Impacts of low oil price on China and the world natural gas industry chain

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ScienceDirect Natural Gas Industry B xx (2017) 1e11 www.elsevier.com/locate/ngib

Impacts of low oil price on China and the world natural gas industry chain Liu Yijun*, Ma Li College of Business Administration, China University of Petroleum, Beijing 102249, China Received 25 May 2016; accepted 1 September 2016

Abstract Since the second half of 2014, the crude oil price has been in rapid decline, which poses profound impacts on the global natural gas industry chain. The issue started to surface in the oil and gas sector on how to survive in such a situation. In this paper, an overview was first made on the world natural gas industry chain experiencing from the high-oil-price period to the low-oil-price period, then the influences of low oil price on natural gas production patterns, prices and development prospects, etc., and finally discussion focus was put on the challenges and opportunities brought about by the sustained low oil price to the natural gas industry chain in present China. The results are concluded as follows. First, under such low oil price situation, oil and gas companies at present have to cut capital expenditure to such a degree that the oil and gas output will be both of particular concern in the future. Second, low oil price will compel the falls of global natural gas prices to different degrees, so natural gas economy will drop greatly compared with crude oil prices. Third, such a low oil price will exert more severe impact on the high-cost unconventional natural gas sector; as a result, many unconventional oil and gas companies have suffered frequent bankruptcy at abroad, while such companies in China are holding different attitudes towards unconventional natural gas. Fourth, the oil and gas M&A market remains a laggard due to many other reasons. Fifth, this drop in oil prices is just occurring at the time when natural gas is developing so rapidly in China, which will bring both challenges and opportunities to the industrial structural reform of natural gas in China. © 2017 Sichuan Petroleum Administration. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Keywords: Low oil price; Natural gas; Industry chain; Unconventional natural gas; Price; Oil and gas companies; LNG; China

Natural gas is a clean and efficient energy, and thus its development and utilization receive high attention all over the world. According to the data of BP Statistical Review of World Energy 2015, by 2014, natural gas had accounted for 24% of the primary energy consumption globally, of which the US natural gas accounted for 30%, and Russia and Qatar accounted for more than 54% and 80% respectively. According to the estimate of BP Energy Outlook (2016), natural gas will account for 25.58% of the primary energy consumption globally by 2035. But since June 2014, the crude oil market of the world has experienced profound changes, and the sharp drop in international crude oil prices has weakened the economic efficiency of natural gas, which brings a significant and

far-reaching influence on the whole natural gas industry chain [1e5]. Currently, most studies focus on the analysis of the relations between oil prices and natural gas prices [6e12], and few concern the influence of this round of continuous drop in oil prices on the natural gas industry chain. Under such a background, this paper discusses the influence of this round of oil prices on the natural gas industry chain.

* Corresponding author. E-mail address: [email protected] (Liu YJ.). Peer review under responsibility of Sichuan Petroleum Administration.

Natural gas industry refers to the aggregation of enterprises and units that are engaged in natural gas exploration, development, production, etc. Associated industries of natural gas

1. Natural gas industry chain development under high oil prices and the approaching low oil prices 1.1. High oil prices and development of natural gas industry chain

http://dx.doi.org/10.1016/j.ngib.2017.02.010 2352-8540/© 2017 Sichuan Petroleum Administration. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Please cite this article in press as: Liu YJ, Ma L, Impacts of low oil price on China and the world natural gas industry chain, Natural Gas Industry B (2017), http://dx.doi.org/10.1016/j.ngib.2017.02.010

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refer to different industries consisting of different enterprises and units that are engaged in natural gas transportation, storage, liquidation, gasification, compression, sale, or investment in natural gas and its by-products. Natural gas industry chain refers to the chained correlative structure formed between node enterprises and units in different links of the natural gas industry and its associated industries. It has value delivery and appreciation functions. It is formed based on the specific technological and economic correlations. It centers on natural gas exploration, development, production, transportation, storage, liquidation, gasification, compression, marketing, utilization, and relevant supporting services, and takes natural gas and relevant services as the tie, and the supplyedemand relation as the core [13]. International crude oil prices rose all the way from 1998 to 2013. In this period, the Dated Brent rose from USD12.72/bbl to USD108.66/bbl, and recovered its rising trend quickly after each of the three times of drop. In the first half of 2014, international crude oil prices continued to remain high, with monthly prices of USD108.83/bbl. The consecutive rise of oil prices promoted the development of natural gas industry chain. In 15 years from 1998 to 2013, global natural gas production and consumption averagely saw an annual growth of 2.75% and 2.70% respectively; by contrast, an average annual growth of crude oil production and consumption were only 1.10% and 1.36% respectively. From the perspective of prices, the Dated Brent accumulatively rose 7.5 times during this period, but natural gas prices failed to rise correspondingly. Japan's LNG prices accumulatively rose by 430.20%, German's average imported natural gas prices by 362.23%, the UK's NBP natural gas prices by 470.13%, the US Henry Hub natural gas prices by 77.88%, and Canada's natural gas prices by 105.70%. This was partially caused by the rising price ratio of crude oil to natural gas due to the increase of natural gas supply [14]. Natural gas prices of the US and Canada showed a significantly different trend. Their natural gas prices basically had the same trend with that of other regions before 2008, but later, they gradually “lagged behind”. This was inseparable from the successful development and utilization of the North American shale gas. The natural gas industry chain evolves to different extent in different regions. The US and European natural gas industry chains have entered a mature development stage; the former has formed a competitive structure while the latter is transforming into a competitive structure. Similar to China, Brazil and India's natural gas industry chains are in a rapid development stage and belong to a monopolistic structure. Now, they are actively promoting the reform for a competitive structure [13]. This paper, by taking the natural gas industry chains of the US, Europe, and China as examples, analyzes the influence of oil prices on the natural gas industry chain. Up to now, the US natural gas industry chain has already been very mature. The US has the largest natural gas consumption market in the world. In the late 1980s, as the reserveeproduction ratio gradually fell, the US started to worry its natural gas supply, but the development and utilization of shale gas changed this situation. According to the

data of Energy Information Administration (EIA), between 2007 and 2013, share of the US shale gas well production in total natural gas production rose from 8% to 40%, and natural gas import dependency correspondingly reduced from 16.4% to 5.0%. In 2014, the US shale gas production accounted for 44% of the total natural gas well production, and natural gas import dependency was 4.4%. Meanwhile, as is estimated by EIA, by 2017, the US will become a net exporter of natural gas and in the future, the net import volume of natural gas under high oil prices will be 3 times that under low oil prices [15]. “Shale gas revolution” not only changes the US status as the importer of energy, but also affects the world's natural gas market and energy structure [16]. Thanks to the breakthrough of the development technology in unconventional natural gas, especially in shale gas, in 2009, the US surpassed Russia for the first time with a natural gas production of 5840
108 m3 and became the largest natural gas producer in the world. This also stimulates a wave of exploration and development of unconventional natural gas on a global scale. However, compared with conventional natural gas, unconventional natural gas resources are low in quality. For example, shale gas is characterized by low production per well, low recovery ratio, high investment cost, fast production decline, long production cycle [17]. Because of this, the exploration and development of unconventional natural gas need certain conditions, and the high oil prices during this period just became one of the important factors in view of the following aspects. First, high oil prices greatly increased the profits of oil and gas companies, who thus had surplus funds to invest in the upstream exploration and development. Second, gains brought by high oil prices and relatively high natural gas prices strongly supported the high cost development of unconventional oil and gas. Third, as unconventional oil and gas exploration and development were a popular investment spot during this period, companies interested in such projects could easily obtain a fund support. Many energy companies raised funds through borrowing money, issuing shares and bonds, or other methods [18]. From the statistical data of IPOs in the energy industry of Renaissance Capital Report in 2015 and the Dated Brent, we can see (Table 1) [19] that, IPO in the energy industry was active in the period of high oil prices, and the amount involved was large, among which, oil and gas production and natural gas transmission and distribution projects accounted for an overwhelming majority.

Table 1 The U.S.A. energy IPOs during 2011e2015. Year

Number of energy IPOs

Value/USD100 million

Share of total IPOs

Brent crude oil price/(USD per barrel)

2011 2012 2013 2014 2015

28 25 22 30 12

87 73 107 127 55

22% 20% 10% 11% 7%

111.26 111.63 108.56 98.97 52.32

Data source: Renaissance Capital, IPO Center; Energy Information Administration (EIA).

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The European natural gas industry chain plays a very important role in the world's natural gas industry chain, especially in the downstream market. According to the BP Statistical Review of World Energy 2015, in 2014, Eurasian regions totally consumed natural gas of 10096
108 m3, 1.06 times that of North America, 5.94 times that of the Central and South America, 2.17 times that of the Middle East, 8.41 times that of Africa, and 1.49 times that of the AsianePacific region. Though later than the US, European natural gas industry chain developed very fast. In recent years, Europe also has attached great importance to the development and utilization of shale gas, because it wants to: (1) reduce its dependency on Russian natural gas and strengthen its national energy security; (2) stimulate its economic growth and employment; and (3) seek for cleaner fuels than coal in the power generation sector [20]. From the share of crude oil and natural gas consumption of Eurasian regions in the primary energy consumption, the crude oil prices, and other data between 1998 and 2013, we can see (Fig. 1) that, during this period of high oil prices, the share of natural gas consumption in the primary energy consumption showed a rising trend, and the share of crude oil consumption declined on the whole. From 2004, the share of natural gas consumption has exceeded that of crude oil. After decades of development, China's natural gas industry chain is now in a rapid development stage. The period between 1956 and 1997 saw an introduction stage; marked by the production of the No. 1 ShaanxieBeijing Gas Pipeline project since September 1997, it has entered a transitional stage for rapid development; marked by the formal production of the whole No. 1 West-to-East Gas Pipeline project at the end of 2004, it has entered a rapid development stage. As China is relatively poor in natural gas resources, it needs to increase natural gas import. China's natural gas import volume increased from 10
108 m3 in 2006 to 518
108 m3 in 2013. As the Asian natural gas closely links up with oil prices, the cost of China's natural gas import is relatively high. In order to develop downstream market of natural gas as soon as possible, the Chinese government has had lower-priced natural gas in the domestic market for a long time, causing a serious price inversion phenomenon. As international oil prices rise constantly and the economic efficiency of natural gas is obvious, natural gas substitutes LPG, gasoline, diesel oil, fuel oil, and other fuels on a large scale. According to the

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data of China Energy Statistical Yearbook, in 2000, oil accounted for 22.9% of China's energy consumption, and natural gas 2.3%; in 2013, share of oil dropped to 18% while share of natural gas rose to 5.6%. In June 2014, Energy Development Strategy Action Plan (2014e2020) proposed that by 2020 share of natural gas in primary energy consumption should reach over 10% and natural gas should be greatly developed. Driven by high oil prices, in addition to the great development of natural gas industry chain in many countries and regions, another highlight e liquefied natural gas (LNG) stands out in the international natural gas industry chain. The mode of trade of LNG to a large extent breaks down the limitations of traditional pipeline transmission on the circulation of natural gas, and thus pushes the efficient circulation of natural gas between different markets on a global scale [21]. According to the data of LNG Industry 2015 issued by the International Group of Liquefied Natural Gas Importers (GIIGNL), in 2014, global LNG trade volume reached 239.2
106 t, annual nominal liquefaction capacity of natural gas reached 298
106 t, and annual regasification capacity was 751
106 t; there are 30 import countries/regions and 19 export countries. With the strengthened natural gas transmission capacity, regional natural gas markets are gradually globalized, and “Price Island” of regional natural gas is vanishing [21]. The relationship between natural gas market and crude oil market becomes more complex, but the influence of crude oil market on natural gas market is much larger. Generally speaking, natural gas market is mainly associated with crude oil market in two paths. First, natural gas competes with and replaces oil and its products, such as fuel oil and LPG. Second, natural gas competes with crude oil for exploration and development funds. Through these two paths, natural gas and crude oil affect each on supply and demand and prices. Under the circumstance of high prices, through the first path, consumers are more willing to consume the cheaper natural gas; through the second path to develop and produce oil, oil and gas companies make more profits, but supply of natural gas will be tight. The unbalance between supply and demand on the natural gas market pushes the rise of natural gas prices and also promotes the development of links of natural gas industry chain.

Fig. 1. Share of crude oil and natural gas consumption in the primary energy consumption in Eurasian regions and the Brent Spot Crude Oil Price. Data source: BP Statistical Review of World Energy 2015 Please cite this article in press as: Liu YJ, Ma L, Impacts of low oil price on China and the world natural gas industry chain, Natural Gas Industry B (2017), http://dx.doi.org/10.1016/j.ngib.2017.02.010

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1.2. Oil prices continue to fall High oil prices accelerate the progress of natural gas to become the leading role of energy [22]. But from June 2014, international oil prices continued to fall, and the Dated Brent fell from USD111.80/bbl to USD62.34/bbl in December of the year and continued to fall to USD38.01/bbl in December 2015. In 2016, Brent crude oil price rose slowly but was still lower than USD50/bbl by May. As to the reasons for the drop in oil prices, Liu [23] proposed that the reversion of the supplyedemand relationship is a basic cause, political game and fierce competition for crude oil market shares are a key factor, and the stronger US dollar and financial speculation factors also have important influence. Wu and Ma [2] analyzed that the sharp drop of oil prices is the result of several factors dominated by the change of relation between supply and demand. It originated from the accumulative oversupply of international petroleum market and high spare capacity, and OPEC's stopping to cut oil production to maintain the prices for the purpose of protecting its own market share, coupled with the weak world economic recovery and complex geopolitics. Most international agencies predicted that international crude oil prices in 2016 will continue to be weak. In the ShortTerm Energy Outlook issued in May 2016, EIA predicted that Brent crude oil price will average USD40.52/bbl in 2016 and USD50.65/bbl in 2017 [24]. International Energy Agency (IEA) in its recently issued Oil Market Report estimated the supply and demand of the crude oil market and storage situation by 2021, predicting that crude oil market will enter a stage of balance of supply and demand after 2017 and crude oil reserves will be consumed from 2018 [25]. The World Bank in Commodity Market Outlook issued in January 2016 down-regulate its expectation for crude oil price from USD51/ bbl in October 2015 to USD37/bbl in 2016, and USD48/bbl in 2017. According to the report of Bloomberg Businessweek, Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. in New York said that before supply falls short of demand, it will be difficult to maintain the rising trend of prices. On April 17, 2016, 16 oil producing countries failed to reach any agreement to freeze crude production in Doha, which immediately sent the crude oil prices tumbling further and the opening oil price on the Asian market falling by over 6% for a time. The “haze” of low oil prices will continue to hang over the world in a short run, and its impact on natural gas industry chain will also continue. 2. Impact of low oil prices on the international gas industry chain 2.1. Low oil prices changed the natural gas production pattern The international crude oil price (Brent Crude Oil Spot Price) was USD108/bbl, USD98/bbl and USD52.39/bbl respectively from 2013 to 2015, and has decreased by more than 50% since the second half of 2014, which brought great

challenges to the survival and development of oil and gas companies, especially those with emphasis on the upstream business. In five major international oil companies (Exxon Mobil, BP, Shell, Total and Chevron), for example, their business performances in 2014 and 2015 were in a decline. Especially in 2015, their annual business performances declined significantly. Exxon Mobil achieved an annual profit of USD16.15 billion, with a year-on-year decline of 50%; Chevron achieved an annual profit of USD4.587 billion, with a year-on-year decline of more than 76%; Shell achieved an annual profit of USD2.2 billion, with a year-on-year decline of 85%; Total achieved an adjusted net profit of USD10.518 billion, with a year-on-year decline of 18%, while its net profit before adjustment was only USD5.087 billion; BP was in an even more difficult situation, since its upstream profit fell by more than 92% and an annual overall loss was USD6.5 billion, the biggest loss during the past 20 years [26e30]. These companies referred to the environment of low oil prices and low gas prices in 2015 annual reports. For example, Exxon Mobil said that oil and gas prices and other market conditions were affecting its oil and gas industry [26]; Shell said that low oil prices and low gas prices had a profound impact on its energy sector in its strategic report [28]; BP listed low oil prices as the priority in the key strategies of the board of directors [30]. To cope with the impact of low oil prices, oil and gas companies have to adjust their business strategies. Subject to the lack of cash flow caused by the profit decline, reducing the upstream capital expenditures and the exploration and development investment is one of the must ways. According to the statistical data of Wood Mackenzie, in the first three quarters of 2015, a total of about USD220 billion capital expenditures were cut in the global oil industry. From a geographic perspective, international oil companies had the highest percentage of capital investment reduction in North America and Russia, with a decline of up to 40e60% generally; their investment reduction ratio was about 20e40% in Africa, Latin America and Europe; their investment reduction ratio was relatively low in the Asia Pacific regions, but the average ratio was close to 20% [31]. According to the BP Statistical Review of World Energy 2015, by the end of 2014, gas production in North America (including Mexico) and Russia accounted for 44.4% of the global production; gas production in Africa, Latin America and Europe (excluding Russia) accounted for 22.9%; gas production in Asia Pacific regions accounted for 15.3%. Such a large-scale reduction in capital expenditure is bound to affect the supply of natural gas in the future. In the context of low oil prices, how to use limited funds to maximize risk diversification is an issue that oil and gas companies have to face, wherein balanced portfolio is an optional strategy. Shell's emphasis on natural gas business is the highest among the five major international oil companies. In the period of low oil prices, Shell believes that integration management of natural gas is its recent and mid-term business development strategy, which can effectively avoid the risks brought by lower oil prices. In February 2015, Shell integrated natural gas and deepwater oil and gas projects by completing

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its acquisition of BG. In terms of the upstream business, Shell retreated from the project in Alaska and also stopped Carmon Creek project in Canada because of their losses in 2015, while the integrated natural gas business helped it to partially offset the impact of low energy price [28]. BP released its upstream projects in 2015 annual report: two deepwater oil projects and an LNG project, 12 gas projects and 5 oil projects under construction (expected to be launched during 2016e2020), and six gas projects and three oil projects in the design evaluation phase (expected to be launched during 2017e2020) [30]. According to BP's anticipation of future net production of new projects, in 2020, the net production of conventional gas, tight gas and LNG will be 3.4 times that of the net production of conventional oil, deep-sea oil and heavy oil [32]. The investment hot spot in North America over the past decade was dominated by unconventional oil and gas resources. Compared with conventional oil and gas, unconventional oil and gas are characterized by high cost, high risk investment and poor ability in resisting the low oil price shocks. In the current “cold winter time” of low oil prices, adjustments also have to be made in unconventional oil and gas exploration and development. At the time of high oil prices, great progress was achieved in shale oil and gas development technology. Many energy companies even entered this field through debt, additional stock issuance, bond issuance and other ways [18]. In the context of lower oil prices, the US shale oil and gas exploration and development boom receded, and the value of oil and gas reserves shrank. As a result, oil companies face debt surge and decline in refinancing capacity, and the number of small and medium-sized enterprises (SMEs) in bankruptcy or reorganization constantly increases [33]. As was reported in the Oil Patch Bankruptcy Monitor of Haynes and Boone LLP, a total of about 45 oil and gas producers in North America filed for bankruptcy in 2015, involving about USD8 billion unsecured debt and USD9.2 billion secured debt. The report also predicts that there will be more oil and gas producers in North America filing for bankruptcy in 2016. From a historical perspective, in the mid-1950s, corporate mergers and acquisitions worldwide were increasingly active. During 1986e1989, the period of low oil prices less than USD20/bbl was ushered, the host countries of oil resources introduced preferential investment policies, and international oil companies accelerated the strategic adjustment and obtained oil and gas resources through mergers and acquisitions on a global scale to get out of the adverse situation brought by low oil prices. After the mid-1990s, oil prices fell to a low level which was rare in the past 30 years, a new round of mergers and reorganizations was carried out in the world's oil industry under the lead of major Western petroleum and petrochemical companies [34]. In 2014, global oil and gas resources M&A market “bottomed out”, an investment of about USD171 billion was put in mergers and acquisitions throughout the year, with a year-on-year growth of nearly 1/3 [35]. In 2015, global oil and gas resources M&A market trended in the doldrums, during which the number of annual global M&A transactions of oil and gas resources hit the low

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record over the past decade, and the average monthly number of transactions was only about a third of that in the past two years. In addition, M&A transactions of the upstream oil and gas resources throughout the year amounted to about USD138 billion, with a year-on-year decline of 20% [36]. If the event that Shell merged BG at the price of USD82 billion is not considered, the global oil and gas M&A market will be even bleaker. Low oil prices make the M&A market of oil and gas resources not only keep calm, but show the following characteristics. 1) Asset buyers and sellers are more cautious. Oil prices have been in a decline for nearly two years from the second half of 2014. According to the general rule, a lot of companies should face a tight financial condition and need to sell assets to weather the crisis. However, this “M&A boom” did not come as expected. From the perspective of the asset sellers, the current low oil prices generally lower the appraised value of oil and gas assets, so the sellers are cautious in making the decision of selling assets in the face of risks that assets are undervalued. From the perspective of the asset buyers, there is a great uncertainty about when the predicament of current low prices can be broken and how much oil price can rebound, and the question whether the investment in asset purchase can bring about enough future profits also makes the buyers more hesitating. However, for the entire oil and gas M&A market, the buyer's market power is relatively stronger. This is mainly because the sellers are eager to optimize financial conditions, in order to give investors confidence and divest non-core assets. For example, BP experienced the event of oil spill in the Gulf of Mexico in 2010, resulting in divestiture of USD10 billion during 2014e2015. After it suffered the largest losses over the past 20 years in 2015, it planned to peel off assets of USD3e5 billion in 2016 and peel off assets of USD2e3 billion annually since 2017 [30]. 2) M&A strategies of different oil companies have different focuses, dominated by strengthening the weakness. International oil giants began to focus on the sale of noncore assets from 2013, in order to optimize the strategic structure of the company. In the context of low oil prices, international oil companies may choose the company that has a unique expertise in a particular field as their M&A targets. For example, Shell was relatively weak in the upstream business due to its misjudgment of the trend in international oil prices in previous years, while BG Group had a strong strength in the upstream natural gas exploration and development, especially in LNG transportation and sales. Shell improved its weakness in the upstream business to a certain extent and consolidated the status of natural gas business in the company by acquiring BG. 3) The natural gas asset M&A fever in North America remained. In 2014, natural gas related asset merger and acquisition activities returned to be active in North

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America and its transaction amount accounted for 42% of the total annual transaction amount in North America, becoming a highlight in the market [35]. In 2015, the natural gas asset M&A fever in this region remained. The 2015 Domestic and International Oil and Gas Industry Development Report shows that North America was the world's most active region in the oil and gas M&A last year and its number of transactions was 198, accounting for 69% of the total global number of transactions, in which unconventional oil and gas assets was a hot spot. Meanwhile, North America was the region with the world's largest downstream asset M&A amount, and its annual M&A transaction volume accounted for 54% of the total global downstream transaction volume, in which the trading assets were mainly natural gas distribution assets, with the trading volume accounting for 60% of the total trading volume in the region [37]. 2.2. Low oil prices weighed on natural gas prices As high oil prices can pull up gas prices to a certain extent, low oil prices can have a reverse effect on the natural gas market and lower gas prices. Different from the fixed price of crude oil, natural gas prices vary in different regions [28]. In the United States, annual average Henry Hub natural gas spot price in 2015 was USD2.62/mmBtu (1 mmBtu ¼ 1054.350
106 J), 40% lower than that in 2014. In Europe, the UK NBP gas prices fell by 14% in 2015 compared with that in 2014, and natural gas prices in other trading centers had different degrees of decline. Natural gas prices in Asia Pacific are closely linked with the Japan Customs-cleared Crude (JCC) and decrease with the decline in crude oil prices. The Japanese LNG prices in 2015 fell by 35% compared with that in 2014. Natural gas prices are correlated with crude oil prices apparently. From the perspective of the general principles of economics, however, commodity prices are still essentially determined by the supplyedemand relation. Thus, the decline in natural gas prices is mainly determined by its supplyedemand relation. From the perspective of end users, there is a strong competitive substitution effect between natural gas and crude oil. In the period of high oil prices, users bear a high cost in the use of crude oil. In terms of the conversion cost, natural gas has a strong competitive advantage. However, the decrease in oil prices just makes this process reversed. Fig. 2 shows the ratio of Dated Brent to natural gas prices in the United States, Europe and Japan, which is generally large during the period of high oil prices and small during the period of low high oil prices. From January 2000 to January 2015, the US shale gas production increased from 21.7
108 ft3/d (1 ft3 ¼ 0.0283 m3) to 418.1
108 ft3/d, with an average annual growth rate of 21.8%. In addition, the United States had a gas pricing center linked with “gasegas”, so its natural gas market was significantly different from that in Europe and the AsianePacific regions. Natural gas in the United States shows a growing economy after 2008. Since the monthly ratio of Dated Brent to natural gas prices is greatly

influenced by seasonal change in the US, the Henry Hub gas price is used in the calculation of annual price ratio. According to EIA data, in 2013, the average Dated Brent was USD108.56/bbl, and its ratio to natural gas prices was about 29.1; in 2014, the average price of crude oil was USD98.97/ bbl, and its ratio to natural gas prices was about 22.6; in 2015, the average price of crude oil was USD52.32/bbl, and its ratio to natural gas prices was about 20.0. Considering the growth in natural gas production in recent years, it is more obvious that the advantage of natural gas in the price has weakened. In Europe and Japan, in 2011, when the Dated Brent was USD96e123/bbl, its ratio to natural gas prices in Europe and Japan was 9.3e12.2 and 6.5e9.2 respectively; in 2015, when the price of crude oil was USD27e65/bbl, its ratio to natural gas prices in Europe and Japan was 5.2e8.9 and 3.1e7.4 respectively. Apparently, low oil prices do make gas prices a relative disadvantage. In addition, the slow global economic recovery affected the energy consumption, so the energy demand in natural gas is insufficient. Subject to tight upstream exploration and development funds and insufficient downstream demand in the natural gas industry chain, natural gas infrastructures construction has slowed down. On the one hand, midstream and upstream integrated companies bear increased financial pressures because of poor upstream profit conditions, so they have limited funds to invest in the infrastructures construction. On the other hand, future growth in demand for natural gas will be affected by many uncertain factors, such as whether natural gas can be competitive with coal in the field of power generation, whether natural gas can be in a coordinated development with renewable energy, and whether China entering the stage of economic shift will drag down the global natural gas demand growth [38], so investors in natural gas infrastructures will be more cautious. As there has been the “Asian premium” problem in the pricing of international crude oil, the premium on the price of crude oil is passed naturally on to natural gas through pricing. With the decline in crude oil prices, natural gas prices drop, and the premium section in the “Asian premium” has narrowed. Fig. 3 shows the natural gas price and Dated Brent in the USA, Europe and Japan. During 2010e2015, “Asian premium” change was most obvious, and there was a high correlation between natural gas prices and crude oil prices in Europe and Asia. When the price was about USD110/bbl, the difference in gas prices between Europe and Asia was about USD4/mmBtu; when the price was about USD35/bbl, the difference in gas prices between Europe and Asia was about USD2/mmBtu. Regional spread narrowing reduced the driving force of cross-regional natural gas arbitrage trade, which would have some influence on the future natural gas trading market. In addition, since the impact brought by low oil prices on natural gas demand contributed to global excess supply of natural gas, there was much more possibility for the buyer's market to determine the price, which could be seen from the fact that the spot price was lower than the price in the longterm agreement in the Asian gas market.

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Fig. 2. Price ratio of crude oil to natural gas in the USA, Europe and Japan. Data source: World Bank

2.3. Impact of low oil prices on the future natural gas industry chain Low oil prices led to a substantial reduction in the upstream investment and slowdown of midstream infrastructures construction in gas industry chain. Coupled with the decline in demand for natural gas due to a continued economic downturn, the impact of low oil prices on the development of natural gas industry chain will be more apparent in the future, which will be reflected in the following aspects. 1) The measures taken by oil and gas companies in response to low oil prices, such as capital expenditure reduction and staff reduction, can reduce the companies' financial pressure in the short term, but they will affect the future oil and gas production in the medium and long term. 2) For the natural gas industry chain, production decline and the delay or cancellation of many challenging projects planned to be invested in the high oil price period will cause a negative impact on the future supply of natural gas market. The slowdown of investment in infrastructures construction slows down the connection between the upstream and downstream businesses and the development speed. The natural gas consumption market loses its economic advantage, and even the “reverse substitution” results in insufficiency of consumption drive. 3) The financial and operating pressure brought by low oil prices will make oil and gas companies pay more attention to the cost reduction and efficiency improvement, thus oil and gas companies will further put an emphasis on investment in technology, lower the cost of natural gas breakeven prices, and increase the competitiveness of natural gas in the energy market. 4) Oil and gas companies optimize their management structures by accelerating non-core and inefficient asset stripping. Some M&A transactions are carried out between the company with “good assets and poor management” and the company with “good management and

poor asset”. The entire natural gas industry chain is expected to grow healthier through asset “replacement”. 3. Impacts of low oil price on China's natural gas industry chain 3.1. Impacts of low oil price on China's oil and gas companies Under the background of the depressed world oil industry, China's three major oil companies couldn't be immune either, and their profits in 2015 were substantially reduced. Net margin of PetroChina Company Limited (hereinafter referred to as PetroChina), China Petrochemical Corporation (hereinafter referred to as Sinopec) and China National Offshore Oil Corporation (hereinafter referred to as CNOOC) reduced by 66.7%, 15.8% and 66.37%, respectively, on a year-on-year basis [39e41]. Exploration and development business of PetroChina and CNOOC took a large proportion of their total business and the upstream business weighed a lot; therefore, they were influenced relatively more by low oil price. In contrast, the business of Sinopec tended more for refining and was relatively less influenced. Cost decreasing and benefit increasing is also an important measure to improve the operation level of China's oil and gas companies in a period in the future. Fig. 4 shows the capital expenditure of PetroChina, Sinopec and CNOOC in the last 5 years. It is clear that the capital expenditure in 2015 was obviously reduced, among which that of PetroChina was reduced by 31% on a year-onyear basis, Sinopec 27% and CNOOC 38%. Though their capital expenditures reduced, they are competing in the natural gas market. PetroChina disclosed in its 2015 Annual Report just published that its total crude oil production in 2015 was 971.9 million barrels, increased by 2.8% compared with the same period of last year, and marketable gas production was 31310
108 ft3, increased by 3.4% compared with the same period of last year. Meanwhile, PetroChina has also proposed that the planned crude oil production in 2016 is 924.7 million barrels, reduced by 4.86% on year-on-year basis, and gas production is 31720
108 ft3, increased by 1.31% on year-on-

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Fig. 3. Brent crude oil spot price vs. natural gas prices in the USA, Europe and Japan. Data source: World Bank

year basis. Sinopec also pointed out in its 2015 Annual Performance that, influenced by low oil price, the proved reserves of crude oil was reduced on a year-on-year basis, but the proved reserves of natural gas was increased by 12.3% on a year-on-year basis, which was mainly attributed to the sharp increase of shale gas reserves in Fuling. Capital expenditure in upstream exploration and development segment of Sinopec was CNY54.71 billion in 2015, which is mainly used for the shale gas (first phase) productivity construction in Fuling and promoting gas pipeline construction like Guangxi and Tianjin LNG projects and Line 2 of JinaneQingdao Gas Pipeline and overseas project construction. Planned capital expenditure in exploration and development segment of Sinopec is CNY47.9 billion in 2016, laying an emphasis on domestic oil and gas exploration projects, such as the second phase of Fuling Shale Gas and Daniudi Gas Field, in order to accelerate the boosting project of the first phase of Natural Gas Transmission from Sichuan to East. In 2015, the realized average oil price of CNOOC was USD51.27/bbl, reduced by 46.6% on a year-onyear basis, and the realized average gas price was USD6.39/ 103 ft3, reduced by 0.8% on a year-on-year basis [42]. In light of price fluctuation, change in crude oil price is much greater than that in natural gas under the background of low oil price.

Fig. 4. Capital expenditure of three major oil and gas companies over the past five years. Data source: Annual reports of PetroChina, Sinopec and CNOOC.

Besides the three oil giants, other Chinese oil and gas companies also have adjusted their business strategies under the influence of low oil price. For example, Shaanxi Yanchang Petroleum (Group) Co., Ltd (hereinafter referred to as Yanchang Petroleum), which is known as the fourth oil giant in China, has reduced its capital expenditure by CAD10 million in its Canada Novus Energy. Listed company Lanzhou Haimo Technologies Co., Ltd, which has set foot in exploration and development business in recent years, has also slowed down oil and gas development under the influence of low oil price. It stated in its announcements that production in Block Niobrara mainly depended on the drilled wells in production in the second half of 2015 and that the number of new drilled wells was reduced; three vertical wells have been drilled in the independent development block, and though all have achieved high production, only one is in production at present due to the low oil price, and the rest two haven't been completed yet. The company owners also said that they wouldn't complete the wells and put them into production until the oil price recovered to a certain level. Over the last 5 years, China has achieved great-leapforward development in shale gas exploration and development, becoming the third country that has realized commercial recovery of shale gas after the US and Canada [43]. However, China's shale gas reservoirs are quite different from those of the US, which undoubtedly increased the difficulty in development [44]. Late start, low technical level and lack of experience have caused high cost, which restrains China's shale gas development, so the scale development of shale gas resources still needs a long period of time. So far, under the influence of low oil price, the whole natural gas industry is faced with pressures like insufficient demand from the downstream and declined price, and gas supply is relatively loose. Oil and gas companies are working hard to reduce the cost in order to respond to the “severe winter time” brought by low oil price. And except for PetroChina and Sinopec, shale gas development and utilization turns to be dominated by technical reserve in order to slow down the commercialization. LNG business is also influenced by the low oil price. According to the monthly bulletin of China Customs statistics,

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China imported 1983
104 t LNG in 2014, with an average price of CNY3783/t, and 1963
104 t in 2015, with an average price of CNY2783/t. According to the statistics from http://www.sci99.com/, domestic LNG price declined from about CNY5000/t in the first half of 2014 to CNY3066/t in March 2016. Since China entered a rapid development stage of natural gas industry chain, gas consumption keeps increasing rapidly. In order to solve the problem of shortage in natural gas, China has signed a number of LNG import contracts through the three major oil companies with CNOOC, as the dominator at a time when Asian LNG was in the stage of sellers' market of high oil price. The mode of linking with Japanese Customs-cleared Crude (JCC) was adopted in China's LNG long-term trade contract pricing [45] and there may contain some restrictive clauses in the trading contracts such as “take-or-pay”. Global bulk gas sales usually employ the contract mode of “take-or-pay” clause [46]. Since the Dapeng Project, prices of LNG import contracts signed by China in the period of high oil price were relatively high, making China enter the age of high oil price. Under the influence of low oil price, big buyers like China were supposed to sign low-price gas purchase contracts in order to dilute the previous too high import cost. However, limited by financial problems like profit drop caused by oil price decline and short cash flow, oil and gas companies tend to be more cautious when purchasing LNG. With a market environment of oversupply, LNG buyers now are less motivated to link with oil price. Due to the sharp decline of growth in China's gas market in the past two years, the relatively high-price imported LNG signed previously is centrally increased, and with a poor opening of the established LNG receiving stations to the third parties, there are more difficulties in importing low-price LNG. 3.2. Low oil price weighed on the gas market Since 2004, China's gas industry chain has been developing rapidly with a sharp increase in gas consumption. The reasons can be summarized in three aspects. First, environmental problems are acute due to the rapid economic development, which urgently needs clean and efficient energy. Second, the government greatly encourages gas popularization and application, and natural gas enjoys low price and even subsidies in special industries or sections. And third, prices of crude oil and petroleum products are high, providing much motivation for the replacement of natural gas in the downstream market. Through many years of cultivation, natural gas has been in an increasing proportion in China's primary energy consumption. According to the BP Statistical Review of World Energy 2015, natural gas took a proportion of up to 6% in China's primary energy consumption in 2014. Since 2013, under the influence of relevant policies, the cumulative adjustment amplitude of domestic onshore pipeline gas price rose by about CNY0.1/ m3. However, as the substitute goods for natural gas, the prices of petroleum products, LPG and fuel oil are all closely linked with crude oil price. Sharp decline of crude oil price also caused a sharp decline of the prices of these substitute goods,

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and difference in price between natural gas and the alternative energy is narrowed and economy advantages are largely weakened, and there even occurs “reverse substitution” of gasto-oil and coal in some regions. Taking the ceramic enterprises in Chaozhou of Guangdong for example, since November 2014, enterprises using LNG previously has gradually turned to LPG. By December 2014, the monthly substitution rate had reached 50% [47], and these enterprises were cultivated with hard efforts for years. Driven by this round of global crude oil price decline, price of petroleum products obviously declined. Domestic gasoline and diesel prices in 2015 were adjusted for 19 times and accumulated decline of price of gasoline standard products was CNY670/t and that of diesel standard products was CNY715/t. Though the gate price at provincial level of domestic non-civil gas consumption was lowered by CNY0.7/ m3 at the end of November 2015, seen from either time or price adjustment amplitude, suppression by low oil price on natural gas demand has become an established fact. This can be concluded from the rapid decline of natural gas consumption growth in 2014 and 2015. Another example of gas consumption by automobiles and boats can also present the impact of low oil price on natural gas market. Some data show that, the cost of LNG automobiles is generally CNY60e80 thousand higher than that of diesel automobiles, and transformation of boats costs even more, which is around CNY0.6e1 million. Moreover, due to the immature technology of LNG automobiles and boats, failure rate and maintenance costs are much higher. Under the background of low oil price, development of natural gasfueled automobiles and boasts is impacted. Taking Sichuan Province for example, Table 2 and Table 3 are the automotive fuel price lists in Sichuan Region in January 2014 and January 2016. We can clearly see the difference in the price of petroleum products like diesel, No. 93 gasoline and No. 97 gasoline and LPG when the international crude oil price was USD108/bbl and USD30.7/bbl. Obviously, the difference in the price of these petroleum products and unit calorific value of LNG has been reduced, especially that of LNG. 3.3. Low oil price is both an opportunity and a challenge for natural gas reform After China's natural gas industry chain entered the stage of rapid development in 2004, related government sectors tried to advance the reform of natural gas pricing mechanism, gradually turned it to a structural reform of natural gas industry chain (also called reform of natural gas system), and finally made it a competitive industry chain. Reform of pricing mechanism began in 2005. After ten years of efforts, ideal starting price (relatively reasonable price relation between natural gas and other alternative energy) of natural gas for non-civil gas consumption was established in provincial gate stations. Attempts in linking gate price at provincial level with that of renewable energy and opening the gate price for direct supply users (except fertilizer-related enterprises) were made to make the price through negotiation between both sides of demand and supply. But the whole

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Table 2 Prices of automotive fuels in the Sichuan Region in January 2014.a Name

Retail price

Calorific value

Price of unit calorific value/(CNY$MJ1)

Price difference of unit calorific value/(CNY$MJ1)

LNG CNG Diesel No. 93 gasoline No. 97 gasoline LPGb

CNY6.90/kg CNY4.00/m3 CNY7.29/L CNY7.41/L CNY7.99/L CNY6.40/kg

53.9 38.5 35.7 33.6 34.0 47.0

0.13 0.10 0.20 0.22 0.24 0.14

(Criterion) 0.03 0.07 0.09 0.11 0.01

MJ/kg MJ/m3 MJ/L MJ/L MJ/L MJ/kg

Note: a Data source comes from Wind Info. b LPG price is the nationwide average market price.

Table 3 Prices of automotive fuels in the Sichuan Region in January 2016.a Name

Retail price

Calorific value

Price of unit calorific value/(CNY$MJ1)

Price difference of unit calorific value/(CNY$MJ1)

LNG CNG Diesel No. 93 gasoline No. 97 gasoline LPGb

CNY5.90/kg CNY3.00/m3 CNY5.11/L CNY5.48/L CNY5.91/L CNY2.799/kg

53.9 38.5 35.7 33.6 34.0 47.0

0.11 0.08 0.14 0.16 0.17 0.06

(Benchmarking) 0.03 0.03 0.05 0.06 0.05

MJ/kg MJ/m3 MJ/L MJ/L MJ/L MJ/kg

Note: a Data source comes from Wind Info. b LPG price is the nationwide average market price.

reform was still basically a simulation of market by government. From the perspective of industry chain structure, only a small incremental reform happened during the last ten years. It was not until 2013 when the Third Plenary Session of the 18th Communist Party of China was held that the government began planning the reform of natural gas industry chain structure. It put the reform of industry chain structure before the real marketization reform of pricing mechanism and emphasized the decisive role of the former to the latter. The purpose of the former is to realize the latter [48]. But the whole reform plan of natural gas system hasn't been launched yet. World major developed economies and emerging economies are all still in profound adjustment. Economic recovery is a long process. In the short run, international gas and oil prices are hard to have a continuous and significant rise; price of imported gas in China lacks drive to go up. After 2014, domestic natural gas was in abundant supply on the whole and main petroleum companies in China, limited by cash flow, were more motivated to optimize their own assets. At the same time, China's coal price was hard to increase continuously and significantly. The 18th Communist Party of China reached an agreement in reform and a top design was in plan, which provided an important window for promoting the structural reform of natural gas industry chain and for establishing a modern energy market system, thus becoming the key to whether the reform can bring about benefits as soon as possible. Low oil price is both an opportunity and a challenge for the structural reform of natural gas industry chain. There is severe

lack of consumption motivation in domestic natural gas market. Therefore, how to digest the natural gas imported when the price was high and when it was expected to go up has become a tough problem. Now the gas price is low and the market is expected to increase slowly. So emerging market entities lack motivation to get into the upstream of the industrial chain and they are still hesitating. Domestic major oil companies are worried about their loss of assets. The third round of bidding for shale gas exploration right was repeatedly postponed, which was a good evidence for this. What's more, low utilization of natural gas pipeline and LNG receiving stations has also led to the drop of investment in such kind of infrastructures. It also makes it more difficult to separate network management and operation management in middle reaches of the industry chain. In other words, appropriately low oil price is conducive to the structural reform of natural gas industry chain, but excessively low price will hold back significant and rapid advance of the reform. 4. Conclusion (1) Low oil price has resulted in business performance decline of oil and gas companies. All these companies cut down their capital expenditure to get through the current difficulties, which is likely to have a negative effect on future oil and gas production. (2) Low oil price has led to a decrease in natural gas prices worldwide to different extent. Economy of natural gas is greatly reduced compared with the crude oil price.

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(3) Unconventional natural gas industry is greatly impacted by low oil price because of the high costs. There is an increasing number of overseas unconventional oil and gas companies going bankrupt. Except PetroChina and Sinopec, domestic oil and gas enterprises are inclined to be more cautious about their assets. (4) More than one factor contributes to oil and gas asset acquisition. The market is keeping “calm”. (5) China's natural gas industry chain is now in a rapid development. This round of decline in oil price is both an opportunity and a challenge for the structural reform of natural gas industry chain. Funding Project supported by the National Major Science and Technology Project “Quantitative evaluation of economic limits and risks for shale gas development” (No.: 2016ZX05037006e003). References [1] People's Network. Drop in oil prices cut natural gas price advantage. (2014-12-17) [2016-05-25]. http://energy.people.com.cn/n/2014/1217/ c71661-26227205.html. [2] Wu Yongjun, Ma Yu. On current international oil price declineereasons & impacts. Pet Petrochem Today 2016;24(1):23e30. [3] Ma Yunfei. Natural gas economy meets challenges from the drop in oil prices. (2014-11-29) [2016-05-25]. http://www.ceh.com.cn/cjpd/2014/ 11/794326.shtml. [4] Zhang Kang, Lu Quanjie. The primary cause and profound influence of oil price slumps. SinoeGlobal Energy 2015;20(5):1e15. [5] Smead RG. Low oil priceseimpact on natural gas and associated industries. Nat Gas Electr 2015;31(8):29e32. [6] Erd} os P. Have oil and gas prices got separated? Energy Policy 2012;49(10):707e18. [7] Ji Qiang, Geng Jiangbo, Fan Ying. Separated influence of crude oil prices on regional natural gas import prices. Energy Policy 2014;70(7):96e105. [8] Villar JA, Joutz FL. The relationship between crude oil and natural gas prices. Energy Info Adm 2006:1e43. Office of Oil and Gas. [9] Luo Zuoxian, Zhou Xinke, Lu Xuemei. Oil companies' operating strategy analysis under low oil prices. Int Pet Econ 2015;23(4):51e8. [10] Wen Qian, Li Zhijian. Competitiveness analysis of coal-to-gas under fluctuation of crude oil price. Chem Ind 2015;33(4):8e14. [11] Kang Kang. Impact of low oil price on the unconventional oil and gas companies in the United States. Int Pet Econ 2015;23(10):11e7. [12] Zhou Shuhui, Fan Jinwei, Li Guang, Tan Jianhui. Natural gas market development under China's new normal and low international oil prices. Int Pet Econ 2015;23(6):4e12. [13] Liu Yijun. Research on sustainable development of natural gas industry chain. Beijing: Petroleum Industry Press; 2014. [14] Kolb RW. The natural gas revolution: at the pivot of the world's energy future. Beijing: China Machine Press; 2015. [15] EIA. Annual energy outlook 2015. New York: EIA; 2015. [16] Li Yanbin, Li Yun, Wang Bingqian, Chen Zhuoer, Nie Dan. The status quo review and suggested policies for shale gas development in China. Renew Sustain Energy Rev 2016;59:420e8. [17] Liu Shuang. The rational call of “Unconventional”eanalysis of unconventional oil and gas development in China. China Pet Dly 2013-10-08;3.

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