly on liquefied natural gas (LNG) imports through maritime routes that are potentially vulnerable to outside interference. Even so, China is unlikely to see natural gas provide even 10 percent of the country’s energy by 2020. The pipeline marks a concrete infrastructural link between China and Central Asia as Beijing advances its influence in the region. The pipeline gives the Central Asian states a clear signal that Chinese investment can counter Russia's presence in the region. Nevertheless, Russian dominance remains a reality in Central Asia, and China knows this. Although the Central Asia Natural Gas Pipeline is not currently an object of rivalry between Beijing and Moscow, it could be in the future — which means that China could experience what it means to be on the receiving end of a natural gas pipeline controlled by Russia.
Meeting Rising Demand
Currently, natural gas consumption is a small component of China's overall energy consumption — 3.6 percent, compared to about 70 percent for coal, 18.8 percent for oil and 6.6 percent for hydroelectric energy. Nevertheless, it is rising rapidly — by 25 percent from 2006 to 2007 and by 16 percent from 2007 to 2008, reaching 80.7 billion cubic meters in 2008. This increase is a result of Beijing's pursuit of a national energy strategy that boosts natural gas consumption in order to diversify its energy mix, modernize its energy consumption patterns and reduce pollution (since natural gas emits about half as much carbon as coal). Consumption is expected to grow by about 50 percent between now and 2020, when it could reach around 120 bcm per year — it could exceed 200 bcm per year by 2030. All sectors are increasing natural gas consumption — residential consumption is one of the fastest growing categories, with per capita consumption increasing by a factor of 10 since 1990. Currently, industry consumes about 73 percent of China's natural gas supply (with manufacturing consuming 48 percent), while household consumption accounts for 19 percent and power generation 12 percent. The rapid growth in demand was exemplified pointedly in November, when cities like Wuhan, Chongqing and Hangzhou suffered from shortages due to increased demand with the early onset of winter weather, and were forced to limit industrial gas consumption to ensure residents got enough heating. To meet this rising demand, China is increasing domestic natural gas exploration and production. Its natural gas reserves are estimated at 2.5 trillion cubic meters. Exploration and new projects are taking place especially in Xinjiang province, where production at the Tarim field currently provides about 21 percent of the country's total consumption, and in Sichuan province, where state firms CNPC and Sinopec are seeking to develop the major Chuandongbei and Puguang natural gas fields, respectively. China National Offshore Oil Corp. has also undertaken natural gas exploration and development in the South China Sea. Nevertheless, domestic production has been falling behind consumption in recent years (with a 4-bcm shortfall in 2008), and China's dependence on external sources of natural gas is set to increase in coming decades; government officials expect a shortfall of 80 bcm by 2020. (click here to enlarge image) As a result, China has turned outward. China began importing natural gas in 2007, when consumption first inched ahead of domestic production. Imported natural gas met 11 percent of China's total natural gas demand in 2008, with LNG accounting for 96 percent of imports. China has invested heavily in building adequate LNG import facilities (located in Guangdong and Fujian provinces and Shanghai, with new facilities to come online soon) to receive exports from Australia, Indonesia, Qatar and Malaysia. China's LNG consumption is expected to grow by 12 percent per year until 2020. To complement these LNG imports, China is seeking imports through land routes by forming pipeline connections with neighbors — not only in Central Asia, but also Myanmar and potentially Russia. But the growth of natural gas as an energy source is limited. First, inadequacies remain in the pipelines and distribution networks that will continue constraining accessibility and preventing demand growth. China's existing pipeline infrastructure provides the country's major cities with natural gas, but it will not be nationally integrated until several new pipeline projects come online. Beijing is working to redress this problem by expanding and upgrading its pipelines — a plan that has been boosted with fiscal stimulus in 2009. Domestic price controls present another complication. In general, prices are overregulated, creating a disincentive for natural gas companies to invest in expanding or improving infrastructure since they cannot accurately predict profits. While Beijing is moving toward reforming the price structure and allowing domestic natural gas prices to fluctuate more, to reflect supply and demand, it is also proceeding cautiously so as to ensure that rising prices do not affect households too negatively and that vulnerable sectors are provided with subsidies. A more important factor limiting natural gas usage in China is the role of coal. China has the world's third-largest coal reserves (about 115 billion metric tons). It has depended on coal for years, with production reaching nearly 2.8 billion metric tons per year and consumption at 70 percent of total energy consumption — in 2008, China made up about 43 percent of global coal consumption. The economy was built on coal and is disproportionately reliant on it. This is especially true for electricity generation, where coal provides three-fourths of feedstock for power generation, compared to natural gas at around 10 percent. Beijing has had considerable success since 2003 in jump-starting new natural gas-fired power generation projects, but pricing structures and incentives still favor coal. Ultimately, China is unlikely to reach its loftiest goals of having natural gas provide 10 percent of the country’s energy by 2020, as it could take most of the next decade to push the share of natural gas to 5 percent of overall energy consumption. It will also be difficult to reach the goal of 30 percent of natural gas going toward power generation, as coal's share of power generation is expected to increase. China's structural dependence on coal will limit the growth of natural gas as an energy source.
China's reasons for seeking Central Asian natural gas are strategic as well as economic. As China's economy rapidly expands, it consumes more and more energy and becomes increasingly dependent on imports. For example, a chief problem is China's dependency on foreign oil, which has reached 4 million barrels per day (about half of the country's total oil consumption). The risks associated with oil imports include instability in the Middle East (especially when the West is sliding toward a confrontation with Iran that could lead to interruptions in the Strait of Hormuz, through which much of China's oil passes), and vulnerability to the naval supremacy of the United States, which could cut off China's oil imports at will. China's natural gas consumption is increasing, and LNG is set to account for one-sixth of the country’s total natural gas supply in the next decade. Yet LNG import facilities are extremely capital-intensive, and LNG tankers are potentially vulnerable to U.S. naval interdiction. And this explains Beijing's desire to seek sources of natural gas on land, both through developing domestic production and connections with neighboring Asian natural gas producers. Central Asia is the primary target. China has invested heftily in the region, seeing Central Asia as an area that is close, shares a land border and badly needs Chinese cash. To Beijing, Central Asia is a more or less secure source of the commodities China needs — not only hydrocarbons but also minerals and agricultural products like cotton — and a market for Chinese goods. In essence, the Central Asian pipeline is a major tangible link between China and Central Asia. These states have seen Chinese influence growing in recent years, as Beijing has contributed capital for a level of infrastructure and development these states have never had. Beijing even showed its willingness to come to the financial rescue of Central Asian states during the economic crisis, bailing Turkmenistan out for $4 billion and loaning $3.5 billion for non-extractive purposes to Kazakhstan. The Central Asian states, for their part, have been happy to oblige. Since the fall of the Soviet Union, the newly independent Central Asian states have sought outside investment to capitalize on their abundant natural resources. Some are also looking for a counterbalance to Russia's predominant influence — especially since the vast majority of their infrastructure and institutions are wedded to Russia through vestiges of Soviet rule. Turkmenistan in particular has suffered, since Russia cut off natural gas imports earlier in 2009, and is looking for a more reliable recipient for its energy exports. Turkmenistan's only other customer is Iran, which is attempting to increase imports to about 14 bcm per year. China — which in a few short years is expected to import 30 bcm annually through the new pipeline — is therefore a godsend for Ashgabat, as it offers a rapidly growing consumer market that is outside of Russia's sphere of influence and manifestly willing to invest the cash to boost Turkmenistan's energy production and build the pipelines. For China, however, there are liabilities associated with the new pipeline. Becoming more reliant on Turkmen natural gas brings the risk of Russian interference — since Moscow still holds sway over Central Asia’s security and political institutions. Beijing got a taste of Moscow's interference when the Russian construction companies responsible for the Central Asian pipeline repeatedly delayed their work. In the future, if Russia should disagree with China, it could pull strings in Turkmenistan (where it outright owns the energy infrastructure) or Kazakhstan to reduce or cut off natural gas exports. Europe has long understood the implications of depending on Russian or Russian-controlled natural gas — Moscow has not shied away from politicizing natural gas exports to pressure Europe. Beijing, however, has not dealt with it before. Uzbekistan poses another risk for China. It is the only self-sufficient Central Asian state, and thus is a wild card. Though Uzbekistan is merely a transit state, the Uzbeks could choose to cut off the pipes to extract concessions from China, for instance. Presently, there is little risk that Russia and China will compete for the same natural gas supplies in Turkmenistan. Russia does not currently need Turkmen natural gas — low demand in Europe has lowered Russia's own natural gas exports, obviating the need to import Turkmen gas for domestic uses. Meanwhile, China's natural gas consumption is a small enough component of its overall energy mix that it is not a critical vulnerability. But in a few years, when European demand increases, Russia could begin to seek more imports from Turkmenistan — potentially competing with China for the same supplies. Thus, while the Central Asian natural gas pipeline is not a point of contention between Moscow and Beijing now, it could be in the future.