Rapid growth in China’s natural gas consumption has outpaced growth in its domestic natural gas production in recent years. China’s natural gas imports, both by pipeline and as liquefied natural gas (LNG), accounted for nearly half (45%) of China’s natural gas supply in 2018, an increase from 15% in 2010. To increase the domestic production of natural gas, the Chinese government has introduced incentives for several forms of natural gas production.
Natural gas production has recently grown in China largely because of increased development in low-permeability formations in the form of tight gas, shale gas, and to a lesser extent, coalbed methane. In September 2018, the Chinese State Council set a target of 19.4 billion cubic feet per day (Bcf/d) for domestic natural gas production in 2020. In 2018, China’s domestic natural gas production averaged 15.0 Bcf/d.
In June 2019, the Chinese government introduced a subsidy program that established new incentives for the production of natural gas from tight formations and extended existing subsidies for production from shale and coalbed methane resources. This subsidy is scheduled to be in effect through 2023. In addition to the changes in the subsidy program, the government allowed foreign companies to operate independently in the country’s oil and natural gas upstream sector.
Source: U.S. Energy Information Administration, based on China National Bureau of Statistics and IHS Markit
Production of tight gas, shale gas, and coalbed methane collectively accounted for 41% of China’s total domestic natural gas production in 2018. China has been developing tight gas from low-permeability formations since the 1970s, especially in the Ordos and Sichuan Basins. Tight gas production was negligible until 2010 when companies initiated an active drilling program that helped lower the drilling cost per vertical well and improve well productivity.
Shale gas development in China has focused on the Sichuan Basin: China National Petroleum Corporation’s (CNPC) subsidiary PetroChina operates two fields in the southern part of the basin and the China Petroleum and Chemical Corporation (Sinopec) operates one field in the eastern part of the basin. PetroChina and Sinopec have respectively committed to producing 1.16 Bcf/d and 0.97 Bcf/d of shale gas by 2020, which, if realized, would collectively double the country’s 2018 shale gas production level.
Source: U.S. Energy Information Administration
China’s coalbed methane development is concentrated in the Ordos and Qinshui Basins of Shanxi Province. These basins face significant challenges, including relatively low well productivity and relatively high production costs.
China also generates synthetic natural gas from coal, a source that accounted for 2% of China’s natural gas production in 2018. China’s synthetic gas projects involve gasifying coal into methane in coal-rich provinces, such as Inner Mongolia, Xinjiang, and Shanxi. In 2016, the Chinese government hoped to reach 1.64 Bcf/d of coal-to-gas production capacity by 2020. China’s coal-to-gas production was less than 0.3 Bcf/d in 2018 as stricter environmental mandates have slowed down plant construction and increased the cost of further developing coal-to-gas.
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The amount of natural gas held in storage in 2019 went from a relatively low value of 1,155 billion cubic feet (Bcf) at the beginning of April to 3,724 Bcf at the end of October because of near-record injection activity during the natural gas injection, or refill, season (April 1–October 31). Inventories as of October 31 were 37 Bcf higher than the previous five-year end-of-October average, according to interpolated values in the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report.
Although the end of the natural gas storage injection season is traditionally defined as October 31, injections often occur in November. Working natural gas stocks ended the previous heating season at 1,155 Bcf on March 31, 2019—the second-lowest level for that time of year since 2004. The 2019 injection season included several weeks with relatively high injections: weekly changes exceeded 100 Bcf nine times in 2019. Certain weeks in April, June, and September were the highest weekly net injections in those months since at least 2010.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
From April 1 through October 31, 2019, more than 2,569 Bcf of natural gas was placed into storage in the Lower 48 states. This volume was the second-highest net injected volume for the injection season, falling short of the record 2,727 Bcf injected during the 2014 injection season. In 2014, a particularly cold winter left natural gas inventories in the Lower 48 states at 837 Bcf—the lowest level for that time of year since 2003.
Headline crude prices for the week beginning 4 November 2019 – Brent: US$62/b; WTI: US$56/b
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