open-access intercity natural gas pipeline grid as a platform for china’s energy market economy...

Open-Access Intercity Natural Gas Pipeline Grid as a Platform

for China’s Energy Market Economy

Presented at2007 Sino-Asian Oil & Gas Pipeline

Projects Cooperation ForumBeijing

by

卜若柏Robert Blohm

KEEN Resources Asia Ltd.亞洲金能源有限公司http://www.blohm.cnc.net

January 29-30, 2007

1. East Asia pays the world’s highest price for natural gas imports. North America pays the world’s lowest.

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3Source: http://www.ieej.or.jp/aperc/final/ne.pdf

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2. North America has the world’s second-biggest gas pipeline system supporting the world’s most efficient market.

440 000 kilometers of intercity pipeline grid operated by some 160 companies

serving as the backbone of one of the world’s most liquid commodity markets with over 15 years of stable pricing patterns and some 10000 participants

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4

SOURCEhttp://www.irecusa.org/articles/static/1/binaries/Thornton%20ASES%202003-Version%202.pdf

3. Europe has a 50-year old 800 000 kilometer robust diversified & ever- expanding pipeline grid supporting a gas trading market that can become more efficient

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3 trading hubs• National Balancing Point (UK) • Zeebrugge, Belgium• Bunde Oude (German-Dutch Border)

National obstacles to a single European market

Directly linked by pipeline

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SOURCE http://www.inogate.org/en/images/maps/gas_map_big.gif

4. Japan’s natural gas system consists of 24 dispersed LNG terminal locations feeding no intercity pipeline grid Terminals owned by the large electric companies

or top city-gas companies. Distribution:• Over 2/3rds is to nearby electric power plants

• Only 24 % is Town Gas, ultimately to end-use customers

• Only 1.5 % is to industrial consumers

LNG provides 12% of Japan’s energy need and the world’s biggest LNG consumption (half the world’s demand)

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4. Japan’s natural gas system consists of 24 dispersed LNG terminal locations feeding no intercity pipeline grid (cont.d) Consequently Japan has very inefficient energy

distribution systems• LNG is used at adjacent power plants• Gas is trucked through streets to substations of the

big City Gas companies

Consequently Japan has the world’s highest delivered prices for industrial and space-heating energy.

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4. Japan’s natural gas system consists of 24 dispersed LNG terminal locations feeding no intercity pipeline grid (cont.d) Japan’s overused and overbuilt electric

transmission system: • The exclusive means of distributing energy over

distances.• This adds enormous expense to stabilizing the

electric system and is much costlier than a combined gas-pipeline grid and electricity grid.

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4. Japan’s natural gas system consists of 24 dispersed LNG terminal locations feeding no intercity pipeline grid (cont.d)

The Japan lesson: building LNG gasification terminals at too many locations• has made a national pipeline grid uneconomic

• impaired the development of a gas trading market, &

• strained the electric system.

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SOURCE: http://www.ieej.or.jp/aperc/final/ne.pdf

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5. Korea Gas: Asia’s most advanced intercity pipeline grid and East Asia’s most advanced LNG trader A robust 2579 km intercity pipeline grid

• more than half of gas delivered to end-use customers residential (over half of the end-use demand) commercial industrial

• less than half of gas delivered to electric power plants Delivering 90 % of S. Korea’s natural gas and over 7%

of S. Korea’s energy need Serving the world’s fastest-growing LNG market &

world’s 2nd-biggest LNG consumption equal to 36 % of Japan’s

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5. Korea Gas: Asia’s most advanced intercity pipeline grid and East Asia’s most advanced LNG trader (cont.d) 20 storage tanks of 100 000 kiloliters each,

enabling Korea Gas to buffer Japanese gas companies excesses or deficits and to benefit from seasonal diversity of supply with Japan.

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15

Deagu

Pohang

Busan

Tongyoung

Yeosu

Gwangju

Mokpo

JeonjuGunsan

Deajeon

Cheongju

ChuncheonEuijeongbu

Incheon

Pyeongtaek

Wonju

SuwonJecheon

Seoul

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5. Korea Gas: Asia’s most advanced intercity pipeline grid and East Asia’s most advanced LNG trader (cont.d)

Will China let Korea become the (North)east Asian natural gas pipeline and trading hub?

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16 SOURCE http://www.chathamhouse.org.uk/pdf/research/sdp/KPJan05.pdf

6. India is serving Inward demand and rural demand by a 12 000 km pipeline grid

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through India’s industrial corridor from coastal LNG terminals conveniently located in the main region of India’s traditional oil & gas wells, and

functionally separated from production and subject to an open-access tariff.

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SOURCE http://www.mapsofindia.com/maps/oilandgasmaps/gaspipelines.htm

6. India is serving Inward demand and rural demand by a 12 000 km pipeline grid (cont.d)

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India plans “the Great Gas Grid” spanning the sub-continent from coast-to-coast southward from the current gas grid.

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10 coastal locations for LNG gasification terminals may be too many. Their large number• may contribute to risk and the difficulty of

concluding supply contracts under current world market conditions

• may raise the cost of eventual intercity pipeline grid network construction

217. China needs an intercity natural gas pipeline grid delivery and trading system before it builds LNG plants in too many locations

(cont.d) 10 coastal locations for LNG gasification terminals may be too many. Their large number• detracts from price stability because:

Multiple potential customers linked by a pipeline drive up price;

Multiple suppliers linked by a pipeline drive down price


(cont.d)

Difficulty of LNG pricing: little linkage to oil and the need in China to create an arbitrage relationship with coal.

A gas pipeline grid enables any natural gas to be shipped to any customer and thereby facilitates natural gas trading to reduce the risk of contract over-supply or under-supply.


(cont.d)

China can have a national intercity gas pipeline grid that, as in North America, supports a robust natural gas trading market that provides • an objective basis for pricing natural gas contracts

and that

• complements and underlies the market for trading electricity and coal

Shanghai's potential as Asia's eventual natural-gas and oil trading capital.

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(cont.d)

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SOURCE http://www.eia.doe.gov/oiaf/ieo/nat_gasboxfigure.html

轮南

发展多气源

LNG

26 SOURCE: PetroChina Planning & Engineering Institute 中国石油规划总院

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0 300 公里Km

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SOURCE http://www.iea.org/textbase/work/2005/LNGGasMarkets/session_5/1_Yugao_Xu.pdf

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30Source: http://www.ieej.or.jp/aperc/final/ne.pdf

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SOURCE: http://www.ieej.or.jp/aperc/final/se.pdf

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8. Long-Distance Transportation- Cost Tradeoff between Pipeline Gas and LNG

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Source: http://www.ieej.or.jp/aperc/final/ne.pdf

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SOURCE: http://www.ieej.or.jp/aperc/final/se.pdf

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9. Grid Calculations of Cost Tradeoff between a Natural Gas Pipeline Grid and Electric Transmission take into account only transportation cost

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They don’t take into account the huge additional cost of keeping the electric transmission system reliable in the absence of sufficient natural gas pipeline grid.

Accordingly, they understate the relative cost of electric transmission and don’t recognize the benefit of gas pipeline to electric transmission system reliability

36SOURCE: http://www.ieej.or.jp/aperc/pdf/GRID_COMBINED_DRAFT.pdf

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10. China’s Electric Grid May be Planned to Use Electric Transmission without Enough Natural Gas Pipeline.

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Example: Sichuan to Guangzhou, Sichuan to Shanghai

Plan to use Ultra-High Voltage to move remote coal and hydro power.

Effort to maintain the dominant roles of hydro and coal in China’s energy mix, and China’s status as world’s biggest hydro producer and 2nd biggest coal producer.

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3000MW

7200MW

9000MW

2000MW

Hydro Power Base

Thermal Base

AC

Regional Grids Interconnection in 2005

DC

2500MW

10000MW

3000MW

1800MW

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3000MW

7200MW

9000MW

2000MW

Hydro Power Base

Thermal Base

AC

Regional Grids Interconnection in 2010

DC

10000MW

3000MW

1800MW2500MW

Possible International connection

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40

3000MW

7200MW

9000MW

2000MW

Hydro Power Base

Thermal Base

AC

Regional Grids Interconnection in 2015-2020

DC

10000MW

3000MW

1800MW2500MW

Possible International connection

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11. China South Grid Co. Interconnection to South East Asia Grid.

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42SOURCE: http://www.ieej.or.jp/aperc/pdf/GRID_COMBINED_DRAFT.pdf

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12. Calculations of Cost Tradeoff between Coal and Natural Gas for Power Generation take into account only energy cost, not reliability cost or environmental cost

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They don’t take into account the huge additional cost of keeping the electric transmission system reliable in the absence of sufficient local power generation or local reserve generation.

Accordingly, they understate the relative cost of coal and don’t recognize the benefit of natural gas to electric transmission system reliability or to the environment.

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SOURCE: http://www.ieej.or.jp/aperc/pdf/CHINA_COMBINED_DRAFT.pdf

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SOURCE: http://www.ieej.or.jp/aperc/pdf/CHINA_COMBINED_DRAFT.pdf

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13. Make Oil & Gas Transportation Policy Consistent with Electricity Transportation Policy

"Unbundle"/separate ownership of pipelines from ownership of production, just as was done in electricity in 2003.

Establish a non-discriminatory open-access tariff for pipeline usage and a right/option to finance pipeline expansion where needed by producers and users.

Independent ownership of pipelines should attract enough investment to finance a national intercity natural gas pipeline system, the only kind of major infrastructure missing in Asia except for South Korea.

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3 contradictions:• Electric reliability and cost may be compromised.

China’s plan to have a single synchronous electricity grid, the world’s largest, cannot be achieved by over-reliance on long-distance power transmission without the support of a robust intercity gas grid that fuels a sufficient amount of distributed local electric generation proven necessary by the Great 2003 Northeast North American Blackout.

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13. Make Oil & Gas Transportation Policy Consistent with Electricity Transportation Policy(cont.d)

3 contradictions (cont.d):• Natural gas cannot be efficiently marketized differently than

electricity. China’s electric transmission was “functionally unbundled” from power

generation at the end of 2002.

Eventually customers were to be functionally unbundled, creating electric transmission [State Grid Corporation of China 国家电网公司 ] as a non-discriminatory service with a publicly-posted regulated tariff reflecting (locational) congestion cost.

“Functional unbundling” overcomes classical producer and economists’ bias toward production that surrogates distribution and “the trades” to production, in resistance to the modern concept of “services economy”.

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13. Make Oil & Gas Transportation Policy Consistent with Electricity Transportation Policy (cont.d)

3 contradictions (cont.d):• Natural gas cannot be efficiently marketized differently than

electricity. (cont.d) the Energy Ministry was abolished and replaced by the State Electricity

Regulatory Commission [SERC 国家电力监管委员会 ] to

• oversee competitive market self-regulation of price negotiated directly between producers & customers

• set regulated transmission tariff.

Government announced that SERC is eventually to become State Energy Regulatory Commission [SERC 国家能监管委员会 ]. This is consistent with identical oversight of the natural gas market and pipeline grid!

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3 contradictions (cont.d):• 11th 5-year Plan promotes Inward economic development and

Coal-Bed Methane (CBM) gas development. The 11th 5-year Plan addresses China’s future as an Inward

producer/manufacturing-economy and a coastal high-wage/high-cost consumer/services-economy. A national intercity gas pipeline network addresses getting LNG to the future (Inward) economy, not just to the past (Coastal) economy.

The 11th 5-year Plan aggressively promotes development of CBM to US production/consumption levels. Non-discriminatory interconnection of coal-companies’ pipelines to a national natural gas-pipeline grid is essential to achieving this.

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14. Coordinate expansion of the electricity grid with expansion of a national intercity natural gas pipeline grid. Electric transmission lines and natural gas pipelines

are both substitutes for one another and complements of one another.

The presence of one affects the feasibility of the other. A natural gas pipeline grid affects the need/extent of

the Ultra-High Voltage 1000 kV electric transmission project promoted by State Grid Corporation and vice versa.

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Exclusive reliance on the electric grid for long-distance shipment of energy creates huge reliability cost reflecting vulnerability of the electric system to collapse by a local disturbance.

As China becomes an increasingly high-value economy, cost-effective reliability and economic efficiency become more valuable than low energy cost that is accompanied by increasing outage rate or subsidy cost to taxpayers & that just feeds demand growth by expediency and customary and judgmental rules of thumb for investment.

15. Apply least-cost planning metho- dology for energy investment & least-cost reliability standards for the design of the electricity grid

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15. Apply least-cost planning metho- dology for energy investment & least-cost reliability standards for

the design of the electricity grid(cont.d) A reliable and environmentally clean electric grid requires

a mix of small local, gas-fired generation close to the load, and not just large centralized generation close to the fuel and connected by transmission lines that add an element of weakness to the system besides the reliability of the power plant itself.

The more "nodes" a network has, the more we say the system is "distributed" and, so, the less vulnerable it is to collapse, like the principle that guided the initial development of the internet by the US military in the 1970s.

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16. Evaluate energy-related investment on the basis of capital efficiency (business-cycle risk) & location efficiency, not just on the basis of production efficiency

& meeting demand growth. As much as possible leave forecasting-risk to

individual market participants. The more decentralized the risk of forecasting error, the more accurate.

China has not experienced a business-cycle downturn. Downturns are healthy because they instill more responsible risk-based decision-making in investors, and less herd-like bubble behavior.

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& meeting demand growth. (cont.d)

Natural-gas fired power plants reduce the business-cycle capital-risk of forecast error and underutilized-capacity because they are efficient at small scale and enable capacity to be increased in small increments.

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& meeting demand growth(cont.d) Market-pricing that reflects the cost of congestion &

transportation needs to be developed to determine the economically efficient location & scale of power plants or petrochemical plants, closer to the fuel source or closer to the customer.

Publicly available statistical data-bases on econ-omics & operations need to be developed to pro-vide the wherewithall for energy industry/market participants to do effective risk analysis.

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17. Further develop market pricing of natural gas and electricity.

An electric power market is normally built on the foundation of a natural gas market which is much more liquid and easier to operate than an electricity market, as evidenced by the US natural-gas market's 15 years of stable pricing history and the world's lowest market prices of natural gas with 10 000 participants over a 100-year-old pipeline system of 1/2 million kilometers!

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17. Further develop market pricing of natural gas and electricity.(cont.d) A natural gas market requires an intercity natural gas

pipeline grid providing instantaneous direct shipping access between all suppliers & consumers.

East Asia has the world's highest delivered cost/ price of energy because it has the world's least developed regional transportation-infrastructure & markets for energy. East Asia's energy security challenge is the challenge of minimizing competitive market prices & that means developing first the necessary transportation infrastructure, then the regional markets for energy.

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Download this presentation:

In English now at http://www.blohm.cnc.net/chinapipe.ppt

In Chinese a few days later at http://www.blohm.cnc.net/chinapipehanyu.ppt

open-access intercity natural gas pipeline grid as a platform for china’s energy market economy...

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