WoodMac: NGVs to lead China’s diesel displacement

Wood Mackenzie says that natural gas vehicles will be the largest single factor in the substitution of diesel within the Chinese transport sector by 2020. 

The transition follows similar moves in the industrial and power sectors. Wood Mackenzie estimates that 450 thousand barrels per day (kb/d) of diesel, or ten-percent of demand, will have been displaced by gas before the end of the decade. The influence of NGV’s is already being felt in China, with diesel demand weakening through 2014 and a large surplus forecast by 2020 – something global refiners need to consider.

Wood Mackenzie’s Head of Refining Research, Sushant Gupta says, “In 2013, there were about 250,000 NGVs in the commercial sector, predominantly trucks and buses, in China. This displaced around 110 kb/d of diesel.”

Wood Mackenzie forecasts that by 2020, the number of NGV’s will increase to 900,000 in the commercial sector – a near four-fold increase on 2013 levels.

Despite this level of growth, transport will remain the smallest component in China’s booming gas sector – accounting for only eight-percent of demand by 2020 (from five-percent in 2013). In real numbers however, this results in a trebling of transport-related gas demand to 30 billion cubic metres. Even with the recent fall in oil prices, Wood Mackenzie does not expect this to curb gas penetration into transport as gas prices in China will similarly soften in line with oil through to 2020, based on the government’s natural gas pricing formula.

Sushant says, “We continue to see diesel substitution in the industrial and power sectors in China. However, the majority of diesel demand in these sectors has already been substituted, with only limited opportunities remaining. In contrast, NGVs will account for most of the future diesel substitution thanks to both domestic market and policy incentives.”

This year, China will experience a decline in diesel demand for the first time in more than a decade, falling by nearly one-percent. Although NGVs played a part in diesel demand contraction, the major driver has been more moderate GDP growth, in particular a slowdown in investments, which sharply reduced the call on freight within the resource sectors.

Explaining the wider regional impact of gas penetration into China’s transport sector, Sushant expands, “A slowdown in China’s diesel demand and continued refinery investments will have China emerge as a large diesel exporter in Asia. This also means that for Chinese NOCs’, which supply the bulk of both oil and gas to the transport sector, strategic choices will increasingly come into focus around supporting more gas penetration and slowing refinery investments.”

Asia Pacific is expected to remain surplus in diesel/gasoil at around 520 kb/d by 2020.

Sushant says, “Identifying export market opportunities will become challenging for export refiners in Asia as they will be marginal suppliers of diesel/gasoil to Europe and face a stiff competition from US, Middle East and Russia suppliers. If the arbitrage opportunities do not materialise, then the competition within the region will intensify.”

Wood Mackenzie asserts that the future pace of substitution of diesel will have a material impact on the amount and type of refining capacity required in Asia. NOCs in China and India, which are building new regional refining capacity, could face an oversupply, especially for diesel, if they fail to balance domestic supply and demand. Therefore, understanding the role NGVs play in driving China’s incremental diesel surplus is vital.

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