China’s new air quality plan could increase LNG imports

By Staff | July 10, 2018

Early this month, China’s State Council released a three-year “blue sky” action plan to curb air pollution by 2020—a plan that could have implications for the U.S. oil and gas industry.

The latest plan extends to cities in the Fenwei plain in Shanxi, Shaanxi and Henan provinces, where air pollution is worsening. The target area for air pollution control and prevention now includes 28 cities—11 in Fenwei plain and provinces in the Yangtze River Delta.

Prakash Sharma, head of China research for Wood Mackenzie, provided insights on the plan, why it was implemented and what it could mean to the energy industry. As air pollution in China spreads to more cities and inland provinces, he said the affected area is home to 37 percent of the country’s population and 41 percent of its gross domestic product.

“The measures taken so far are falling short of government goals and public expectations,” Sharma explained. “The recently announced ‘blue sky action plan’ offers tougher limits and proposes a quicker shift to cleaner fuels such as LNG and electricity, and high-grade iron ore, coal and metals.”

He noted that many of these commodities are not produced locally or at competitive prices. Therefore, Sharma believes they will need to be imported.

“Additionally, a large portion of existing capacity will now require stricter supervision and environmental compliance,” he said. “As a result, we expect domestic costs to rise and production curbs to increase.

“A ban on trucking to move raw materials from port to plant could be a game changer as it creates more competition between domestic supply and imports and strengthens the arbitrage relationship,” Sharma added. “China’s slow transition means uncertainty for commodity prices will continue”

He stressed that China is on a track to tighten its fuel specification and vehicle emission standards. Under the current plan beginning Jan. 1 next year, a unified fuel specification standard will be enforced for road diesel, off-road diesel and bunker diesel.

“Most giant refineries are geared to meet this challenge of supplying a uniform standard fuel from next year, but some small independent players may struggle,” Sharma said. “The current plan will impose more stringent supervision on fuel blending, which will further compress the marketplace for independent refiners and fuel blenders.”

Sharma noted that China intends to develop a “green transport system” with higher fuel efficiency and lower emissions intensity. This would be achieved by increasing the share of railways and waterways and drastically reducing road transport.

“The plan highlights a target of 2 million electric vehicle sales by 2020,” he said. “While it would be tough to hit the target for the passenger car segment alone given the gradual phase-out of subsidies, inclusion of urban utility and public transport would ease pressure and help control pollution.”