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China's Natural Gas Demand and CNPC's Natural Gas Business Strategy

Zhou Jiping, Vice President of CNPC, President of PetroChina
Nov. 30, 2010, Doha

Mr. Chairman, Ladies and Gentlemen:

Good morning! I'm delighted to take part in this meeting, and to discuss with you an important topic in the energy field:"The Role of Natural Gas in the Future of Sustainable Energy." For my part, I'd like to offer some personal views on China and CNPC's natural gas development issues within the context of trends in the global development of natural gas.

First, "low carbon economy" has already become a key component of every country's economic strategy for combating climate change.

For developed countries and developing countries alike, from the perspective of both resource and environmental considerations, low carbon economy is the inevitable choice of any country seeking sustainable development. Therefore, accelerated development of low-carbon energies and the low-carbon use of high-carbon energies have become important trends.

As a clean and highly-efficient energy, natural gas will see its position continually rise within the hierarchy of global energy types. It will serve an important function in the transition towards low-carbon economy. It is forecast that through 2030 natural gas will rise from the current 23 percent to 28 percent of global primary energy use, supplanting oil to become the number one energy type. This will provide strong impetus during the global transition to low-carbon, carbon-free energy.

In recent years, along with the rapid growth in consumption of natural gas and the worsening of regional supply/demand imbalances, the volume of world trade in natural gas has increased tremendously. In 2009, world trade in natural gas reached 876.6 billion cubic meters, representing nearly 30 percent of total world consumption of natural gas. It is estimated that by 2030 world trade in natural gas will reach 1.1 trillion cubic meters.

We have observed that accelerating the development of natural gas business has become the common choice of NOCs and IOCs as they pursue sustainable development. Many NOCs such as SaudiAramco and Qatar Petroleum have actively pursued domestic development and use of natural gas, in order to maintain stable exports of crude oil. With the increasing stringency of environmental requirements and the continual rises in the price of natural gas, IOCs have energetically pursued natural gas strategies in order to realize an orderly shift in energy use and sustainable development of their companies. As a result, the strategic status of natural gas business has increased in prominence. For ExxonMobil and Royal Dutch Shell, reserves of natural gas already amount to over half of total oil/gas reserves. In recent years, these oil giants have seen their revenues from natural gas rapidly increase, and profitability has risen fast, making natural gas a key pillar in their sustainable development. China as a country, and CNPC as a company, have both seen the same trends in natural gas development.

Second, natural gas is playing an increasingly important role in China's energy development.

China is a major energy producing country. At the same time, it is also a large consumer of energy. Since the beginning of the 21st century, in conjunction with China's rapid economic development and industrialization, and surging urbanization, energy consumption has experienced continual increases. In 2009, China's total energy consumption approached that of the US, reaching 2.18 billion tons of oil equivalent (3.1 billion tons of standard coal). This was twice that of 2000, the result of an average increase of 9.3 percent per year — meaning energy consumption essentially tracked growth in economic output. It is estimated that in 2020 China's energy consumption will surpass 2.8 billion tons of oil equivalent (4.0 billion tons of standard coal), and that by 2030 China will consume over 3.5 billion tons of oil equivalent (5.0 billion tons of standard coal). This process will result in major stresses between the need for secure, clean and high-efficiency energy supply and energy conservation and emissions reduction.

Accelerating the development of natural gas is a strategic choice for China's energy development. Currently coal accounts for 70 percent of the country's primary energy supply. Large scale development and use of coal faces resource, environment, water and many other restraints. Relying on sizable increases in coal production to satisfy new energy demands is no longer a practicable option. In the short term, developing wind, solar, biomass and other renewable energy sources will face numerous technical and economic difficulties. China's natural gas industry remains in an early, high-speed phase of development. Accelerating the development of natural gas has tremendous significance for increasing China's energy supply, enhancing the energy mix, protecting the environment and controlling greenhouse gas emissions.

China's consumption of natural gas has increased rapidly, and its proportion in primary energy mix is continually growing. China's natural gas consumption rose from 24.5 billion cubic meters in 2000 to 88.7 billion cubic meters in 2009. This year it will possibly surpass 100 billion cubic meters, which would be a 15.4 percent increase year on year. China's record is very similar to the rapid expansion in natural gas consumption that took place in the US and other major natural gas consuming countries from the 1950s to the 1970s. The trend was particularly impressive from 2004, when average annual increases in consumption of natural gas surpassed 10 billion cubic meters, and the average annual growth rate rose to 17.7 percent. Generally speaking, the market for natural gas in China has already entered a period of high-speed development. Sustained economic and population growth, industrialization and urbanization, along with increasing emphasis on low-carbon development, will ensure that China's demand for natural gas will remain in high-speed growth mode through 2030.

Assuming a modestly positive outlook, demand for natural gas in China could reach 230 billion cubic meters in 2015, 350 billion cubic meters in 2020 and 500 billion cubic meters in 2030. During that period, natural gas will see its portion of the overall primary energy mix rise from today's 3.9 percent to more than 10 percent. As a result, its contribution towards reduction of greenhouse gas emissions will increase tremendously.

(NOTE: If the proportion of natural gas within the primary energy mix increases from 10 percent to 11 percent, and coal's proportion drops 1 percent in 2020, carbon emissions per unit of GDP will fall by 0.5 percent. Given the expected replacement rate of coal by natural gas, by 2020 China will have reduced 493 million tons of carbon emissions and 7.68 million tons of sulfur dioxide emissions.)

China's large, stable market for natural gas will be a boon for the global natural gas industry. Since 2006, when China first started importing LNG, imports have grown at a rapid rate. It is estimated that in 2010 China's imports of LNG will approach 9 million tons (equivalent to 12.3 billion cubic meters), up 63 percent compared to the previous year. At the end of 2009, China began importing natural gas via pipeline from Central Asia; this year this source is expected to supply China with 4.8 billion cubic meters of natural gas. This will mean that China's total imports of natural gas will reach 17 billion cubic meters in 2010, equivalent to 17 percent of total national consumption. China's imports have helped result in renewed prosperity in the natural gas industries in countries such as Turkmenistan, Australia, Malaysia, Indonesia and Qatar. Going forward, China will become a major natural gas consuming and importing nation. To quote a November 2010 issue of the IEA-published World Energy Outlook, "China could lead us into a golden age for gas." We hope that things turn out that way.

Third, CNPC will implement a much more active natural gas development strategy.

In 2009 China's output of natural gas reached 85.2 billion cubic meters, with a reserve-production ratio above 45. In general, China's natural gas endowment can support high-speed increases in China's natural gas reserves and output. Currently it is wintertime in China, but I believe that it is early spring for development in China's natural gas industry. CNPC is China's largest natural gas producer and supplier. In 2009, CNPC's natural gas reserves and output accounted for 80 percent of the nation's total. It supplied 73 percent of China's natural gas demand; and operated 28,600 kilometers of natural gas pipeline, 90 percent of China's total. In the next 10-20 years, CNPC's natural gas business has tremendous room for further growth, with strong possibility for accelerated development. Recently we announced our aim to turn CNPC into a green, internationally-minded company focused on sustainable development. Towards this end, CNPC will pursue an active program for natural gas development.

First, we will promote rapid growth in the company's natural gas reserves and output. CNPC views increasing reserves and output as the core of our natural gas development strategy. The company will strengthen exploration of conventional natural gas; pay more attention to risk exploration in new basins, new regions and new layers to prove more reserves; maintain a reasonable reserve-production ratio; and realize continual, stable increases in our conventional gas output.

At the same time, CNPC will promote foundational work for unconventional gas, get an accurate assessment of available resources, make breakthroughs in key technologies for low permeability and unconventional gas resource development, lower development costs to a significant degree, and foster efficacious replacement of conventional resources. On top of these efforts, CNPC will increase the pace of reserve-to-production conversion; maintain stable production at existing gas fields and see that production comes online at new gas fields; and ensure that conventional gas output in 2020 be double that of 2009.

Second, we will speed up the construction of natural gas infrastructures. CNPC's current natural gas pipeline network already connects China's main natural gas producing areas with consumption markets. On the whole it satisfies the growing demand from downstream markets. After nearly 10 years of independent efforts and international cooperation, our pipeline technology has experienced leap-frog development. In the future, CNPC will deploy more distribution networks, accelerate the construction of gas storages and other infrastructure by region and phase based on market demands and resource locations. The trunk lines, branch lines and connecting lines will operate in a more coordinated manner, along with simultaneous perfection of supporting facilities. In the end, a highly-efficient, fully-connected, secure and flexible modern pipe network with coverage across all across the country will be formed to ensure stable and orderly delivery of upstream resources to downstream markets.

Third, we will expand international natural gas cooperation.
CNPC is an active practicer in international oil and gas cooperation, and has long attached importance to establish mutually beneficial strategic cooperative relationships with world’s major oil companies. In recent years, we have signed and implemented a number of natural gas development projects and purchase and sales contracts with some NOCs such as Petronas, Petramina, QatarGas and Gazprom. This has undoubtedly supported development of the natural gas industries of related countries and increased their export market options. At home, CNPC strengthens the cooperation with IOCs and expands the scope of cooperation to coal bed methane and shale gas. At Changbei gas field, which is jointly developed by CNPC and Shell, the annual gas production is expected to be 3 billion cubic meters, 5 percent of China's total. We also have a joint development project with Chevron at Chuandongbei gas field with an investment of nearly 4 billion USD, and a designed production capacity of 7 billion cubic meters per annum, making it so far China's largest onshore foreign cooperation project.

CNPC is willing to reinforce technology cooperation and experience sharing with fellow companies. CNPC is a new participant in the natural gas industry. We still lack experience in areas such as building natural gas business systems and demand prediction. At the same time, we also face technological challenges, as well as policy factors related to government regulation, finances and taxation, and use of natural gas.

Going forward, CNPC will further strengthen international cooperation in fields such as resource development, technical services, technological research and development, and pipeline construction. We will work together with companies from around the world to promote the harmony and prosperity of the global natural gas market; and help natural gas, a high-quality fossil fuel, to reach its potential and benefit the world.

Ladies and gentlemen, the future is bright for global natural gas development. We feel fortunate to be a part of an undertaking like natural gas that brings so many benefits to humanity. Let us work together, hand in hand, to push global development of natural gas to new heights.

Thank you very much.

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