China‘s Gas Choices Beijing, Tianjin, Hebei Burgeoning Demand Faces Midstream Bottlenecks April...

8/12/2019 Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning Demand Faces Midstream Bottlenecks April 2014

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Please refer to the important disclosures and analyst certification on inside back cover of this document, or on ourwebsite www.macquarie.com/disclosures.

ASIA EX JAPAN

Chinas Gas Choices is our thematicresearch series on Chinese gas mark ets,

featur ing granular bot tom-up wo rk on:

- Demand by province and by end-customer,inc luding associated impl icat ions on coal

demand and carbon emiss ions

- Supply by f ie ld (convent ional onsho re,offsh ore, t ight gas, shale gas, coal bed

methane), pipe impo rts, LNG

- Infrastructure trunkl ines, storage,d is t r ibut ion, impor t terminals

Beijing, Tianjin, Hebei gas growth plays

Source: Bloomberg, Macquarie Research, March 2014

Related Research

Chinas Gas Choices - Light My FireThe Chinese NGV (R)Evolution

Analyst(s)Aditya Suresh, CFA+852 3922 1265 [email protected] Hubbard, CFA+852 3922 1226 [email protected] Chiu, CFA+852 3922 1435 [email protected] Dai+852 3922 1295 [email protected] Zhao+852 3922 1293 [email protected] Lewis, CFA+852 3922 5417 [email protected] Chen+86 21 2412 9087 [email protected]

13 March 2014Macquarie Capital Securities Limited

Chinas Gas ChoicesBeijing, Tianjin, Hebei: Burgeoningdemand faces midstream bottlenecksWe take a detailed look at the gas supply-demand outlook for Beijing, Tianjin

and Hebeiprovinces with the worst air quality problems in China, and that we

expect to account for one-fourth of incremental Chinese gas demand growth

over the next decade. We foresee an implied gas shortage of c.30bcm or one-

third of the provincial gas demand targets by 2020e, with lack of midstream

infrastructure the key bottleneck (pipelines, LNG regas, and gas storage). We

conclude that if these provinces want to improve air quality, via increased gas

usage, then a wave of new midstream projects is urgently required.

An insatiable thirst for gas in Beijing, Tianjin and Hebeidemand to quadruple by 2020e

The major structural tailwind for gas demand growth in these provinces is the

growing resolve to enforce a switch from coal/oil to gas for industrial boilers,

powergen, vehicles and residential. Based on our bottom-up work, we forecast

gas demand in these provinces to grow 21% pa (almost double the national

average) to reach 70bcm by 2020e - at which point these provinces would

account for 18% of China gas demand, and would have contributed to a 70mt or

2% cut in national coal consumption.

Gas supply rising fast butmidstream capacity has to morethan double to realize government demand targets

During the same period, based on existing and confirmed new capacity, we

expect total gas supply to these provinces to grow an impressive 17% pa, but

this still falls 37% short of the provincial demand targets due to midstream

constraints. In our view, this implied shortage provides impetus to commission

Kunluns Shaanjing line-5(15bcm; on top of line-4 under construction), LNG

regas expansion projects, and/or formalize the agreement with Russia.

Structurally long the mid/downstream players

Our forecast gas shortage structurally underpins gas volume growth for Kunluns

Shaanjing pipelines at least until the end of this decade. We raise our Kunlunprice target by 10% to HK$22on higher transmission volumes and a higher

implied target PE. China Suntienbenefits from its leveraged downstream gas

exposure in Hebei and we raise our price target by 36% to HK$4.75.

A wave of new midstream projects needs to be commissioned soon

Source: WMAC, CEIC, Macquarie Research, March 2014

Company Ticker MacQ

Rating

NEW PT

(HK$)PT upside

Current

2015E

PER

Direct Benefic iar ies

Kunlun 135 HK OP 22.00 60% 9.9x

Suntien 956 HK OP 4.75 39% 12.4x

CR Gas 1193 HK OP 30.00 17% 14.8x

Beijing Enterprises 392 HK NR 14.8x

Beijing Jingneng 579 HK NR 10.1x

Indirect Benefic iar ies

Petro-King 2178 HK OP 6.90 92% 10.3x

Anton 3337 HK OP 7.50 35% 14.4x

More social obligations?

PetroChina 857 HK N 8.00 2% 7.9x

Sinopec 386 HK UP 5.00 -26% 7.6x

-30.0

-20.0

-10.0

0.0

10.0

2014 2015 2016 2017 2018 2019 2020

(bcm) Implied Gas Excess/(Shortfall) vs. Govt Targets

Base case (Existing + Confirmed Capacity) Base + Shaanjing Line-5 Base + Shaanjing Line-5 + LNG expansion

Shaanjing Line-5 + LNGregas projects have to be built

if the provincial demandtargets are to be met
https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7172710&file_name=HuntingStocks220512e117474.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7172710&file_name=HuntingStocks220512e117474.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf


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Macquarie Research Chinas Gas Choices

13 March 2014 2

Beijing, Tianjin, Hebei: Burgeoningdemand faces midstream bottlenecksIn this edition of Chinas Gas Choiceswe take a detailed look at the gas supply-

demand outlook for Beijing, Tianjin andHebeiprovinces with the worst air

quality problems in China and provinces that we forecast will account for one-fourth

of incremental Chinese gas demand growth over the next decade. This note

complements our detailed work inLight My Fire,which looked at overall China gas

supply-demand dynamics.

An insatiable thirst for gas in Beijing, Tianjin and Hebei demand to

quadruple by 2020e

As an extreme example of the air quality issues facing these provinces, PM2.5

emissions in Beijing reached 35x the WHO-recommended daily health safety

limit during peak smog last year.

These provinces target cutting annual coal consumption by 63mt or 16% by

2017 (vs. 2012), to help cut PM2.5 emissions by 25% over the same period.

The major structural tailwind for gas demand in these provinces is the growing

resolve to enforce a switch from coal/oil to gasindustrial boilers, powergen,

vehicles and residential.

We forecast gas demand from these provinces to grow 21% pa over the next

seven years (almost double the national average) to 70bcm by 2020e, at which

point these provinces would account for 18% of overall Chinese gas demand

(vs 11% today).

Gas supply rising fast but faces midstream constraints

The Kunlun Energy/Beijing Enterprises operated Shaanjing or Shaanxi-Beijing

pipelines cater to c.90% of gas demand in Beijing, Tianjin and Hebei, and will

remain the major conduit of supply (70%+) until the end of this decade.

Based only on existing and confirmed new capacity we expect total available

gas supply to these provinces to rise an impressive 17% pa, but this still falls

37% short of the provincial demand targets due to midstream constraints.

Our preferred Beijing-Tianjin-Hebei gas growth plays

If Beijing, Tianjin and Hebei want to improve air quality, via increased gas

usage, then Shaanjing line-5(on top of line-4 under construction), and the

Tangshan and Tianjin LNG regas expansion projectsmust break ground.

We raise our Kunlun price target by 10% to HK$22on higher transmission

volumes and a higher implied target PE. China Suntienbenefits from its

leveraged downstream gas exposure in Hebei, and we raise our price target by36% to HK$4.75.

Fig 1 Order of preference for Beijing, Tianjin, Hebei gas growth plays

Source: Bloomberg, Macquarie Research, March 2014. 2015E for non-rated stocks based on Bloomberg consensus

Company Ticker Mkt Cap

(US$, bn)

MacQ

Rating

Price

Local

(HK$)

NEW PT

(HK$)

PT %

changePT upside

NEW

2015E EPS

(LC)

2015 EPS

% change

2015e EPS

MacQ vs

Cons

Current

2015E

PER

Target

2015E

PER

Direct Beneficiaries

Kunlun 135 HK 14.4 OP 13.7 22.00 10% 60% 1.38 4% 19% 9.9x 15.8x

Suntien 956 HK 1.5 OP 3.4 4.75 36% 39% 0.23 3% 4% 12.4x 16.1x

CR Gas 1193 HK 7.3 OP 25.7 30.00 0% 17% 1.71 0% 19% 14.8x 17.3x

Beijing Enterprises 392 HK 11.8 NR 71.9 14.8x

Beijing Jingneng 579 HK 3.9 NR 4.7 10.1x

Indirect Beneficiaries

Petro-King 2178 HK 0.5 OP 3.6 6.90 0% 92% 0.35 0% 3% 10.3x 20.0x

Anton 3337 HK 1.6 OP 5.6 7.50 0% 35% 0.31 0% 7% 14.4x 20.0x

More soc ial obl igat ions?

PetroChina 857 HK 183.4 N 7.8 8.00 0% 2% 0.78 0% 3% 7.9x 8.0x

Sinopec 386 HK 98.5 UP 6.7 5.00 0% -26% 0.69 0% 0% 7.6x 6.0x

Inside

Beijing, Tianjin, Hebei: Burgeoning

demand faces midstream bottlenecks 2Gas demand to rise four-fold by 2020e 7Gas supply rising fast but faces

midstream constraints 20The choices to achieve government

targets 27Kunlun Energy 34

China Suntien 40

PetroChina 47

China coal sector 50

Great Wall Motor Company 52

Whats New?

Granular work on the gas demandoutlook by end-customer for Beijing,Tianjin, Hebei.

Feasibility of provincial coal demanddestruction targets.

Analysis of the gas supply options -Ordos, Tarim, West-East pipelines, coal-to-gas, LNG regas, local gasfields

Associated work looking at midstreaminfrastructure to get the gas to marketShaanjing pipelines, gas storage etc.
https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&


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13 March 2014 3

Fig 2 Beijing, Tianjin and Hebei have the worst airquality problems in China

Fig 3 providing these provinces the impetus toaccelerate the switch from coal to gas

Source: Macquarie Research, March 2014 Source: NDRC, Macquarie Research, March 2014

Fig 4 ...translating to four-fold rise in gas demandfrom these provinces by 2020e

Fig 5 However, rising demand meeting constrainedsupply due to infrastructure bottlenecks

Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014 Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014

Fig 6 resulting in an implied gas shortage of nearlyone-third of the provincial demand target by 2020

Fig 7 Shaanjing line-5, LNG regas expansionprojects all need to be commissioned

Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, WMAC, Macquarie Research, March 2014

-60%

-50%

-40%

-30%

-20%

-10%

0%

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Beijing Tianjin Hebei

(mt) Coal demand destruction targets

Absolute cut (2012-17) % cut vs 2012 levels (RHS)

0%

3%

6%

9%

12%

15%

18%

21%

0.0

10.020.0

30.0

40.0

50.0

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90.0

bcm Beijing, Tianjin, Hebei gas dmd outlook

Beijing Tianjin

Hebei NDRC estimates

% of overall China dmd (RHS)

0.0

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(bcm) Beijing, Tianjin, Hebei Demand-Supply Summary

Supply: existing + confirmed MQe DmdGovt Dmd Targets

A widening gap due to midstreaminfrastructure bottlenecks, rather

than lack of supply...

-35.0

-30.0

-25.0

-20.0

-15.0

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-5.0

0.0

5.010.0

2014 2015 2016 2017 2018 2019 2020

(bcm) Implied Gas Excess/(Shortfall) vs. Govt Targets

Base case (Existing + C onfirmed Capacity)

Base + Shaanjing Line-5

Base + Shaanjing Line-5 + LNG expansion

Shaanjing Line-5 + LNGregas projects have to be built

if the provincial dmd targetsare to be met, in our view

0

10

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90

2013 2014 2015 2016 2017 2018 2019 2020

(bcm) Beijing, Tianjin, Hebei midstream capacity required

Exist ing available capacity Confirmed addit ions

New capacit y needed Prov inc ial Dm d Target

New capacityneeded: Shaanjing 5

+ LNG expansions

Confirmed:Shaanjing 4, Keqi,

Tangshan LNG,Tianjin LNG


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13 March 2014 4

Stock ImplicationsWe see multiple stock/sector implications as a result of the burgeoning gas demand growth

outlook for Beijing, Tianjin and Hebei.

Structurally long the mid/downstream players: We raise our Kunlun price target by

10% to HK$22, on higher transmission volumes and a higher implied target PE. We nowmodel 24%/17% y/y gas transmission volume growth for Kunlun's Shaanjing pipeline

over 2014/15, above consensus at ~10-15% y/y growth.We continue to think the risk-

reward for Kunlun is compelling, with potential 60-95% base-bull fair value upside

potential versus 20% downside in a low probability bear scenario. China Suntien

(covered by Patrick Dai)benefits from its leveraged downstream gas exposure in Hebei

and we raise our price target by 36% to HK$4.75. Also China Resources Gas (covered

by Gary Chiu)will benefit from downstream gas volume growth in Tianjin.

Play upstream growth via oilfield services, rather than PetroChina or Sinopec. We

believe it is likely that PetroChina will continue to be responsible for the majority of the

new upstream gas required to satisfy Chinas rapidly growing gas demand. This role has

unambiguously destroyed shareholder value thus far and we continue to see such work

as more social duty than value creation. Our preferred upstream gas volume relatedplays remain the independent oilfield service provides Petroking (Outperform, HK$6.9

PT 92% upside) and Anton(Outperform, HK$7.5 PT 35% upside), rather than

PetroChina (Neutral rating)or Sinopec (Underperform rating). Separately,while

Datang International Power (Neutral rating)will benefit from coal-to-gas volume

growth in Beijing, the impact on group EPS is minimal.

Fig 8 Whos most exposed to Beijing, Tianjin, Hebeis insatiable gas demand?

Source: Company data, Bloomberg, Macquarie Research, March 2014. Estimated gas volume and group EPS impact for 2014e.

Company Gas volume mix (MQe) Impact of gas vols on EPS (MQe)Key assets impacted by Beijing,

Tianjin, Hebei gas growthGrowth drivers

Kunlun Energy(135 HK, Outperform, TP: HK$22)

Shaanjing pipelines 60% (line 1-3, 35bcm)

Shaanjing line 4 (15bcm) in 2015 Taangshan LNG regas (4.7bcm) - potential

asset injection

Strong anti-pollution inspired thirst for gas in

Beijing, Tianjin, Hebei... & Shaanjing pipelines is the only major

conduit of gas supply to the entire region

Suntien Green Energy(956 HK, Outperform, TP: HK$4.75)

~30% mkt share for gas & wind in Hebei Anti-pollution inspired switch away from coal

to gas/wind

China Resources Gas(1193 HK, Outperform, TP: HK$30)

159 city gas projects in 20 provinces

JV with Tianjin gas group

176 CNG/LNG gas refueling statio; ~300 by

2015

Tianjin coal/oil to gas growth

Turnaround of 50 currently loss-making

projects, to drive group earnings growth

PetroChina(857 HK, Neutral, TP: HK$8.0)

Chaangqing Gas Fields in Ordos Basin

supplies a bulk of Shaanjing vols

West-East Pipelines (Tarim, Turkmen imports)

also feeds the Shaanjing pipelines

Offtake agreement with Datang CTG for

supply to Beijing

Taangshan LNG regas terminal (4.7bcm)

While P'China would benefit from higher

upstream vols...

this is offset by losses in its gas imports and

refining businesses; and mature oil production

declines in Daqing

Sinopec(386HK, Underperform, TP: HK$5.0)

Daniudi gas field in Ordos supplies small vols

to Beijing, Tianjin, Hebei

8bcm pipeline under const to serve Hebei

(2015e)

Tianjin LNG under construction, startup in

2017e

Limited near-term impact from gas growth in

these provinces

Near-term refining remains a headwind, while

medium-term we continue to see a poor FCF

outlook

Beijing Enterprises(392 HK, Not Rated)

Shaanjing pipelines 40% (1-3, 35bcm)

Shaanjing line 4 (15bcm) in 2015

Keqi coal-to-gas (33% stake)

50 CNG retail stations

Strong government support driven by growing

environmental concern

LNG/CNG volume growth

Beijing Jingneng(579 HK, Not Rated) Largest gas-fired power supplier in Beijing 56% gas powergen mkt share

Beijing plans to become coal free by 2017

BJ Jingneng to add 2.4 GW capacity by 2017and maintain its leading gas powergen mkt

share

BTHOthers

BTHOthers

BTH BTH

Wind

BTH

BTH

Others

BTH BTHOthers

BTH

Others

BTH

Others

BTH BTH

BTH

Others

BTH

Others


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13 March 2014 5

Remain cautious on thermal coal sector. We estimate annual coal consumption in

Beijing, Tianjin and Hebei will decline 70mt or 20% by 2020e, due to the expected coal-

to-gas switch. While the absolute impact on coal demand is not large from a national

perspective (~2%), this trend supports our expectation for a slowdown in Chinas coal

demand growth to 2-3% in the next few years, and we maintain our Underperform

ratings onYanzhou Coal, Fushan and Hidili.

Further we highlight three non-rated stocks that could benefit from this forecast gas

growth in Beijing, Tianjin, Hebei: Beijing Enterprises (not rated)could directly benefit

from higher gas transmission volumes (as it controls 40% of Shaanjing pipeline) and

downstream gas volumes in Beijing; Beijing Jingneng (not rated) could benefit from

gas-fired powergen growth in Beijing; CIMC Enric (not rated) could benefit in the

medium term from LNG equipment growth.

Risk-reward outlook for our key stock picks

Fig 9 Kunlun still offers a compelling risk-reward valuation skew

Base: HK$22.0/sh @ 15.8x base HK$1.40/sh 2015e EPS, 60% TSRupside

Gas transmission:24%/17% y/y gas transmission vol growth in2014/15e, and flat EBITDA margins

Natural gas sales (incl LNG):38%/20% y/y gas sales volumegrowth, and a rebound in EBITDA margins to Rmb0.42/cu.m in2014/15 (from Rmb0.34/cu.m)

E&P:$106/109/bbl realized oil prices in 2014/15e

LNG regas:95% utilization rates, backed by take-or-pay contracts

Target 15.8x 2015 PE, 10% disc to HK/China gas sector, backed byDCF.

Bull: HK$26.8/sh @ 18x bull target PE, 95% upside

Assuming no valuation gap to the HK/China gas sector.

Bear: HK$10.9/sh @ 7.8x bear target PE, 20% TSR downside

Pipelines sold at acquisition cost; further PE suppression related tosenior exec investigations.

Risks to our base case thesis

Pipeline tariff cuts; inability to pass on rising upstream gas costs;higher than forecast capex would imply higher DD&A and a delay inachieving +ve FCFs.

Source: Datastream, Macquarie Research, March 2014

Fig 10 Suntien (covered by Patrick Dai) risk-reward shows limited downside for material potential upside

Base: HK$4.75/sh, 39% TSR upside, gas market share in Hebei fallso 15% in 2020 from 27% in 2012

Natural gas sales:16%/17% y/y gas sales volume growth in2014/15e, average ASP increase by 3% pa, and gross margins

rebound to Rmb0.48-0.49/cu.m in 2014/15 (from Rmb0.47/cu.m),gas sales vol CAGR 15% in 2014-2020.

Wind power sales:21%/26% y/y wind power revenue growth, newcapacity addition 400MW pa in 2014/15 (up from 150MW-250MWpa) , and 85%/86% EBITDA margins in 2014/15

TP from DCF implies 16.1x 2015 PE, 10% disc to HK/China gassector (from 30% disc), 17% prem to valuation derived from sum-of-the-parts.

Bull: HK$6.15/sh, 70% upside, gas market share falls to 20% in 2020

Implies 20.9x 2015PE, 20% gas sales vol CAGR in 2014-2020.

Bear: HK$3.00/sh, 20% TSR downside, gas gross margin falls toRmb0.4/cu.m by 2020

Implies 10.6x 2014PE, assuming 70% cost hike pass-through.

Risks to our base case thesis

Inability to pass on rising upstream gas costs; lower than forecastreceivable turnover imply a delay in achieving +ve FCFs.

Source: Datastream, Macquarie Research, March 2014

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MacquarieResearch

ChinasGasChoices

13March2014

6

Fig 11 Beijing, Tianjin, Hebeis Gas Supply Options

Source: WMAC, CEIC, Macquarie Research, March 2014

010203040506070

2 01 3e 2 01 5e 2 02 0e

Local fields

010203040506070

2013e 2015e 2020 e

Tangshan, TianjinLNG

010203040506070

2013e 2015e 2020e

Keqi CTG

010203040506070

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Note: All figures in bcm. Scale for all charts 0-70bcm

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13 March 2014 7

Gas demand to rise four-fold by 2020e

We expect Beijing, Tianjin and Hebei to account for one-fourth of incremental Chinese

gas demand growth over the next decade.

Beijing, Tianjin and Hebei have the worst air quality problemsin China. As an

extreme example, PM2.5 emissions in Beijing reached nearly 35x the WHO-

recommended daily health safety limit in Jan-13.

These provinces target cutting annual coal consumption by 16%by 2017 versus 2012,

in turn to help cut PM2.5 emissions by 25%during the same period.

The major structural tailwind for gas demand in these provinces is the growing resolve to

enforce the switch from coal/oil to gasindustrial boilers, powergen, vehicles,

residential.

Over the next seven years, we forecast gas demand from these provinces to grow 21%

pa, or an average increase of 7.5bcm pa, to 70bcm by 2020e, at which point these

provinces would account for 18% of overall Chinese gas demand.

Our bottom-up demand forecasts are lower than the provincial target of 84bcm by 2020e,due to more conservative assumptions.

Beijing, Tianjin and Hebei together consumed 18.2bcm of gas in 2013, representing 11% of

overall Chinese gas demand. Till the end of this decade, we forecast demand from these

regions to grow 21% cagr (well above the industry trend of 13% cagr) and reach 70bcm or

18% of overall Chinese demand by 2020e. These provinces have the highest concentration of

PM2.5 emissions in China (fig 16), and the growing resolve to improve air quality by

accelerating the switch from coal to gas is a major tailwind supporting gas demand in these

provinces.

Fig 12 Beijing, Tianjin, Hebei account for 11% ofoverall China gas demand today

Fig 13 but these provinces would be responsible

for ~25% incremental Chinese gas demand growth(2013-20e)

Source: WMAC, CEIC, Macquarie Research, March 2014 Source: WMAC, CEIC, Macquarie Research, March 2014

The Airborne Pollution Prevention and Control Action Planintroduced by Chinas

Ministry of Environment Protection in Sept-13 calls for a 10% reduction in nationwide PM2.5

emissions by 2017, from 2012 levels. The plan outlines 35 broad action points, including

cutting coal consumption in several regions, banning heavy polluting motor vehicles, and

accelerating the process of monitoring and disclosing PM2.5 readings. Over the same time

frame, Beijing-Tianjin-Hebei target cutting PM2.5 emissions by at least 25%. Towardsachieving these PM2.5 emissions cut goals these provinces target cutting coal consumption

by 63mt or 16% of 2012 coal consumption (fig 18).

Beijing6%

Tianjin2%

Hebei3%

Others89%

2013 China Gas Demand (162bcm)

0%

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(bcm) China Gas Demand Outlook

Others BeijingTianjin HebeiBTH as % of overall dmd


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13 March 2014 8

Fig 14 Beijings air quality today is as poor as it was in London and Tokyo in the 1950s

Source: Greater London Authority, Bureau of Environment of Tokyo Metropolitan Government, Macquarie Research, March 2014

Beaut i ful China The Proven Path Tow ards Cleaner Air

Macquarie Analysts: Jiong Shao, Jing Yang

Beautiful China (II) - The proven paths towards cleaner air

In The Proven Path Towards Cleaner Air, our strategy team reviews the history of air pollution controls in the United Kingdom,

United States, and Japan, to shed some light on how China may proceed to combat air pollution. They outline the necessary

changes in Chinas anti-pollution legislations and regulatory regimes for sustainable environmental protection in the coming

decades identifies, and also highlight three near-term priorities for China;

Coal Control Areasto cut emiss ions from c oal combus t ion (refer ring to the smokeless zonesin th e UK)

The designation of Coal Control Areain London and other cities were widely recognized as the most effective airpollution control measures in response to the 1952 Great Smog. The measure directly led to the energy consumption

structure shift in the country towards cleaner fuels. In January 2013, immediately after several days of severe smog,

Beijingsmunicipal government introduced Coal Control Areascalling for a ban in coal consumption in the fourth ring

road by 2014, and in the sixth ring road by 2015.

Str icter emissio n limits for indu str ial plants (referr ing to th e 1968 UK Clean Air Act) :

In mid-February 2013 the Ministry of Environmental Protection of China announced that from March 2013, stricter

emission standards would be implemented for greenfield projects of coal-fired plants/boilers, steel mills, petrochemical,

non-ferrous and chemical plants, and also for retro-fit projects of coal-fired plants/boilers, steel mills and petrochemical

plants in over 47 cities and 19 provinces. In addition the Airborne Pollution Prevention and Control Action Plan

introduced in Sept-13 calls for a 10% reduction in nationwide PM2.5 emissions by 2017, from 2012 levels.

Gasoline & diesel quality upgrades to reduce emission s from autom obiles (referr ing to the US Ultra-Low Sulp hurGasoline/Ultra-Low Sulp hur Diesel stand ards).

Since 2006, refiners in the US are required to supply Ultra-Low Sulphur Gasoline and Ultra-Low Sulphur Diesel to

reduce sulphur levels in these fuels by 90% and 97%, respectively. In Feb-2013 the State Council of China announced

to accelerate refined oil quality upgrades, by 1) strictly implementing the existing gasoline and diesel standards (with

max sulphur content at 50ppm and 350ppm), and 2) accelerating publication and promotion of new National IV & V

diesel standards and National V gasoline standards.

All these measures highlighted are a clearly step in the right direction, and serve as major structural tailwind for gas demandgrowth in Beijing, Tianjin and Hebeiprovinces with some of the worst air quality problems in China.

Tokyo 1950s Beijing todayLondon 1950s
https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7197044&file_name=BeautifulChinaII_040313e142809.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7197044&file_name=BeautifulChinaII_040313e142809.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7197044&file_name=BeautifulChinaII_040313e142809.pdf


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13 March 2014 9

Fig 15 Beijing, Tianjin, HebeiGas, Coal, PM2.5 targets

Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014.Note: If an official provincial gas demand target is unavailable, we include estimates by local gas planning authorities, gas distribution companies etc.MacQ demand forecasts lower than provincial estimates due to more conservative assumptions.

Fig 16 Beijing, Tianjin and Hebei have the highestconcentration of PM2.5 emissions in China

Fig 17 recent PM2.5 emissions cut targets, whilst astep in the right direction, still leave emissions in theseprovinces well above the WHOs air quality guidelines

Source: Greenpeace, Macquarie Research, March 2014 Source: MEP, WHO, Greenpeace, Macquarie Research, March 2014

Fig 18 Beijing, Tianjin and Hebei advocate the coalto gas switch and target cutting annual coal

consumption by 16% versus 2012 levels...

Fig 19 translating to a potential four-fold rise to gas

demand growth from these provinces by 2020e

Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, WMAC, Macquarie Research, March 2014

PM2.5

emissions

reduction 2012-

17e

Coal dmd

destruction

target 2012-17e

(mt)

Gas Dmd 2013A

(bcm)

Gas Dmd

Target 2015

(bcm)

Gas Dmd

Target 2017

(bcm)

Gas Dmd

Target 2020

(bcm)

Gas Dmd

Growth (2013-

17 cagr)

Gas Dmd

Growth (2013-

20 cagr)

Beijing 25% 13.0 9.6 20.0 24.0 30.0 26% 18%

Tianjin 25% 10.0 3.4 16.0 20.0 23.6 56% 32%

Hebei 25% 40.0 5.2 4.0 15.0 30.0 30% 28%

Combined Target 25% 63.0 18.2 40.0 59.0 83.6 34% 24%

MacQe 45.3 18.2 33.7 47.0 70.5 27% 21%

Guangdong

Shandong

Jiangsu

Hebei

Henan

Beijing

PM2.5>40g/m3 PM2.5


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13 March 2014 10

Beijing

Beijing is currently the fifth-largest consumer of gas in China, and demand has grown 13%

cagr over the past five years (2008-13), broadly in line with the industry growth trend. The

severe smogs in Beijing in January 2013, when PM2.5 emissions in Beijing touched 886/

cu.m or 35x the WHO- recommended health safety levels, raised concerns domestically and

internationally. Recent official rhetoric and policy suggest Beijing is getting more serious onsolving its pollution problems, and as things stand gas is the only viable substitute for coal in

Beijing. By 2017, the NDRC (National Development and Reform Commission) expects Beijing

to cut annual coal consumption by at least 13mt (56% versus the 2012 baseline), and projects

gasdemand to rise to 24bcm (2.5x 2013 levels) or 35% of the local energy mix (from 14% in2013). Based on our bottom-up work, we forecast Beijings gas demand to rise to 18.6bcm by

2017 (17% cagr 2013-17e) and 25.1bcm by 2020 (15% cagr 2013-20e), lower than the

provincial targets due to more conservative assumptions. Our work indicates the provincial

coal demand destruction targets are achievable; we forecast a 15.5mt cut to coal demand

versus the target of at least 13mt by 2017.

Fig 20 Beijing gas demand to grow 15% cagr 2013-

20e

Fig 21 Incremental gas demand growth to peak over

the next two years

Source: Beijing DRC, CEIC, Macquarie Research, March 2014 Source: CEIC, Macquarie Research, March 2014

PowergenBeijing currently has 4.2GW of gas-fired powergen capacity and targets

having 7.2GW capacity by end-2014, rising to 8.6GW by end-2017. Beijing Jingneng is

the main gas-fired IPP in Beijing and is set to add 2.5GW of capacity by 2017, followed

by Datang (1.4GW NW centre), and Guohua (0.7GW NE centre). By the end of 2015,

Beijing plans to have decommissioned all four existing coal-fired power plants with a

combined 2.7GW capacity. While the cost of gas-fired powergen in Beijing is more

expensive than coal, the on-grid tariff for gas is now ~65% more than that for coal.

Further, the Beijing government also provides subsidies (~Rmb0.05/KWh) to broadlyensure that the power plant operator makes an 8% IRR. Based on the gas-fired

powergen capacity additions, and assuming Beijing continues to generate one-third of its

electricity needs locally, we forecast gas demand from powergen to rise to 9.3/12.6bcm

by 2017/20e, from 4.4bcm in 2013a, and during the same time this results in a 11.9mt cut

in coal consumption.

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

(bcm) Beijing Gas Demand

Industrial Powergen Residential NGV Other

ProvincialTarget

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016 2017

(bcm) Beijing Incremental Gas Demand Growth

Beijing Downstream GasVolume Split

Source: Company data,Mac quarie Research, March 2014

Beijing

Enterprises


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13 March 2014 11

Fig 22 Gas to play an increasingly important role inBeijings energy mix

Fig 23 and higher powergen costs offset by higheron-grid tariff and subsidies

Source: Beijing DRC, CEIC, Macquarie Research, March 2014 Source: Beijing Jingneng, Beijing DRC, Macquarie Research, March 2014

IndustrialBeijing targets banning coal consumption from industrial boilers in the 4th

ring road by end-2014, and the 6thring road by end-15. To date 93 boilers have been

retrofitted to use gas, and over the next couple of years another 44 boilers should be

converted (note that the typical size of an industrial boiler in Beijing is nearly three times

the nationwide average). In addition to the demand growth due to the coal-to-gas switch,

historically industrial gas demand has had an extremely strong correlation with GDP

growth (R298%). Consequently, if we assume 7% sustainable growth long-term GDP,

we forecast underlying industrial gas demand to grow at 10% pa. Put together, we

forecast industrial gas demand to rise to5.6/7.4bcm in 2017/20e, from 2.9bcm in 2013a.

ResidentialIn 2013, 66% of Beijings 21mn population had access to gasnearly 2x

the nationwide average. By 2017, Beijing targets to increase the residential gas

penetration rate to 80%. Further, with rising household incomes, gas demand per capitahas been growing at 2% pa over the past five years. Consequently as more households

get access to gas and with rising consumption per capita, we forecast residential gas

demand to rise to 1.7/2.2bcm by 2017/20e, from 1.1bcm in 2013a.

NGVsBeijing targets converting two-thirds of its 21k bus fleet to gas or EV by 2015;

and also targets 200k new energy vehicles by 2017e. Over the next seven years, we

assume a steady ramp-up in LNG/CNG truck/buses to 42k by 2020e or 20% of the

provincial commercial vehicle fleet (from 3.5k in 2013), and 50k CNG-based taxis in

2020e (from 6.5k today). Consequently, we model gas demand from NGVs to grow to

1.4/2.2 bcm in 2017/20e, from 0.4bcm in 2013a.

Fig 24 Beijing gas demand growth led by new gas-fired powergen capacity and conversion of industrial boilers

Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

(bcm)(TWh) Beijing powergen outlook

Coal Gas

Imported f rom other prov inces Powergen gas dmd (RHS)

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Rmb/KWh Beijing powergen tariffs

Coal-fired on-grid tariff Gas-fired on-grid tariff

Gas-fired total settlement tariff

Tariffpaid by

local grid

Subsidyfrom local

govt

6.89.6

3.6

1.40.8 0.3

15.3

4.6

3.1

1.30.8

25.1

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2010a 2013a Powergen Industrial NGV Residential 2015e Powergen Industrial NGV Residential 2020e

(bcm) Beijing Gas Demand Growth Outlook

3.4GW ofnew capacity

added

~30 largescale boilersconvt to gas

Ramp uptwds

200k"NewEnergy

Vehicles" by2017

Resipenetrationincreases t o73% in 2015,from 66% in

2013

5GW of newcapacity

added; gasramps to40% mkt

share

10% pa GDPdriven

industrialdmd growth

LNG reaches20% CV

penetrationby 2020e

Resipenetrationincreases to

90% by2020e

Provincialtarget

Provincialtarget


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13 March 2014 12

Fig 25 Beijing gas demand growth summary outlook

Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+

Tianjin

120km south of Beijing, the coastal province of Tianjin currently consumes one-third the gas

of Beijing. However, Tianjin is set to quickly close the gas consumption gap to Beijing and

local authorities have aggressive plans in place to quadruple gas demand over the next two

years to 12.3bcm by 2015. By 2020, Tianjin expects gas demand to rise to 23.6bcm and

account for 20% of its primary energy mix. We conservatively assume a more gradual ramp-

up in gas demand to 13.3/19.3bcm in 2017/20e, implying 28% cagr (2013-20e). We forecast

an 8.7mt cut to annual coal consumption by 2017, slightly lower than the 10mt provincial

target.

Fig 26 Tianjin gas demand to grow 6x by 2020e Fig 27 Tianjin Incremental Gas Demand Growth

Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, Macquarie Research, March 2014

PowergenTianjin commissioned the 250MW GreenGen plant in 2013; Chinas coal

gasification powerplant (integrated gasification combined cycle; coal is converted to

syngas and then combusted). GreenGen is funded by a group of power companies led by

Huaneng. By end-2015 Tianjin targets to have more than 5GW of gas-fired capacity with

Huaneng, Datang, Guodian, Huadian, and China Power New Energy all bringing on

stream new capacity. Beyond these known capacity addition projects, we assume

another 2GW of capacity to be added between 2017-20e. Consequently, we forecast gas

demand from powergen to rise to 6.3/9.0bcm by 2017/20e, from 0.7bcm in 2013a.

BEIJING 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20

CAGRComments

Industrial (bcm) 0.3 0.4 0.5 0.7 0.7 0.9 0.9 1.5 2.9 3.7 4.4 5.1 5.6 6.1 6.7 7.4 14% Ban coal boilers 4th ring road 2014; 6th ring road 2015Cumulative # of boilers converted 30 93 115 125 137 137 137 137 137

Powergen (bcm) 0.8 1.2 1.0 1.8 2.4 2.9 3.1 3.6 4.4 5.6 8.0 8.8 9.3 10.5 11.5 12.6 16% 40% gas mkt share by 2020, from 16% todayTotal electricity consumption TWh 57 62 68 71 76 83 85 87 90 92 94 97 99 102 104 107 3%

% locally produced 38% 32% 33% 33% 32% 32% 31% 33% 33% 33% 33% 33% 33% 33% 33% 33%

...Coal TWh 15.1 13.5 16.1 17.4 17.8 20.2 16.4 17.0 15.2 11.8 4.8 2.8 2.0 0.0 0.0 0.0

...Gas TWh 6.3 6.3 6.3 6.3 6.3 6.6 9.9 12.1 14.7 18.8 26.6 29.4 31.0 35.0 38.5 42.0

% Gas mkt share 11% 10% 9% 9% 8% 8% 12% 14% 16% 20% 28% 30% 31% 34% 37% 39% Target 35% of power consumption mix by 2017e

Gas-fired powergen capacity GW 1.8 1.8 1.8 1.8 1.8 1.9 2.8 3.4 4.2 5.4 7.6 8.4 8.9 10.0 11.0 12.0

Residential (bcm) 0.6 0.8 0.9 0.9 1.0 1.0 1.0 1.1 1.2 1.3 1.4 1.6 1.7 1.9 2.1 2.2 10% 90% resi penetration by 2020, from 66% in 2013Population w access to gas (mn) 9 10 10 11 11 13 13 14 14 15 16 17 18 19 21 22

% popln w access to gas 57% 60% 60% 60% 61% 66% 66% 66% 66% 69% 73% 76% 80% 83% 87% 90%

Gas dmd per capita w access 64 88 90 86 86 79 79 81 83 86 88 91 94 97 100 103 3% Grows with rising urbanization

NGVs (bcm) 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.6 0.9 1.2 1.4 1.7 1.9 2.2 28% Half of target 200K new energy vehicles gas-based# of LNG trucks, buses ('000) 4 9 15 20 26 31 37 42 Target 2/3rd of 21k bus fleet to be gas/EV by 2015

# of CNG taxis, light vehicles ('000) 2 7 12 17 23 28 34 39 50

Others (bcm) 1.4 1.3 1.3 1.6 1.7 1.8 1.7 1.9 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Beijing Gas Demand (bcm) 3.1 3.8 3.9 5.2 6.1 6.8 6.9 8.4 9.6 12.0 15.3 17.2 18.6 20.8 22.9 25.1 15%Incremental demand y/y (bcm) 0.8 0.1 1.3 0.9 0.8 0.1 1.5 1.1 2.4 3.3 1.9 1.4 2.2 2.1 2.2

Y/Y growth % 25% 2% 33% 16% 12% 1% 22% 14% 25% 28% 13% 8% 12% 10% 10%

Gas Dmd Targets/Research Institute Ests (bcm) 9.6 11.5 20.0 24.0 30.0

of which winter (Nov-Mar) gas dmd ests (bcm) 4.7 5.3 6.6 7.8 9.9 12.1 16.3 50%+ annual dmd in winter months mid-Nov to mid-Mar

Cumulative coal dmd destruction from gas (mt) 3.5 7.0 12.8 14.8 15.5 17.0 17.0 17.0

Overall coal dmd destruction target 2012-17 (mt) 13.0 Target 3mt cut in 2014; 13mt between 2012-17e

0.0

4.0

8.0

12.0

16.0

20.0

24.0

(bcm) Tianjin Gas Demand


NDRCest

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016 2017

(bcm) Tianjin Incremental Gas Demand Growth

Tianjin Downstream GasVolume Split

Source: Company data,Macquarie Research, March 2014

CR

Gas/Tianjin

Gas JV


13/56


13 March 2014 13

IndustrialTianjin plans to retrofit 132 coal-fired boilers to gas by end-2015, and

expects gas demand from these boilers to reach 3.58bcm in 2015. Further, Tianjins Gas

Heat Planning Institute expects a steady increase in the use of gas for central heating/

cooling by commercial users to 1.74bcm in 2015. In addition, if we assume GDP-driven

10% pa underlying industrial gas demand growth (similar to that for Beijing), we forecast

gas demand from industrial to increase to 4.7/6.2bcm by 2017/20e, from 2.1bcm in

2013a.

ResidentialAs on end-2013, 48% of Tianjins 14mn population had access to gas.

Assuming the residential penetration rate rises gradually to 80% by 2020e (in line with

Beijings target but with a three-year lag), and assuming 3% pa increase in gas demand

per capita, in line with the trend over the past three years, we model residential gas

demand to rise to 0.9/1.3bcm in 2017/20e, from 0.5bcm in 2013a.

NGVsTianjin plans to have more than 20k NGVs by 2015. We model the number of

LNG trucks/buses in Tianjin to rise to 58k by 2020, implying a commercial vehicle NGV

penetration rate of 20% by 2020 (at the top end of NDRCs target of a 10 -20% nationwide

commercial vehicle penetration rate by 2020 for NGVs), from less than 1% today. In

addition we assume the number of CNG taxis increases to 25k by 2020, from c.3k today,

implying an 80% taxi penetration rate. Put together, we forecast NGV gas demand to riseto 1.4/2.5bcm in 2017/20e, from essentially zero today.

Fig 28 Tianjin gas growth also led by new powergen and industrial conversions

Source: Tianjin Gas Heat Planning Institute, C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+

2.3 3.4

3.4

1.40.7 0.2

9.1

4.9

3.1

1.70.5

19.3

0.0

5.0

10.0

15.0

20.0

25.0

2010a 2013a Powergen Industrial NGV Residential 2015e Powergen Industrial NGV Residential 2020e

(bcm) Tianjin Gas Demand Growth Outlook

3GW of newcapacityadded

50 mediumscale boilersconvt to gas

LNG

reaches5% CVpenetration

Resipenetrationincreases t o

58% in 2015,from 48% in2013

5GW of newcapacity

added; gasramps to34% mkt

share

10% pa GDPdriven

industrialdmd growth

LNG reaches20% CV

penetrationby 2020e

Resipenetrationincreases t o

80% by2020e

Provincialtarget

Provincialtarget

TIANJIN 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20

CAGRComments

Industrial (bcm) 0.4 0.5 0.7 0.9 0.9 1.3 1.5 1.7 2.2 2.9 3.6 4.6 5.0 5.5 6.1 6.7 17% Conv of 163 boilers to gas & GDP led organic growth

Cumulative # of boilers converted 25 40 55 81 106 132 163 163 163 163 163



Coal TWh 34 34 37 37 39 56 57 57 58 55 50 47 46 46 44 42

Gas TWh 2 2 2 2 2 2 2 2 2 7 14 18 21 23 26 30

% Gas mkt share 4% 4% 3% 3% 3% 3% 2% 2% 3% 10% 17% 23% 26% 27% 31% 34%

Annualised powergen capacity (GW) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 2.1 3.9 5.3 6.0 6.5 7.5 8.5 Target >5GW gas-fired powergen by end-15e

Residential (bcm) 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.6 0.6 0.7 0.8 0.9 1.0 1.1 1.3 13% 80% resi penetration by 2020, from 49% in 2013Population w access to gas (mn) 4 5 6 6 6 6 6 6 7 8 9 10 10 11 12 13 9%

% popln w access to gas 39% 44% 53% 50% 46% 44% 44% 45% 49% 54% 58% 63% 67% 71% 76% 80% Assuming resi penetration similar to Beijing by 2020

Gas dmd per capita 76 66 58 64 68 72 73 75 78 80 82 85 87 90 93 96 3%

NGVs (bcm) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.7 1.1 1.4 1.8 2.1 2.5 80% 20% LNG penetration by 2020, from essentially zero# of LNG trucks, buses ('000) 0 1 9 17 25 34 42 50 58

# of CNG taxis, light vehicles ('000) 1 3 6 10 14 18 22 26 30

Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Tianjin Gas Demand (bcm) 0.9 1.1 1.4 1.7 1.8 2.3 2.6 2.8 3.4 6.1 9.1 11.7 13.3 14.8 16.8 19.3 28%Incremental demand y/y (bcm) 0.2 0.3 0.3 0.1 0.5 0.3 0.2 0.6 2.7 3.0 2.6 1.7 1.5 2.0 2.5

Y/Y growth % 24% 27% 18% 8% 27% 11% 10% 21% 79% 50% 28% 14% 11% 14% 15%

Gas Dmd Targets/Research Institute Ests (bcm) 3.4 12.3 16.8 23.6

of which winter (Nov-Mar) gas dmd ests (bcm) 1.0 1.2 3.2 4.7 6.8


Overall coal dmd destruction target 2012-17 (mt) 10.0 Target 10mt cut between 2012-17e


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13 March 2014 14

Hebei

Hebei is the largest consumer of coal in China, and unsurprisingly its air quality problems are

worse than that in Beijing and Tianjin. In 2013, Hebei announced a multi-pronged strategy to

cut PM2.5 emissions by at least 25% and annual coal consumption by 40mt by 2017,

including: decommissioning cement and steel factories (seeEnvironmental restrictions curb

North China Output,6-Jan);retrofitting all coal-fired boilers in Shijiazhuang, Tangshan etc;and bringing on stream new gas and wind power plants. Hebei expects its gas demand to rise

to 15bcm by 2017, from 5.2bcm in 2013. Based on our bottom up work, we model 15.0/

26.1bcm in 2017/20e, implying 26% cagr between 2013-20e. We estimate the switch from

coal to gas alone would cut Hebeis annual coal consumption by 20mt by 2017, or half the

provincial target.

Fig 29 Hebei gas demand to grow 5x to 26bcm by2020e with industrial and powergen accounting for abulk of growth

Fig 30 Hebei incremental gas demand growth drivenby conversion of coal-fired boilers

Source: NDRC, Interfax, C1 Energy, Macquarie Research, March 2014 Source: NDRC, Interfax, C1 Energy, Macquarie Research, March 2014

PowergenShijiazhuang, the capital city of Hebei province, issued its own five-year

plan on gas in Oct-13, calling for the construction of three new gas-fired power plants (of

which two would be constructed by Huadian) with a combined capacity of 2.4GW and an

expected 2015 start-up. Further, we assume an additional 2.5GW of capacity gets

commissioned across Hebei between 2016-20e. Consequently, we forecast gas demand

from powergen to rise to 6.4bcm by 2020e, from 0.5bcm in 2013a, but this would still

imply that gas accounts for only 6% of Hebeis powergen mix by 2020e.

IndustrialOverall Hebei plans to retrofit all 1765 coal-fired boilers in the province to

gas by 2017. By 2013, nearly 700 boilers had been converted, with 329 conversions

coming in 2013 alone. For instance, Shijiazhuang has already converted its ~600 coal-fired boilers to gas by end-2013, and targets all petchem plants to use gas for its local

electricity needs by 2017; Tangshan plans to convert all its coal-fired boilers to gas by

end-2015 and targets the penetration rate for gas among industrial customers to rise to

30%/80% by 2015/20e; and Handan, Xintai, Baoding etc. have similar conversion targets

in place. We conservatively assume another 800 boilers are converted by 2020e; taking

the total conversions to 1500, below the 1765 target by 2017. This then equates to 21%

cagr industrial gas demand growth to 12.6bcm by 2020e.

ResidentialAs of end-2013, only 16% of Hebeis 74mn population had access to gas,

nearly half the nationwide average. We assume the residential penetration rate rises

gradually to 50% by 2020e, and gas demand per capita increases 2% pa (similar to that

in Beijing and Tianjin). Consequently we expect residential gas demand to rise to 2.0/

3.5bcm in 2017/20e, from 0.8bcm in 2013a.

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

(bcm) Hebei Gas Demand


NDRCest

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016 2017

(bcm) Hebei Incremental Gas Demand Growth

Hebei Downstream GasVolume Split

Source: Company data,Macquarie Research, March 2014

China

Suntien
https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7221127&file_name=MacquarieCommoditiesComment060114e168121.pdf&uid=MTMyNTM2&


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13 March 2014 15

NGVsWe havent come across any specific NGV targets for Hebei, apart from noting

that Shijiazhuang plans to add 30/105 LNG/CNG stations by end-2016. We assume 5%

of Hebeis 1.4mn truck fleet converts to LNG by 2020; note that the NDRCs nationwide

target is 10-20% NGV penetration rate for commercial vehicles by 2020. We model NGV

gas demand to grow to 2.1/3.5bcm in 2017/20e, from 0.6bcm in 2013a.

Fig 31 Hebei Gas Demand Growth Outlook

Source: C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+

Beijing-Tianjin-Hebei summary demand outlook

Putting things together, we expect overall gas demand in Beijing, Tianjin and Hebei to

grow by an average increase of 7.5bcm pa to 47/70bcm in 2017/20e, implying 21% cagr

between 2013-20e. By 2020, we expect these provinces will account for 18% of overall

Chinese gas demand, from 11% today.

Our bottom-up demand forecasts are lower than the provincial target of 84bcm by 2020e,

due to more conservative assumptions.

2.95.2

2.30.6 0.5

0.6

9.3

7.1

5.3

2.4

2.1

26.1

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2010a 2013a Industrial Powergen NGV Residential 2015e Industrial Powergen NGV Residential 2020e

(bcm) Hebei Gas Demand Growth Outlook

0.5GW ofnew

capacityadded in

2015

250 smallscale

boilersconvt to

gas

LNGreaches2% CV

penetration

Resipenetrationincreases to25% in 2015,from 16% in

2013

LNG reaches5%CV

penetrationby 2020e

Resipenetrationincreases to

50% by2020eProvincial

target

Provincialtarget500 small

scaleboilersconvt +10% pa

GDP drivengrowth

5GW of newcapacity

added; gas

mkt shareincr to 6%

HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20

CAGRComments

Industrial (bcm) 0.8 1.0 1.1 1.5 1.7 2.1 2.5 2.8 3.2 4.4 5.5 6.6 7.9 9.3 10.9 12.6 22% Conv of ~1000 remaining boilers to gas by 2017eCumulative # of boilers converted 811 961 1061 1161 1261 1361 1461 1561



Coal TWh 130 143 154 157 165 185 212 217 216 220 222 222 224 224 225 226

Wind TWh 0 0 0 2 6 10 15 17 20 22 24 26 28 31 33 35

Gas TWh 0 0 0 1 1 1 1 2 2 2 4 8 9 14 18 21

% Gas mkt share 0% 0% 0% 0% 0% 0% 0% 1% 1% 1% 1% 2% 3% 4% 5% 6%

Annualised powergen capacity (GW) 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.5 0.5 0.5 1.1 2.2 2.7 4.1 5.1 6.1 2.4GW additions in Shijiazhuang from 2015

Residential (bcm) 0.1 0.0 0.0 0.1 0.3 0.4 0.5 0.6 0.8 1.1 1.4 1.7 2.0 2.4 2.9 3.5 24% 50% resi penetration by 2020, from 16% in 2013Population w access to gas (mn) 1 2 3 6 7 8 9 10 12 15 19 23 27 32 36 43 20%

% popln w access to gas 2% 3% 5% 8% 10% 12% 13% 13% 16% 20% 25% 30% 34% 39% 43% 50%

Gas dmd per capita 56 18 11 11 42 49 53 64 66 68 70 72 74 77 79 81 3%

NGVs (bcm) 0.0 0.0 0.0 0.1 0.2 0.2 0.3 0.5 0.6 0.7 1.2 1.7 2.1 2.6 3.1 3.5 28% 5% LNG penetration by 2020, from essentially zero# of LNG trucks, buses ('000) 5 17 28 40 51 63 74 86 Assuming 5% LNG truck penetration in 2020

# of CNG taxis, light vehicles ('000) 5 9 13 16 20 24 28 30

Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Hebei Gas Demand (bcm) 0.9 1.1 1.2 1.7 2.3 2.9 3.5 4.6 5.2 6.8 9.3 12.4 15.0 18.7 22.2 26.1 26%Incremental demand y/y (bcm) 0.2 0.1 0.5 0.6 0.6 0.5 1.1 0.7 1.6 2.4 3.1 2.6 3.7 3.5 3.8

Y/Y growth % 20% 10% 42% 35% 28% 19% 30% 15% 30% 36% 34% 21% 25% 19% 17%

Gas Dmd Targets/Research Institute Ests (bcm) 5.2 15.0 30.0

of which winter (Nov-Mar) gas dmd ests (bcm) 2.1 2.5 7.5 13.0


Overall coal dmd destruction target 2012-17 (mt) 40.0 Target 8mt reduction in 2014; 40mt between 2012-17e (incl wind)


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13 March 2014 16

Fig 32 Gas demand from Beijing, Tianjin and Hebei to reach 70bcm+ by 2020, or 18% of overall Chinesedemand

Source: NDRC, C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+

Demand seasonality and gas storage

Gas demand in Beijing, Tianjin and Hebei peaks in winter (mid-Nov to mid-Mar) due to higher

demand from residential and commercial users for space heating needs. To get a sense of

the scale of gas demand seasonality in Beijing, Tianjin, Hebei, in fig 33 we show the

estimated monthly average gas demand split between winter and non-winter months, and

highlight that typically demand for gas in winter months is ~2.5x that in summer months.

Further, since residential users receive top priority in terms of gas supply allocation, these

provinces are forced to rationalize supply to industrial customers, due to the under-

utilization/lack of gas storage facilities. For example, in 2013, gas supply to chemical fertilizerproducer Cangzhou Dahua and auto maker Great Wall Motor was curtailed due to the surge

in winter gas demand (see Great Wall Motor Company - Running low on gas).

4.912.0

18.233.7

70.5

5.7

5.74.0

9.8

10.2

16.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2005a 2010a 2013a Beijing Tianjin Hebei 2015e Beijing Tianjin Hebei 2020e

bcm Beijing, Tianjin, Hebei Gas Demand Outlook

BEIJING, TIANJIN, HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202013-20

CAGRComments

Total Demand (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 24.8 33.7 41.3 47.0 54.3 62.0 70.5 21%

Incremental demand y/y (bcm) 1.2 0.5 2.0 1.6 1.9 0.9 2.8 2.4 6.7 8.8 7.6 5.7 7.3 7.6 8.6 Avg 7.5bcm pa incremental gas dmd growth

Y/Y growth % 24% 8% 31% 18% 18% 7% 22% 15% 37% 35% 23% 14% 16% 14% 14%

% of overall China gas demand 10% 11% 9% 11% 11% 11% 10% 11% 11% 13% 15% 17% 17% 17% 18% 18%

Gas Dmd Targets/Research Institute Ests (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 25.2 32.3 44.1 55.8 65.1 74.3 83.6 MQe lower due to conservative industry/power assumptions

of which winter (Nov-Mar) gas dmd ests (bcm) 8.4 10.3 24.3 36.2

Cumulative Coal Dmd Destruc tion (m t) 9.3 17.4 29.8 39.4 45.3 54.5 61.9 69.5

% of total Beijing-Tianjin-Hebei coal dmd 2% 5% 8% 11% 13% 16% 19% 22%

Overall coal dmd destruction target 2012-17 (mt) 63.0

Gas supply from existing sources (bcm) 12.0 12.9 15.8 18.2 25.0 31.8 33.1 34.5 35.9 37.3 38.7 11% Mainly vols from Shaanxi-Beijing

Risked incr vols via WEP 3.6 4.5 7.2 9.8 12.5 15.2 17.9 Higher allocation of WEP volumes

Total risked supply to Beij ing-Tianjin-Hebei (bcm) 12.0 12.9 15.8 18.2 28.5 36.2 40.3 44.4 48.4 52.5 56.6 18%

MacQ - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.7 2.6 -1.0 -2.6 -5.9 -9.4 -13.9 Excess implies gas diverted to other provinces

Govt Targets - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.3 3.9 -3.8 -11.4 -16.6 -21.8 -27.0

Gas to play a major role towards achieving coal dmd

destruction targets
https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdfhttps://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7221365&file_name=GreatWallMotor080114e168376.pdf


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13 March 2014 17

Fig 33 Beijing, Tianjin, Hebei gas demandseasonalityavg monthly gas demand in wintermonths typically ~2.5x than in other months

Fig 34 Gas storage capacity is set to double over thenext two years

Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, PetroChina, Macquarie Research, March 2014

Fig 35 better utilization of newly commissionedstorage facilities should help alleviate the winter gasshortages

Fig 36 and the recently commissioned LNG regasterminals (Tangshan, Tianjin FLNG) provide additionalflexibility to cater to swing demand

Source: NDRC, PetroChina, Macquarie Research, March 2014 Source: WMAC, Macquarie Research, March 2014

To cater to swing demand in Beijing, Tianjin and Hebei, currently there are two gas

storage facilities (Dagang and Huabei) with a combined 5bcm working storage capacityat end- 2013, or 28% of annual gas demand. For perspective, storage typically accounts

for 10-20% of demand in most developed gas markets. However in 2013, only 2.3bcm of

gas was supplied to these provinces from storage (mainly from Dagang), or 13% of

annual demand. In turn the main reason for the apparent underutilization of storage was

that Huabeis Suqiao expansion project was only commissioned towards the end of the

gas injection season. Further, over the next two years we expect another ~5bcm of

storage capacity to be added in Huabei (Suqiao phase-2, Daxingli phase 1-2) taking total

gas storage capacity to 10bcm by 2015e. Assuming an average 70% utilization rate

for these gas storage facilities, we estimate volumes supplied via storage to

Beijing, Tianjin and Hebei would account for ~20% of annual demand.

In addition we note that the Tangshan and Tianjin LNG regasterminals that started in

Nov-13 should also help cater to swing demand in these provinces.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013

(bcm) Beijing, Tianjin, Hebei avg monthly gas demand

Winter (mid-Nov to mid-Mar) Other Months

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

2

4

6

8

10

12

2012 2013 2014e 2015e

(bcm) Gas storage working capacity

Dagang Huabei Utilization (RHS)

Apparent fall in 2013, dueto commissioning of

Huabei twds end of thegas injection season

0%

5%

10%

15%

20%

25%

0

1

2

3

4

5

6

7

8

2012 2013 2014e 2015e

(bcm) Gas storage working capacity

Gas s upplied from s torage % of BTH g as dmd (R HS)

Gas supplied from storageshould increase to 20% ofannual dmd in 2014/15; in

line with the trend indeveloped gas markets.. .

0%

5%

10%

15%

20%

25%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2012 2013 2014e 2015e

(bcm) LNG regas volumes

Tangshan Tianjin % of BTH gas dmd


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13 March 2014 18

Further, in Jan-14, the NEA published a circular calling for more active management and

increased supervision over local gas supply. In Feb-14, the NEA said that it would

monitor fair/open access to the oil and gas pipeline network and storage facilities

in order to ensure stable supply to the market . To this end the NEA has also set up

six regional supervisory bureaus in North China. In our view open access (if implemented

properly) would be a major positive, since it would provide further gas supply visibility.

Implications for coal demand

Based on the forecast switch from coal-fired boilers to gas, and simultaneous decline in

market share for coal-fired powergen, we forecast coal demand from Beijing, Tianjin and

Hebei to cumulatively decline by 70mt by 2020e (target 63mt by 2017), equivalent to 22% of

coal demand from these provinces. Our base case assumptions imply that Beijing and Tianjin

would largely meet annual coal consumption targets by 2017 solely from increasing the share

of gas in the energy mix, whilst gas would only partly help Hebei wean off its obsession with

coal.

Fig 37 Annual coal demand destruction of 70mt, or 2% of total China demand

Source: CEIC, NDRC, Macquarie Research, March 2014

We estimate that coal consumption in Beijing, Tianjin and Hebei were around 21.5mnt,

50mnt, and 250mnt respectively in 2013. Cutting 63mnt coal consumption by the end of 2017

implies 20% decline from current levels. However, given the fact that the Beijing-Tianjin-Hebei

region only accounted for 8.3% of Chinas total coal consumption in 2013, the impact on coal

demand is not large from a national perspective, and is in line with our forecast that Chinas

coal demand growth will slow down to 2-3% in the next few years.

Oversupply in 2014/15e and mid-term price fluctuation at cost curve: despite slower

demand growth, oversupply may remain in the mid-term due to high capacity growth in

Shanxi. According to Shanxi Coal Mine Safety Supervision, 524 mines are under construction

in the province. Including these, Shanxi has a capacity of 1.2bnt (vs. 910mnt output in 2012).

80 of the 524 mines may start to contribute by 2013 y/e (70-80mnt capacity), with the majority

being coking coal. Under the current weak prices/strict safety rules, there may be delays in

construction; yet these extra capacities should put a ceiling on coal prices, especially coking

coal prices. Mid-term price is likely to fluctuate around the cost curve at Rmb 550-600/t.

Cost curve to drop further in mid-term:Industry consultants CCTD and Fenwei believe

there is room for cost cuts, especially admin costs. Production costs may still be cut by

RMB30-50/t in 2014-15F. Railway bottlenecks are likely to be solved by end-2015, when

major new railways are due to be completed. Resources tax may have limited impact on

thermal coal but the impact may be big for coking coal, likely around 3-5% of mine-mouth

price. However, the government will probably clear up other fees and levies by the end of this

year, so the incremental burden might be limited to ~Rmb 5/t for thermal coal per CCTD and

China Coal. Again, the impact to coking coal may be much bigger.

0%

5%

10%

15%

20%

25%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2013 2014 2015 2016 2017 2018 2019 2020

(mt) Cumulative coal demand destruction

Beijing Tianjin Hebei Provincial Target (absolute cut) % of BTH coal dmd (RHS)


19/56


13 March 2014 19

Cautious on thermal coal and bearish on coking coal: Taking into account the oversupply

in 2014-15E with large capacity growth in Shanxi restructured mines, Indonesia output growth

and only 2-3% pa demand growth, we maintain our cautious view on the thermal coal sector

and are bearish on coking coal. We see thermal coal fluctuating at the cost curve at

RMB580/t in 2014 (relatively stable y-y) and RMB550/t in 2015, while we cut the China HCC

price by 10-15% for 14/15. We keep our Neutral rating for Shenhua (1088 HK, HK$19.30, TP:

HK$27.00) and China Coal (1898 HK, HK$3.78, TP: HK$4.20), and maintain Yanzhou (1171HK, HK$5.00, TP: HK$5.00), Fushan (639 HK, HK$2.19, TP: HK$2.10) and Hidili (1393 HK,

HK$0.89, TP: HK$0.60) as Underperform, given our bearish view on HCC, with large

earnings declines forecast in 14-15 (6-53%).

Fig 38 Thermal Coal Cost Curvemarginal costs have come down to RMB550-600/t post government initiativeto lower fees & levies on coal and also lower charges

Source: SXCoal, CCTD, Macquarie Research, March 2014

0

100

200

300

400

500

600

700

Shenhua

Chin a Coal

Yanzhou

Hebei small

mines trucked

Other ShanxiSOE

Shanxi smallmine rail

Inner Mongolia

rail

Inner Mongoliatrucked

Shanxi smallmine trucked

VAT

Transportationcost

Tax, fees andothers

Cash cost

RMB/t

mnt


20/56


13 March 2014 20

Gas supply rising fast but faces midstreamconstraints

At present the Kunlun Energy/Beijing Enterprises-operated Shaanjing or Shaanxi-

Beijing gas pipelines cater to more than 90% of gas demandin Beijing, Tianjin andHebei. Even with Keqi coal-to-gas, Tangshan and Tianjin LNG regas terminals, these

pipelines would remain the major conduit of supply (70%+) to these provinces until the

end of this decade.

The major sources of gas supply to the Shaanjing pipelines are local production from the

Ordos basin, and gas volumes via the West-East pipelines(in turn supplied by

Turkmen importsand the Tarimbasin).

Based only on existing and confirmed new capacity we expect total available gas supply

to these provinces to grow an impressive 17% pa to 53bcm by 2020e.

Our analysis indicates that the gas supply to these provinces could easily increase by at

least another 25bcm (i.e. taking total supply to ~80bcm), if new midstream capacity gets

commissioned.

In 2013, 92% of Beijing-Tianjin-Hebeis combined 18.2bcm gas demand was supplied via the

Kunlun Energy/Beijing Enterprises-operated Shaanjing or Shaanxi-Beijing gas pipelines

(three lines with a current combined 35bcm capacity). The main source of gas supply to the

Shaanjing pipelines is the PetroChina-operated Changqing gas fields in the Ordos basin, with

the remaining volumes sourced from the West-East pipelines (in turn supplied by Turkmen

imports and the Tarim basin). In addition to gas volumes via the Shaanjing pipelines, these

provinces are also served by three small local gas fields (Dagang, Jidong, and Huabei all

operated by PetroChina), Datangs Keqi coal-to-gas (CTG) plant (started in Dec-13),

PetroChinas Tangshan LNG regas terminal (started in Nov-13), and CNOOCs Tianjin

floating LNG regas terminal (started in Dec-13). In fig 39 we summarize the gas supply

outlook for the key fields, LNG regas terminals, CTG plants, supplying Beijing, Tianjin, Hebei.

Fig 39 Beijing, Tianjin and HebeiGas supply from existing sources andprojects confirmed under constructionShaanjing pipeline volumes dominate

Source: WMAC, Macquarie Research, March 2014

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2010 2013 2015 2020

(bcm) Gas Supply (existing + under construction) Tianjin LNG (Sinopec)

Tianjin FLNG(CNOOC)

Tangshan LNG

Local f ields (Dagang,Jidong, Huabei)

Keqi coal-to-gas

Turkmen Imports(Shaanjing/WEP)

Tarim(Shaanjing/WEP)

Ordos (via Shaanjing)

Demand Target

Via ShaanjingPipelines


21/56


13 March 2014 21

The Shaanjing pipelines and Jing bian

Jingbian in Shaanxi province is a major gas transmission hub in China. Gas from the Tarim

basin (Xinjiang, NW China), the Ordos basin (Shaanxi, NW China), and pipe imports from

Turkmenistan via the West-East pipeline (WEP) all converge in Jingbian before reaching the

designated end-markets. Jingbian is also the starting point for the major Shaanjing or

Shaanxi-Beijing pipelines that supply gas to Beijing, Tianjin and Hebei (BTH). Apart from theBTH market, the Shaanjing pipelines also supply gas to Jiangsu and Shandong, via a spur-

line from Anping in Hebei. While the Ordos basin will likely continue to supply the bulk of

Shaanjings gasvolumes, we note that increasingly gas from the Tarim basin and pipe

imports via the West-East pipeline (Shanghai, Guangdong primary end-markets) would also

flow via the Shaanjing pipeline.

Fig 40 Gas supply options for Beijing-Tianjin-Hebei

Source: Wood Mackenzie, Macquarie Research, March 2014. Note: Shaanjing pipelines also known as Shaanxi-Beijing pipelines

Existing sources of gas supply

1) PetroChina Ordos basin (Changqing gas fields) via Shaanjing pipelines

Nearly two-thirds of overall Shaanjing pipeline volumes flow to Beijing, Tianjin and

Hebei; with the remainder flowing to Jiangsu and Shandong. In turn, Ordos basin gas

is responsible currently responsible for nearly two-thirds of gas supply to the

Shaanjing pipeline, however this should decline to ~50% by 2020 as the share of

Tarim and Turkmen imports rises.

Turkmen gas imports and

indigenous production from

Tarim basin flows via the West-East pipelines to Jingbian

Jingbian (Shaanxi) is a major gas hub

from where gas could be sent to

Beijing-Tianjin-Hebei via the

Shaanxi-Beijing pipeline; Shanghai

via WEP1; Guangdong via WEP2

Shaanjing pipelines

Ordos Basin

Ordos basin gas production

flows to Jingbian

Tangshan, Tianjin,

Dalian LNG

Ordos as % of 2014e supply

Ordos66%



22/56


13 March 2014 22

Fig 41 A closer look at Shaanjing pipelines

Source: Wood Mackenzie, Macquarie Research, March 2014

Over the past three years,the Changqing gas fieldsin the Ordos basin (Shaanxi

province, North-West China) have witnessed a 1.6x rise in gas production and have

been responsible for a bulk of overall Chinese gas production growth. Gas production

from Changqing is dominated by the Sulige fieldChinas largest onshore gas field

(20bcm in 2013)although there are many other gas discoveries in the basin

awaiting development, e.g. South Sulige (PetroChina/Total).

We estimate that, at present, nearly two-thirds of gas from the Ordos basin flows via

the Shaanjing pipelines (fig 43), with the remaining gas catering to local demand in

Shaanxi and neighbouring Ningxia. Gas from Changqing could also serve Shanghai

and Guangdong via the West-East 1 and 2 pipelines, respectively.

In 2013, gas production from Changqing grew 20% y/y to reach 34bcm. We expect

PetroChina to focus the bulk of its upstream gas capex towards further developing its

flagship Changqing gas fields (770bcm remaining 2P reserves)and forecast 9% pa

production growth over the next two years, to 40.7bcm by 2015e (PetroChina

targets 41.5bcm by 2015).

Overall, Shaanxi province expects local gas production (Changqing and others) to

reach 45bcm in 2015, of which 15bcm is planned for local use and the remaining

30bcm for sale to other provinces, mainly via Shaanjing.

Fig 42 Shaanjing volumes by end-markets: a majorityof volumes flows to Beijing, Tianjin, Hebei

Fig 43 Shaanjing volumes by source: Ordos basinand gas via the West-East pipelines matter most

Source: WMAC, NDRC, Macquarie Research, March 2014 Source: WMAC, NDRC, Macquarie Research, March 2014

Gas from West-

EastPipelines(Tarim, Turkmen

Imports)

Ordos Basin Gas

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(bcm) Shaanjing Pipeline Vols by End-Market

Beijing, Tianjin, H ebei Jiangsu Shandong

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(bcm) Shaanjing Pipeline Vols by Gas Source

Ordos Basin WEP (Imports, Tarim basin)Tangshan LNG regas Unrisked additional WEP volsCa ac it

Line4 start-up


23/56


13 March 2014 23

Fig 44 Nearly two-thirds of gas volumes from Ordossold via Shaanjing pipelines

Fig 45 Ordos basin gas production to rise 8% pa overthe next two years driven by start-up of new fields

Source: WMAC, NDRC, Macquarie Research, March 2014 Source: WMAC, NDRC, Macquarie Research, March 2014

2) PetroChina-operated gas fields in Tianjin, Hebei

Dagangand Huabeioilfields in Tianjin and Hebei provinces respectively have been

producing oil for nearly 40 years, with associated gas production from the field

catering to local demand. The gas produced from the Dagang field caters to demand

in Cangzhou (via the Banqiao-Cangzhou pipelines), while that from Huabei flows to

Beijing via two 70km pipelines. We forecast gas production from these fields to

remain broadly flat at 1.2bcmuntil 2015, and thereafter decline at c.5% pa. At

present Huabei has 3bcm of gas storage capacity (7.3bcm by 2015e), and a 180km

pipeline links the Shaanjing pipelines to gas storage in Dagang (2.2bcm today rising

to 2.7bcm by 2015e).

Jidonggas field in Tianjin has seen 15% pa production growth over the past three

years to 0.7bcmin 2013. We expect production to decline at c.2% pa from current

levels.

3) Keqi coal-to-gas from Inner Mongolia via the new Keqi-Beijing pipelines

Datang Powers Keqi coal to gas (CTG) project was the first large-scale project

(US$4.2bn cost) to be approved by the NDRC, with commercial operations starting in

Dec-13. The Keqi project is split into three phases with 1.2bcm/yr to be supplied in

phase-1 (planned capacity 4bcm)via a newly constructed 490km pipeline running

from Keqi to Beijing. At the time of commissioning the Keqi plant, Datang also signed

a 30-year gas off-take agreement with PetroChina. Under this agreement,

PetroChina will sell the gas, likely via Beijing Enterprises, to end-customers in

Beijing, and in return Datang will get a fixed tariff of Rmb2.75/cu.m till 2016, and a

market price thereafter.

4) LNGTangshan (PetroChina), Tianjin FLNG (CNOOC)

Tangshan/Caofeidian LNG (3.5mtpa/4.8bcm, start-up Nov-2013, PetroChina

51%, Beijing Enterprises 49%). The Tangshan LNG regas terminal in Hebei

province started up in Nov-13, with first volumes flowing from Qatar. PetroChina

operates the terminal, but as was the case with the Rudong and Dalian LNG

terminals, we expect the Tangshan terminal to be injected to Kunlun Energy; albeit

this would likely be done at a fair market valuation rather than 1x book , as was the

case in the past. Associated with the regas terminal are a 9bcm/129km trunk line and

a 3.5bcm/28km spur line to feed Hebei and Tianjin. There are plans to increase

terminal capacity to 6.5mtpa (8.8bcm), and eventually to 10mtpa (13.5bcm), but

PetroChina has made no firm investment decision on these expansion projects asyet.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2010a 2013a 2015e 2020e

(bcm) Ordos (Changqing) gas by end-market

Vols via Shaanjing to BTH, Other Local use in Shaanxi

0.0

10.0

20.0

30.0

40.0

50.0

60.0

bcm Ordos (Changqing) gas production outlook

Sulige South Sulige J ingbian/Yulin/Mizhi C hangbei Others

Local fields (% of 2014 supply)

Local

Fields

5%

Source: WMAC , Macquarie Research, March 2014

Keqi CTG (% of 2014 supply)

Keqi

3%


LNG regas (% of 2014 supply)

LNG

regas

13%



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13 March 2014 24

Tianjin FLNG - CNOOC (2.2mtpa/3.0bcm, start-up Dec-13, CNOOC 100%).

CNOOC commissioned Chinas first floating LNG receiving and storage facility

(FSRU) in Dec-13. CNOOC plans to expand capacity at the terminal to over 6mtpa

(8.1bcm), but this would likely come in 2018+. The terminal would supply gas to an

integrated petchems and industrial park (Lingang Economic Zone) and residential

customers in Tianjin.

Fig 46 LNG regas terminals supplying Beijing-Tianjin-Hebei

Source: Wood Mackenzie, Macquarie Research, March 2014

Potential incremental sources of gas supply

1) West-East pipelines (Tarim basin, Turkmen imports) feeding Shaanjing pipelines

The West-East pipelines (WEP) already supply c.8bcm of gas via the Shaanjing

pipelines, with 6bcm going to Jiangsu and 2bcm to Shandong. WEP is the backbone of

Chinas gas transmission network, and at present there are two lines operational: WEP-1

(15bcm capacity, started 2004) transports gas from Lunnan in Xinjiang (NW China) to

Shanghaion the east coast 4000km away, also serving Anhui, Henan, Jiangsu, and

Zhejiang en route; WEP-2 (30bcm capacity, started 2009) transports gas from Horgos

(Xinjiang) on Chinas border with Kazakhstan to Guangdong(South China). A third line,

WEP-3 (35bcm from Xinjiang to Fujian), is under construction with first volumes expected

in 2015. While Beijing, Tianjin and Hebei are not the main designated end-markets for

WEP, it is important to note that these provinces still receive gas from WEP via the

connection in Jingbian (starting point of the Shaanjing pipelines). The main sources of

gas for WEP are: a) local production in the Tarim and Junggar basins, and

b) pipe imports from Turkmenistan (fig 47).

WEP (% of 2014 supply)

WEP - Tarim,

Turkmen

Imports

13%



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13 March 2014 25

The Tarim basinis already the largest contributor of domestic gas, and will supply a

major portion of the West-East pipelines throughput in the coming years. PetroChina

is the main operator in Tarim and has three large fields, including, Kela-2, Dabei-1,

and Keshen. We forecast Tarim gas production grow 12% pa over the next two years

to 25.8bcm in 2015, mainly driven by the ramp-up in Dabei-1 and Keshen gas fields.

Gas from the Tarim basin is consumed locally in Xinjiang as well as sent to its end-

markets on Chinas eastcoast via the WEP.

Gas imports from Turkmenistan.China imported 25bcm of gas from

Turkmenistan in 2013, equal to 15% of overall Chinese gas supply. We expect

imports from Turkmenistan to increase by 5bcm pa to reach 65bcm by 2020 as the

Galkynysh gas field ramps up. As we noted for gas production from Tarim, pipe

imports from Turkmenistan could also flow to Beijing, Tianjin and Hebei via the

Shaanjing pipelines.

Fig 47 West-East pipelines (WEP) supplied by gasfrom Tarim basin and Turkmen imports

Fig 48 Gas via WEP flows to multiple end-markets,including potentially Beijing, Tianjin, Hebei

Source: WMAC, CEIC, Macquarie Research, March 2014 Source: WMAC, CEIC, Macquarie Research, March

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