Historically, natural gas has not been a major fuel in China, but its share in the country’s energy mix is increasing. Oil & Gas Journal (OGJ) estimates that China’s domestic proven reserves of natural gas stood at 53.3 trillion cubic feet (Tcf) as of January 2006. Other sources have put reserves much higher. Cedigaz estimates that China held 83 Tcf of proved natural gas reserves as of January 2006. EIA figures show that China consumed 1.3 Tcf of natural gas in 2004, almost doubling the level of natural gas consumption from five years prior. In 2004, natural gas accounted for only around 3 percent of total energy consumption in China, although this figure is expected to rise in the coming years. Until recently, natural gas was used primarily as a feedstock in chemical fertilizer production and an energy source at oil and gas fields.

As with oil, the natural gas sector is dominated by the three large state-owned oil and gas holding companies: CNPC, Sinopec, and CNOOC. CNPC operates primarily through its chief subsidiary PetroChina, and all three companies operate numerous local subsidiaries. CNPC is by a considerable margin the country’s largest natural gas player in terms of production and reserves. CNPC data shows that the company produced 1.3 Tcf of natural gas in 2005, a 28 percent year-over-year increase. Sinopec reports that in 2005 the company produced a total of 222 Bcf of natural gas, a 7 percent increase from the previous year. And finally, CNOOC operating data shows that the company produced 142 Bcf of natural gas in 2005, a 7 percent increase from 2004.

One major hurdle for natural gas projects in China is the lack of a unified regulatory system. Currently, natural gas prices are governed by a patchwork of local regulations. The Chinese government is in the process of drafting a new legal framework for the natural gas sector, but the process has been slow, and there are still considerable uncertainties regarding price regulation and taxation issues dealing with natural gas sales.

The country's largest reserves of natural gas are located in western and north-central China. Several recent discoveries of natural gas, if successfully developed, promise to significantly increase China’s natural gas production in the coming years. In July 2006, Sinopec officials revealed that the company had uncovered three new natural gas fields in northeast China holding an estimated 2.1 Tcf of recoverable reserves. In April 2006, Sinopec confirmed a much larger discovery at the Puguang natural gas field in the southwestern province of Sichuan. The Puguang field holds proven recoverable reserves of 8.9 Tcf, according to an official reserves assessment by China’s State Ministry of Land and Resources. The company expects that commercial operations at the field will begin in 2008, initially producing about 140 Bcf per year, rising to 280 Bcf by 2010. In another significant move, PetroChina announced at the end of 2005 that it had discovered an additional 3.5 Tcf of recoverable natural gas reserves at the existing Daqing oil and gas field in northeast China’s Heilongjiang province.

The discovery of the Puguang natural gas field makes it one of the largest natural gas fields in China. The largest find to date is the Sulige field in the Ordos basin in the Inner Mongolia Autonomous Region, with proven recoverable reserves of 18.9 Tcf. In March 2006, PetroChina and Total signed a PSC to jointly develop the South Sulige block. Another large natural gas field, the Kela-2 field in the Tarim basin, holds proven reserves of 8.9 Tcf. PetroChina declared that it expects to produce 85 Bcf from the Kela-2 field in 2006, eventually raising output to more than 700 Bcf annually in 2010 to supply the company’s West-East natural gas pipeline. CNPC, which includes PetroChina, reported that at the end of 2005, the company held total proven recoverable natural gas reserves of 81.6 Tcf.

In June 2006, CNOOC and Husky Energy announced a new natural gas discovery with estimated possible reserves of 6 Tcf in the South China Sea. CNOOC representatives emphasized that the discovery still needs to be verified and accurately assessed, but if it materializes the find would be China’s first deepwater natural gas discovery.

China has a fragmented system of different pipelines and distribution networks. Until recently, much of China’s natural gas consumption was limited to local natural gas producing regions. For example, Sichuan province in the southwest, which holds a large percentage of China’s proved reserves, has China’s most sophisticated natural gas distribution network. In the past, this local network only had limited connectivity to outside regions. As natural gas demand has grown in recent years, complemented by new natural gas discoveries, China has undertaken an effort to increase its natural gas transport infrastructure and improve the connections between networks. This is especially true since many of China’s largest natural gas fields lay in remote basins in the western part of the country and must be piped to eastern population centers.

On the heels of its large Puguang natural gas discovery, Sinopec is looking to build a cross-country natural gas pipeline originating in Sichuan province. News reports indicate that the company originally planned for a route traveling to Jinan in Shandong province, but that the NDRC has encouraged that the pipeline extend to Shanghai instead. Sinopec is studying different options, and it has not announced a formal decision. Shanghai already receives piped natural gas from PetroChina’s West-East Gas Pipeline and other regional lines, but independent analysts believe Sinopec may choose to build the planned pipeline to Shanghai because of growing demand.

PetroChina’s West-East natural gas pipeline, which began operations in January 2005, represents CNPC’s main natural gas backbone. The 2,500-mile pipeline originates in the Xinjiang region in the west, with the main branch line ending in Shanghai. The West-East pipeline has a capacity of 1.2 Bcf/d and contains numerous regional spurs along the main route, which has improved the interconnectedness of China’s natural gas transport network.

In addition to expanding upon the domestic pipeline infrastructure, China is looking to establish transnational natural gas pipelines with several neighboring countries. In February 2005, Kazakhstan’s state-owned KazMunaiGas (KMG) was reportedly conducting a feasibility study of a natural gas pipeline to China in partnership with CNPC. If such a pipeline were built, KMG officials have said that it could be operational by as early as 2009 and also supply natural gas from Turkmenistan and Uzbekistan.

Another proposed international pipeline project would link the Russian natural gas grid in Siberia to China, and possibly South Korea, via a pipeline from the Kovykta natural gas fields near Irkutsk. The cost of the project has been estimated at $12 billion with a total planned capacity of 2.9 Bcf/d, of which China would consume 1.9 Bcf/d and Kogas, South Korea’s main natural gas company, would consume 1 Bcf/d. Both CNPC and Kogas signed letters of intent for the project in November 2003, although several independent analysts have expressed doubts that the project will come to fruition. During talks between Russian President Putin and Hu Jintao in April 2006, the two leaders reportedly agreed to move ahead with the proposed Kovykta pipeline by 2011, although as of July 2006, no formal decision has been made on whether or not to proceed with the project.

With natural gas use on the rise in China, and uncertainties surrounding the potential of piped Russian natural gas, LNG has increasingly been considered by Chinese companies. In a joint venture with BP and local firms, CNOOC built China’s first LNG import terminal in Guangdong province, which received its first 60,000 ton shipment of LNG in May 2006. The facility has a capacity to handle 3.7 million tons per year (Mmt/y) of LNG, with a planned second phase that would double capacity in the future. CNOOC awarded a 25-year, 3.3 Mmt/y LNG supply agreement to Australia’s Northwest Shelf consortium to supply the new import terminal. CNOOC is currently building another LNG import terminal in Fujian province, which is scheduled to be complete in 2007 and have a capacity of 3 Mmt/y. The Fujian project will receive LNG from BP’s Tangguh consortium in Indonesia.

As many as a dozen other LNG terminals are either planned or proposed. CNPC, Sinopec, and CNOOC are all considering new LNG facilities, but recent LNG price increases have delayed some plans while the companies try to negotiate long-term LNG supply agreements. Planned or proposed LNG projects not yet under construction include: CNOOC projects at Ningbo in Zhejian province, Qingdao in Shandong province, and Shanghai; CNPC/PetroChina projects at Tangshan in Hebei Province , Jiangsu Province, and Dalian in Liaoning Province ; and Sinopec projects in Shandong and an island off the southeastern city of Z uhai .