Issue Number: 112   September 2014

Fuel for Thought: China's Natural Gas Vehicle Boom

China is in the midst of phenomenal growth in the natural gas vehicle sector. The estimates of the number of natural gas vehicles (NGVs) in China vary: the Natural & bio Gas Vehicle Association puts the figure at 437,000 for 2013; China Natural Petroleum Corporation put the figure at 1.48 million at the end of 2012[1]; and more recently, Facts Global Energy (an international energy consultancy group) put the figure at 3 million at the start of 2013, of which 2.8 million are CNG vehicles[2].

Although these estimates vary considerably, it is clear that NGVs are growing at a significant pace: the NGV population was less than 10,000 in 2000, and it might be more than 300 times greater than that now. So what exactly is driving this enormous growth and putting natural gas in the fast lane?

Top-down pressure

One tremendous force in the growth of natural gas in vehicles is the government support. In the 12th Five-Year Plan for Gas Development in Urban Areas, there is a target to use 30bcm of natural gas by 2015 in the transport sector (up from 5.9bcm in 2010).

China's National Development and Reform Commission (NDRC) has encouraged the adoption of natural gas as a vehicle fuel. On 31 October 2012, the NDRC announced the new Natural Gas Utilization Policy, which came into effect on December 1 2012. An important thrust of this policy is to address gas pricing, including linking natural gas prices with the prices of alternative fuels[3]. The Ministry of Transport is also encouraging the wider adoption of NGVs and granted subsidies worth RMB 513.67 million ($83.76 million) during 2011-2013 to support 283 NGV development projects[4].

The 'Airpocalpyse'

Underlying the Government of China's thrust towards increasing the usage of natural gas in transportation are the motives to reduce pollution, and to reduce reliance on oil imports. The state of pollution in China has been put up high on the public agenda after smog filled Beijing in early 2013 in which it was named the 'airpocalypse'. A mini 'airpocalypse' in Beijing is also considered to have returned earlier this year. As NGVs produce 20% less carbon dioxide and around 80% less nitrogen dioxide and near to zero sulfur dioxide and particulates, natural gas is considered a solution to the pollution problems in China.


Figure 1: Smog-filled Beijing[5].

The strongest support for NGVs is coming from local governments. Environmental protection is included in the assessment of the government officials, therefore putting pressure on local governments to convert public transportation to using natural gas as a fuel. In 2013, various regions had a large LNGV (LNG vehicle) population. Gas-rich Xinjiang had 10,097 LNGVs; Shandong had 9,952 LNGVs; Hebei had 9,198 LNGVs; Gunagdong with 7,071; and Jiangsu with 6,123. In addition, there are also plans to develop NGV capacity. In Beijing, 80% of its buses will be replaced with new-energy and clean-fuel vehicles by the end of 2017. 13,825 busses will be replaced by 7,185 NGV buses and 4,058 electrically powered busses. As the 'airpocalypse' happened in Beijing, the city is most under-pressure to change its current state of pollution. In Fuzhou, the capital of the Fujian Province, there are plans to develop a NGV refueling network which will involve the construction of 170 LNG refilling stations by 2015.


Figure 2: Clean Energy is one company among many that is providing China with CNG refueling capacity[6].

Another thrust towards the use of natural gas is related to China's oil dependency. In 2013, China imported 57% of its crude oil needs and its oil consumption growth accounted for one third of the world's oil consumption growth. EIA projects that China will surpass the United States as the largest net oil importer by 2014[7]. Although China holds 24.4 billion barrels of proven oil reserves, and production has increased 54% over the past two decades, the production growth has not kept pace with demand growth during this period. In 2013, China produced 4.2 million barrels per day but consumed 10.4 million barrels per day[8]. It is thought that oil production has reached its peak and the country's oil fields are mature.

The changing fiscal scene

A recent report by Citi highlighted the attractive price differential between natural gas and oil. However, since the report was published, there have been pricing reforms to natural gas in China. China's price reforms have led to a 33% increase in wholesale natural gas prices since mid 2013. The impact of this is that utilization rates at LNG plants have declined. Kunlun has seen the utilization rate fall below 50% indicating that less LNG is being used in transportation. The aim of the reforms is to quicken the pace of domestic gas development. In 2015 it is expected that a uniform price system will be introduced; after this, the market itself will decide energy prices.

There is also an economic slowdown in construction, coal mining and transportation that is reducing the incentive for trucks to convert to LNG. The cost of conversion involves an upfront additional cost that can take eight months to pay back if certain mileage is achieved. But the length of payback will increase if trucks travel fewer miles. Additionally, flat diesel prices have made the prospect of switching to natural gas less attractive.

Back in June 2013, Nicholas Sonntagg, the executive vice president at Westport Innovations, summed up the transformation of China's vehicle fuels: 'Certainly we see a trend in China that is far stronger than anything else we're seeing in the world in terms of shifting to natural gas as a primary fuel for transportation.[9]' However, since this statement, changes to the pricing of natural gas and the slowdown in China's economy is impacting the speed of natural gas breaking into the market.

Conclusion

China is on the way to developing its natural gas vehicle capacity with both natural gas providers and buyers benefitting from the switch to gas. The main driver is the top-down pressure for natural gas vehicles from the 12th Five-Year Plan for Gas Development in Urban Areas, which is being assisted by subsidies. The pressure to reduce air pollution and oil dependency is having a significant impact on the central government and local governments to change to different vehicle fuel types. Natural gas is seen as an attractive solution. However, natural gas pricing reform and a slowdown in China's economy is likely to have an impact on the speed of the growth of natural gas in the transportation sector.

Written and researched by Nico Cottrell


[1] As cited in Citi's report, https://ir.citi.com/ROzgbJktqIDIbvbbj8Kae%2BI%2F1te4V9Hh91ex5wFyG1wuStLT5EL8
L%2BP7DiZLBZC%2FZIYJ%2BHi13iU%3D
.

[2] Special Report: Natural Gas Vehicles: Driving Demand?, Summer 2014, Interfax.

[3] http://www.mondaq.com/unitedstates/x/217828/Oil+Gas+Electricity/
China+Issues+New+Natural+Gas+Utilization+Policy
.

[4] Special Report: Natural Gas Vehicles: Driving Demand?, Summer 2014, Interfax.

[5] http://www.cromo.com.uy/wp-content/uploads/2014/06/smog-shuts-down-chinese-city-of-11-million.jpg.

[6] http://www.fleetsandfuels.com/fuels/cng/2013/08/clean-energy-imw-for-china/.

[7] http://www.eia.gov/countries/analysisbriefs/China/china.pdf .

[8] BP Statistical Review of World Energy June 2014. http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review-2014/BP-statistical-review-of-world-energy-2014-full-report.pdf.

[9] Saqib Rahim, 'Policy is the muscle behind natural gas vehicle in China', http://www.eenews.net/stories/1059983182.


September 2014 MZINE