China faces sharp slowdown in natural gas demand

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China has seen a sudden and rapid slowdown in its demand for natural gas as the country's slowing economy raises worries that its future energy appetite will be smaller than once expected.

In April, according to statistics compiled by the CNPC Economics & Technology Research Institute, China used 2.8 per cent more natural gas than in the same period last year. In the first four months of 2015, gas use rose 6.9 per cent year on year, down from 9.8 per cent growth in 2014, and even bigger numbers in prior years. Over the past decade and a half, Chinese gas use was up sixfold.

Now, however, it is slowing as a decelerating economy takes a disproportionate toll on energy. Though China's headline gross domestic product numbers remain at 7 per cent, industrial performance has been more sluggish, "so that's really changed demand" said Zhou Dadi, chairman of the China Energy Research Association.

"The whole energy balance is facing some very big changes," he said. "Incremental energy demand is significantly lower than what we expected."

For years, energy forecasts have placed China at the heart of forecasts showing that eye-popping new quantities of oil and gas will be needed in coming years. In its latest World Energy Outlook, the International Energy Agency says that "China dominates energy demand growth until the mid-2020s," becoming the biggest oil user by the early 2030s. BP plc, in its own forecasts, predicts that by 2035, Chinese oil demand will climb 67 per cent, while its gas use will rise 270 per cent.

There is little doubt that China, with its massive population, vast industrial sector and growing middle class, will continue to be a major energy driver for years to come. But the ground is now shifting in several ways. In 2015, China is expected to grow at its lowest pace in decades, a "new normal" for the economy that is becoming a new normal for energy, too. Last year, Japan's Institute of Energy Economics computed a low-growth scenario for China and India. If GDP performance is 1.5 percentage points below expectations through 2040, it will cut oil demand by seven million barrels a day from forecast levels, chief economist Ken Koyama said.

Domestic factors are also at play in China, where a reduction in subsidies has increased natural gas prices for buyers, forcing the industrial sector to contemplate its needs and seek new efficiencies.

Other energy sources are also chipping away at the oil and gas stronghold as China seeks to boost non-fossil fuel energy – including nuclear – to 15 per cent by 2020 and 20 per cent by 2030. Renewable-energy use stood at 11.2 per cent last year, when, for the first time, China built more renewable energy capacity than anything else.

"It has become an important component of China's energy production and consumption," Tan Rongyao, administrator of the China National Energy Administration, said in Beijing Thursday at the Pacific Energy Summit. "China is now actively promoting a revolution in energy consumption and production."

Finally, for natural gas, seasonal factors are at play: Northern China has just emerged from two consecutive warmer winters that have constrained gas needs.

But the change under way appears to be more than short-term. China's apparent energy needs are "changing very quickly," said Peter Hughes, a London-based oil and gas analyst and consultant. "They are doing everything in their power, and will continue to do everything in their power, to minimize" energy use in China, he said.

The implications are potentially significant for global energy producers banking on China to underpin growth – including Canada, with its hopes of constructing a West Coast liquefied natural gas industry.

With natural gas in particular, Beijing is compounding the effect of slow growth to make itself a more powerful buyer. China is "creating the conditions for gas-on-gas competition, in an attempt to secure a long-term reduction in the price of gas," Mr. Hughes said. That includes building new pipelines from Myanmar and Central Asia, tapping its own offshore and shale reserves and signing massive contracts with Russia to import Siberian gas.

To think that the Russian deal, in particular, will not drag down the price of liquefied natural gas, which Canada wants to export, is "extremely naive and blinkered," Mr. Hughes said.

Indeed, changes in China should prompt a broader Canadian rethink, said Stewart Beck, president of the Asia Pacific Foundation of Canada. Companies and politicians should broaden their focus to the energy needs in other places, such as India and the Philippines, he said.

"We have to pay attention to what's happening in China and understand that," he said. "But also let's not forget there are other markets we can be selling into. The opportunity is Asia writ large, not just China."