Executive Summary Couv 18/09/02 9:53 Page 1 INTERNATIONAL ENERGY AGENCY DEVELOPING CHINA’S NATURAL GAS MARKET The Energy Policy Challenges Driven by an increasing recognition of the many advantages of natural gas and by the need to diversify its coal-dominated energy supply, China’s natural gas industry is poised for rapid expansion. Some major gas infrastructure projects have been launched to support ambitious gas growth targets in the country for the next five years and beyond. Meeting such targets is easier said than done: expensive gas faces sharp competition from cheap DDEVELOPINGEVELOPING and abundant domestic coal; development of gas infrastructure needs money and will take time; and CHINA’S downstream market must be developed. For gas to CHINA’S achieve its full potential, China must put in place a clear gas policy and regulatory framework. All these NATURALNATURAL GASGAS pose significant energy policy challenges for the Chinese government. MARKETMARKET This study describes China’s gas market situation and examines the key issues facing its industry and policy makers. Drawing on the experiences and lessons from developed gas markets around the world and taking The Energy Policy Challenges into account the specific circumstances of the Chinese gas market, it also offers a number of policy suggestions for the Chinese government to consider in its effort to boost the country’s natural gas industry. page2-20x27 8/04/02 15:20 Page 1 INTERNATIONAL ENERGY AGENCY ORGANISATION FOR 9, rue de la Fédération, ECONOMIC CO-OPERATION 75739 Paris, cedex 15, France AND DEVELOPMENT The International Energy Agency (IEA) is an Pursuant to Article 1 of the Convention signed in autonomous body which was established in Paris on 14th December 1960, and which came November 1974 within the framework of the into force on 30th September 1961, the Organisation Organisation for Economic Co-operation and for Economic Co-operation and Development Development (OECD) to implement an inter- (OECD) shall promote policies designed: national energy programme. • to achieve the highest sustainable economic It carries out a comprehensive programme of growth and employment and a rising standard energy co-operation among twenty-six* of the of living in Member countries, while maintaining OECD’s thirty Member countries.The basic aims financial stability, and thus to contribute to the of the IEA are: development of the world economy; • to maintain and improve systems for coping • to contribute to sound economic expansion in with oil supply disruptions; Member as well as non-member countries in the • to promote rational energy policies in a global process of economic development; and context through co-operative relations with • to contribute to the expansion of world trade non-member countries, industry and inter- on a multilateral, non-discriminatory basis in national organisations; accordance with international obligations. • to operate a permanent information system on the international oil market; The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, • to improve the world’s energy supply and Germany, Greece, Iceland, Ireland, Italy, demand structure by developing alternative Luxembourg, the Netherlands, Norway, Portugal, energy sources and increasing the efficiency of Spain, Sweden, Switzerland, Turkey, the United energy use; Kingdom and the United States. The following • to assist in the integration of environmental and countries became Members subsequently through energy policies. accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), * IEA Member countries: Australia, Austria, Belgium, Australia (7th June 1971), New Zealand (29th May Canada, the Czech Republic, Denmark, Finland, 1973), Mexico (18th May 1994), the Czech Republic France, Germany, Greece, Hungary, Ireland, Italy, (21st December 1995), Hungary (7th May 1996), Japan, the Republic of Korea, Luxembourg, Poland (22nd November 1996), the Republic of the Netherlands, New Zealand, Norway, Portugal, Korea (12th December 1996) and Slovakia Spain, Sweden, Switzerland, Turkey, the United (28th September 2000). The Commission of the Kingdom, the United States. The European European Communities takes part in the work of Commission also takes part in the work of the IEA. the OECD (Article 13 of the OECD Convention). © OECD/IEA, 2002 Applications for permission to reproduce or translate all or part of this publication should be made to: Head of Publications Service, OECD/IEA 2, rue André-Pascal, 75775 Paris cedex 16, France or 9, rue de la Fédération, 75739 Paris Cedex 15, France. INTERNATIONAL ENERGY AGENCY DEVELOPING CHINA’S NATURAL GAS MARKET The Energy Policy Challenges FOREWORD To develop its natural gas market to the size envisaged by its planners within a relatively short time, China has to tackle a number of important challenges. Other countries, within the IEA and outside, have faced similar challenges in developing their gas markets; but the challenges faced by China are greater. Chinese gas reserves are relatively limited and are located far from the main centres of demand; cheap alternative fuels are available - in particular coal; there is a lack of gas-related technologies and skills; and knowledge of how best to develop markets is not widespread. Chinese policy-makers recognise gas as the fuel of choice for environmental and energy diversification purposes and for its potential contribution to the modernisation of industrial activities. The Chinese government’s strong determination to develop a gas market now needs to be translated into concrete policy action. This report, the first of its kind in the Agency’s relationship with China, attempts to address these challenges. It suggests which policies and measures, both within the natural gas sector and outside, can best foster the development of the gas industry and market. A key conclusion of the study is that many of the challenges China faces in developing its gas market are not confined to the gas industry, but require policies affecting the national energy economy as a whole. China’s natural gas market cannot and should not be developed in isolation from the rest of the energy system and economy. This study was carried out by the IEA under the terms of the 1996 Memorandum of Policy Understanding in the Field of Energy with the Chinese government. Although the report draws on Chinese government sources and benefits from the contributions of many individuals, it is not a joint report and therefore does not necessarily reflect the views or positions of the Chinese government. However, we hope the Chinese authorities will regard the recommendations in the report as a useful contribution to the realisation of their commitment to develop China’s gas market. The report is published under my responsibility as the Executive Director of the IEA. Robert Priddle, IEA Executive Director 3 ACKNOWLEDGEMENTS This report has been prepared thanks to contributions from a number of people from Chinese government administrations, research centres, and energy companies, as well as from international energy companies operating in China, IEA member countries and the IEA Secretariat. During the course of the study, a team of IEA experts, led by Olivier Appert, Director of Long- Term Co-operation and Policy Analysis, made two visits to China – in November 2001 and in May 2002. Members of the team included Ann Ducca and Robert Price of the US Department of Energy, Masao Takekawa of Japan’s Ministry of Foreign Affairs, Xavier Chen (IEA Secretariat), Lionel Gaurier (consultant) and Trevor Morgan (consultant) – all of whom contributed to the drafting of the report. The IEA would like to thank the following Chinese institutions that received its gas team: ■ The National People’s Congress (NPC, Environment and Resources Committee); ■ The State Development Planning Commission (SDPC); ■ The Energy Research Institute of SDPC (ERI/SDPC); ■ PetroChina; ■ China National Off-shore Oil Corporation (CNOOC); ■ State Power Corporation of China (SPCC); and ■ China Gas Association. Thanks also go to the following Chinese officials and researchers for their contributions and support: Xu Dingming, Hu Weiping, Wang Young (who spent one month on the project at the IEA) and Gu Jun (SDPC), Xu Xiaojie, Liu Hequn, Zhang Zhaoqi and Song Dongyu (CNPC), Liang Xizhang (retired from CNPC), Zhang Kang and Liu Yan (SINOPEC), Wang Qingyi (China Energy Research Society), Wang Zhongan (CNOOC), Lu Wei (State Council’s Development Research Centre), Huang Guoyu (State Council Office for Restructuring Economic System), Wang Yunlong (China Gas Association), Hu Zhaoguang (State Power Corporation), Wang Qingtian and Zhang Ruihe (China Chemicals Information Centre), Zhou Fengqi (SDPC’s Energy Research Institute), Wang Wenxiang (SDPC’s Investment Research Institute), Wei Dunsong and Zhou Weiguo (Tongji University, Shanghai), Wang Yanjia and Lu Yingyun (Qinghua University), Jiang Zhaozhu (China Investment Association). Contributions and comments were also received from the Shanghai Municipal Planning Commission (Zhang Lihong) and the Shaanxi Provincial Natural Gas Company. Special thanks go to Mr. Xu Xiaojie who helped organise the two discussion seminars during the IEA team’s visits. International energy companies including BP, Exxon Mobil, Gaz de France, Shell and Unocal all extended important support to the study. BP’s Marie-Benedicte Lempire (who was seconded to work at the IEA for one month) and Neil Gough contributed to