China Gas Utilities:Five-year Plan for Clean Heating issued,supportive on coal-to-gas

On 16 Dec 2017, ten ministries jointly issued a notice on Five Year Plan(2017-2021) for Clean Heating in North China which covers 14 whole provincesand part of Henan. In this notice, the government sets several key targets: 1) theclean heating penetration to reach 50% by 2019 and 70% by 2021 (from 34% in2016) in North China, with a key focus on those 2+26 cities located in pollutionchannel; 2) coal-to-gas to bring 23bcm/year incremental natural gas demand in2+26 cities, 63%/37% of which is in urban/rural area, 3) to install an additional12mn hanging space heaters in 2+26 cities and surrounding area over 2017-2021,which translates into 11-12mn rural new connections.

    Coal-to-gas is still a key focus.

    The government continues to encourage coal-to-gas conversions in North Chinaalthough at the same time stressing to develop in an orderly manner dependingon gas supply abundance. Centralized heating (gas-fired heating boilers, cogenerationgas power plants and distributed energy projects) is prioritized inurban/suburban area while hanging space heaters are encouraged in rural.

    districts. Other than natural gas, renewable energy (geothermal, biomass, solar),power and clean coal are also encouraged as other methods of clean heating.

    Pushes are stronger and visibility is higher in city area than suburban/ruralAccording to the notice, for city/county area, gas boilers/co-gen power plantsare prioritized choice for heating; for suburban area, using piped gas/CNG/LNGas source for centralized/individual heating is also strongly encouraged; for ruralarea, gas hanging furnaces should be actively promoted and the conversionprogress will depend on the economy and affordability in that region. Governmentexpects coal-to-gas to bring Incremental gas demand of 23bcm/year in 2+26cities over 2017-2021, 63%/37% of which is in urban/rural area. Government alsotargets to install 12mn wall hanging furnaces in 2+26 cities and surrounding area,which translates into 11-12mn rural new connections. For regions outside of 2+26cities, the notice does not set any concrete coal-to-gas targets.

    Gas supply security is reiterated.

    The notice has an detailed appendix to lay out the plan to increase gas supplyto deal with the increasing gas demand seasonality caused by coal-to-gasconversion. Based on the plan, upstream players should be able to supply106bcm/year to six key provinces in North China by 2021, 60% of whichshould be in winter. The construction of LNG terminals/transmission pipelines/storage facilities will be accelerated and we believe Kunlun and BEHL are keybeneficiaries due to exposure to those assets (see report link).