China overtook the US in 2010 to become the world’s largest consumer of energy, according to the latest Statistical Review of World Energy published by BP. The oil giant calculates that China's energy consumption grew by 11.2 per cent that year to leave the country accounting for over a fifth of all fuels used globally in electricity generation.
However, many are questioning China's ability to maintain the near double-digit economic growth that is demanding such energy consumption, particularly given the economic turmoil that has engulfed many of its developed world trading partners. "China remains a concern," warns Andrew Morris, managing director of the Signature division of investment firm Rowan Dartington, although Mr Morris is encouraged that the Chinese economy is starting to transition away from its reliance on exports into being more consumer oriented.
Even assuming there is no sharp reversal of economic fortunes - the so-called 'hard landing' - the Chinese economy is nevertheless expected to slow near term. The Development Research Centre of the State Council, the Chinese state policy research and strategy review agency, has suggested that a longer term growth rate of 6 to 7 per cent is more likely than the 8 to 9 per cent that might be maintained over the next two to three years. Yet, even the slower rate would be enviable contrasted against the flat-lining and likely recession faced by many Western economies.
Mr Morris points to the dual problems of a global slowdown and speculation in the housing market as challenging the Chinese authorities with conflicting issues. Stimulating growth requires supportive government policies whilst avoiding a property crash requires tightening.
Despite these near-term difficulties, the urbanisation of rural China continues to drive the country's development, in a process that could take several more decades to complete. With China's rulers unlikely to risk the social unrest that could arise from any attempts to dampen continued development, particularly after witnessing last year's 'Arab spring', China's demand for energy and materials will in all probability continue to rise.
In its 2011 World Energy Outlook, government policy adviser the International Energy Agency (IEA) predicted that China would consolidate its position as the world's largest energy consumer. The IEA expects that by 2035, China will consume nearly 70 per cent more energy than the US, albeit by then, Chinese consumption per capita will still be less than half that of the US.
Cleaning up
Its growing need for energy presents China with another challenge: how to diversify its heavy reliance on coal. China is responsible for nearly half of all global consumption of coal, which supplies around 70 per cent of the country's energy needs.
The five-year plan for 2011 to 2015 aims to reduce China's coal usage by accelerating the development of natural gas, in'unconventional' form such as coal bed methane (CBM) - natural gas that has been trapped in coal seams - and shale gas, as well as in its conventional form. CBM could prove particularly attractive as China is estimated to be endowed with the world's third largest reserves, yet CBM currently contributes only a tiny fraction of domestic gas production.
In contrast to the rapid exploitation of its oil reserves, China's development of its gas reserves has been sluggish. This is starting to change. "Natural gas development in China has entered a historically unprecedented stage," says Xu Yongfa, president of the China National Petroleum Corporation (CNPC) Research Institute of Economics and Technology. Natural gas production grew by on average 14 per cent a year over the last decade, making China now the fifth largest natural gas producer compared with 16th largest in 2000, explains Mr Xu.
Boosted by rapidly improving infrastructure, China's consumption of natural gas has grown over the last decade by around 16 per cent a year, making it now the fourth largest consuming nation. The share of natural gas in China's energy mix increased from 2.4 per cent in 2000 to 4 per cent in 2010. Yet, this is still lower than other large producers and consumers of gas and leaves plenty of room for further increase.
China imports both liquefied natural gas and pipeline gas, and Mr Xu expects gas imports to grow to nearly 30 per cent of total domestic consumption in 2015 compared with currently around 16 per cent. This provides further incentives for China to develop its domestic gas reserves.
The Chinese gas market is dominated by national oil companies such as CNPC and Sinopec. CNPC is the largest domestic gas producer and supplier; it owns 80 per cent of domestic gas production and operates over 90 per cent of the country's gas pipelines.
In 2010, the Chinese government issued a policy to encourage private sector involvement in the oil and gas industry, with foreign involvement expected to grow. With accelerated development to meet growing demand and replace both coal and gas imports, the driving forces behind Chinese natural gas should provide plenty of investment opportunities for many years to come.
Investing in the Chinese gas boom
Two London-listed companies are developing integrated gas production, distribution and supply networks to help meet China's gas boom:
■ Green Dragon Gas: Commercialising CBM reserves is a bespoke process that requires understanding and applying the correct technology to the specific reservoir in question. Green Dragon Gas looks to have achieved that and is aiming to ramp up production through an aggressive drilling programme. Increased drilling should lead to substantially higher output, and Green Dragon has also increased its distribution and sales capability to accommodate higher volumes. It is building a pipeline to connect into the West-East pipeline, as well as 25 own-branded compressed natural gas refuelling stations for consumer vehicles. Green Dragon Gas shares trade on the Alternative Investment Market, and so are not eligible for individual savings accounts (Isas).
■ Fortune Oil: With a fairly long history in China's energy industry, Fortune Oil is involved in a number of oil and gas supply and infrastructure projects in China, including the development of CBM reserves that will ultimately integrate with its gas supply business. Australian CBM specialist Dart Energy recently increased its stake in Fortune's flagship project, the Liulin CBM development, from 45 to 50 per cent. The Australian firm brings technical expertise that keeps Liulin on track to deliver first gas sales this year. Fortune's shares trade on the main market.
Source: United Nations, Department of Economic and Social Affairs, Population Division: World Urbanization Prospects 2009 Revision: New York
