Firms finding methods to increase supply as demand for clean energy grows in northern regions

China's battle against air pollution has had an unintended consequence: a shortage of heating fuel supply is affecting many northern cities this winter, boosting domestic prices for natural gas to a three-year high.

Analysts believe the soaring demand for liquefied natural gas, the slow construction of pipelines to import more supply and the lack of gas storage facilities have all contributed to the country's gas shortage, despite a global supply glut of natural gas.

"China's soaring demand for LNG imports this year has been driven by cold weather, coal-to-gas switching policy directives to curb air pollution, and large-scale replacement of coal-fired heating with gas-fired boilers in domestic households," said Abache Abreu, an analyst focusing on Asia LNG from S&P Global Platts.

"China's spot demand growth potential might also be limited by high terminal capacity utilization and further growth in China's LNG demand might be limited by infrastructure constraints, as terminals are currently running above capacity in the key winter demand center of northeast China," he added.

"Even if the price gap between China's northern and southern gas markets was wide enough to make the transport of regasified LNG from the southern terminals to the north economical, pipeline infrastructure connecting both ends is not sufficient to accommodate the current seasonal demand surge," Abreu said.

Figures released by the National Development and Reform Commission, China's top economic regulator, show that liquefied natural gas consumption has witnessed sharp growth this year, reaching 209.7 billion cubic meters during the January-November period, up 18.9 percent year-on-year.

Full-year growth in 2016 was 7 percent.

Li Li, energy research director at energy consulting firm ICIS China, echoed Abreu's comments, saying LNG terminals in China are facing capacity bottlenecks and logistical constraints.

"One of the most significant contributors is the limited capacity of distributed gas storage infrastructure," she said.

Li pointed out that natural gas demand varies a lot from season to season.

"You are going to have a lot of demand in winter months for heating and much in the summer months for refrigeration, and less so in between," she said.

"It's necessary we come up with massive gas storage facilities to avoid large scale gas shortages, which is very likely to happen in face of cold snaps," she added.

On Dec 1, the growing appetite for gas pushed domestic LNG prices to a record high of 9,000 yuan ($1,360) a metric ton in some regions.

By early December, China had imported 32.7 million tons of LNG in 2017, just below the 33.3 million tons imported by South Korea, according to S&P Global Platts Analytics, and well above the 25.7 million tons China imported in the full year of 2016.

China has become the main driver of rising LNG spot prices and a key destination for growing supplies from throughout the Asia Pacific region, it said.

Xu Bo, a senior analyst with China National Petroleum Corporation's Economics and Technology Research Institute, said natural gas consumption is expected to reach 230 billion cu m (165 million tons) this year, with 20 billion cu m coming from the coal-togas transition.

To secure gas supply, China's State-owned energy firms, including CNPC and China National Offshore Oil Corporation, China's biggest LNG importer, are maximizing production at domestic gas fields.

CNOOC said it planned to use more than 100 trucks making round-the-clock supply runs, picking up fuel from import terminals in Guangdong province and transporting it to northern regions－a round trip of more than 2,200 kilometers－to help ease a burgeoning heating crisis there.

CNPC, the country's largest oil and gas producer by annual output, and supplier of more than 70 percent of the natural gas used in China, said it would provide 70 billion cu m of natural gas this year to alleviate gas shortages during the heating season.

All the equipment and staff of the company are in full operation, it said.

Qu Guangxue, a CNPC spokesman, said the company will also continue negotiating with Central Asian nations for additional stocks to ensure adequate supplies.

According to Jing Chunmei, a researcher with China Center for International Economic Exchanges, the ultimate solution lies in allowing more social capital in LNG infrastructure construction to lower costs and come up with a market-based pricing mechanism.