Obstacles to Natural Gas in China

Victor Miller
December 14, 2016

Submitted as coursework for PH240, Stanford University, Fall 2016


Fig. 1: This shows the distribution of critical oil and gas infrastructure as well as locations of reserves. [1] The far western edge is the Xinjiang Uyghur Autonomous Region. (Source: V. Miller)

As China's economy continues to grow, it must feed its economy in joules. The Chinese oil and gas industry is primarily government run, and is composed of three primary companies: PetroChina, SinoPec, and CNOOC. Historically, the majority of China's energy comes from coal. Coal is easy to burn, energy dense, and can be sourced nationally. However, China seeks to diversify its energy and natural resource portfolio to protect its economy against international shocks and to become more environmentally friendly. The state has made public its goal to have natural gas be 10% of its energy mix by 2020; it was 6% in 2014. [1] Natural gas has come to be 145 billion cubic meters (BCM) of domestic production, and 58 BCM of imports. Natural gas offers the benefit of being relatively clean. While it is useful for producing syngas and hence commodity chemicals, Chinese policy prefers its use as a fuel. China has two sources of natural gas: imports and domestic development. [1] The relevant infrastructure and reserves can be visualized in Fig. 1. This article will primarily cover challenges to domestic production.

Domestic Production

China has significant holdings of natural gas. An article in the journal Petroleum indicates holdings of 30 TCM in shale gas, approximately ten times the conventional gas reserves. [2] The same article in Petroleum by Liu et al. notes a large technology gap in drilling ability for shale gas between the US and China. A lack of technological ability will impact the economics and reduce the attractiveness of natural gas projects. [2] Liu et al. go on to note a series of other challenges to developing natural gas projects in China. The gas is extremely deep and hence very challenging to access. The formations are additionally complex. To make matters worse, there is a dearth of both talent and infrastructure local to the reservoirs. This is especially true as the reservoirs are often located in mountainous regions. Many gas extraction techniques rely on water, such as hydraulic fracturing. This is challenged by the points above regarding infrastructure and mountainous terrain. [2] An article by Jialing et. al. seems to offer some consolation, pointing out historical trends. They state that China has done the following in the area of increase natural gas usage in the decade leading to 2014. First, that there was continuous technical innovation and development, including in the engineering safety of high-acidity fields, standardized designs, and description of heterogeneous reservoirs. There have also been large research grants, on site pilot testing, and so forth. [3] Related, China has begun investing in US gas, stated by some to help with access to technology. [4] Jialing et al. point to the rapid production of infrastructure, including pipelines and distributions systems. The pipelines were interconnected, and over twenty underground gas storages systems were built for the purpose of peak shaving, which holding surplus for sudden peaks in demand. At the end of 2014, China had built 8.5E4 km of pipeline. [4] They authors also speak to trends in natural gas exploration and development. They indicate that deep, unconventional reservoirs as well as low- permeability reservoirs will be the targets of explorations and development, and the authors go on to claim that domestic exploration is burgeoning, citing the fact that some major fields have been discovered in Sichuan Basin following 70 years of exploration. Futher, there has been a rapid development of production, including an average yearly increase of 12 percent in domestic production, going from the seventeenth largest producer to the sixth. Related has been a large increase in consumption, with a year-over-year average increase of roughly 14 percent. [4]

China has sought to develop its fields in territory its regards as its own. Work in development and extraction of gas in the South China Sea has been pursued, to some controversy and tension with other nations. How this will unfold is unknown. Nonetheless, arguments on the subject of territory may prove to be an obstacle. [1,5]

There have also been statements that local unrest may impact the ability of China to develop gas fields, as well as transport imported and nationally sourced gas. In the western Xinjiang Uyghur Autonomous Regions passes many miles of critical pipeline, and there stand oil and gas fields as well. Friction between the local populations and the Chinese government may complicate the energy picture, although the energy infrastructure has not been affected. [1,6]

A report by the Congressional Research Service has also listed several obstacles to development. One is the current anticorruption purge in China. [1] A second is the notion that because oil and gas in China are primarily controlled by three government-run companies, that inefficiencies exist. [1] Further, the gas-pricing system may be a source of market inefficiency as well. Historically, the pricing mechanism has been complex and different from the market value. [1] Similarly, there has been limited private investment. It has been claimed that China has inflated the estimates of reserve, with the impact that this would be a source of hesitancy for would-be foreign investors. [1] On both of the last counts, the government of China, including in statements by Premier Li, has announced plans to easy entry into the oil and gas industry, promote foreign investment, as well as connect the price of energy and gas more directly to international pricing. To spur demand by domestic business and citizens, the government cut the cost of natural gas in November 2015. [1]


Chinese imports and trade deals involve international politics, and so it is difficult to effectively obtain good analysis. Some basic facts and statements are presented. China imports gas both by pipeline as well as by barge in the form of liquid natural gas (LNG); about half of it is delivered by each method. [1] The second is imported by tanker into LNG terminals; both the terminal and the tankers are extremely expensive to construct. [7] Both the ability to sign new deals and lay more infrastructure will be the primary way forward and represent the primary obstacles. China receives natural gas from a diversity of countries, including Turkmenistan, Australia, Uzbekistan, Kazakhstan, Burma, and soon Russia; many deals were recently signed. [6] China imports heavily from some of these nations, especially Turkmenistan, via the Central Asia-China Gas Pipelines, which exceeds 1000 miles. A new pipeline, Line D, has been delayed, reducing China's ability to continue to ramp up natural gas imports. [1] Nonetheless, China has been aggressively seeking out deals with its neighbor nations. China and Russia signed a deal for 68 BCM, though that may be subject to change depending on the performance of the global economy. [1,8] It has been claimed by the CEO of Gazprom that natural gas deals with China will affect the global market for natural gas. [8] It is worth noting that the price that is believed to be in effect is between $350 and $380 per 1000 cubic meters, comparable to contracts with European importers. [8] In any case, increasing the number of suppliers does increase its ability to negotiate with any single supplier.

China is a heavy importer of LNG and has invested in LNG terminals. [1,8] LNG terminals are a multibillion dollar investment. China plans to promote LNG construction to increase LNG imports; however, current LNG terminals are not operating at capacity. [1] This attributed to the fact that the pipe network is controlled by three companies, and this allows for inefficiency. It is possible that in the future China may continue to diversify the nations from which it imports. It is possible in the future that China may seek to import from the US, due to its large natural gas boom and reserves; this may have geopolitical ramifications. Regardless, the cost of transportation and building LNG terminals is an obstacle. So, too, is the challenge of finding a trading partner at a reasonable price.


Natural gas is a fuel with growing importance in China. China's commitment to increasing natural gas use is backed by its actions. It has taken many critical steps towards increasing natural gas use and trade. These include increasing exploration and development of domestic fields, developing infrastructure, increasing purchases, and making market conditions favorable to natural gas.

© Victor Miller. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] M. Ratner, G. Nelson, S. V. Lawrence, "China's Natural Gas: Uncertainty for Markets," Congressional Research Service, R44483, May 2016.

[2] P. Liu et al., "Technical Status and Challenges of Shale Gas Development in Sichuan Basin, China," Petroleum 1, 1 (2015).

[3] J. Lu, S. Zhao, "China's Natural Gas Exploration and Development Strategies Under The New Normal," Natural Gas Industry B 2, 473 (2015).

[4] F. Tan, "China's Sinopec Hunting U.S. Shale Deals, But Prices High," Reuters, 16 Jun 15.

[5] N. P. Linh, "Vietnam Says China's Oil Rig Movement into South China Sea Is 'Illegal'," Reuters, 5 May 15.

[6] R. Guo, China's Spatial (Dis)integration (Chandos Publishing, 2015).

[7] A. Barbe and D. Riker, "Obstacles to International Trade in Natural Gas," U.S. International Trade Commission, Working Paper ID-043, December 2015.

[8] V. Smil, Natural Gas: Fuel for the 21st Century (Wiley, 2015), p. 116.