China oil demand to slow amid market deregulation: CNPC

China's oil product demand growth is likely to ease further in the next five years because of a slowing economy and a switch to alternative fuels, state-owned energy firm CNPC's research arm said. More deregulation is likely as the government takes a supervisory role.

Chinese economic growth may recover to an average of 5-6pc/yr in 2021-25 from around 3pc this year, although this would still be down from 6.1pc growth in 2019, CNPC's China Petroleum Planning and Engineering Institute (CPPEI) said in its 14th five-year outlook.

Oil intensity slowed to 310t/100mn yuan ($14.7mn) of GDP in 2019, down by 12.5pc from 2018, the CPPEI said. The decline quickened from an average drop of 6.4pc/yr in 2000-19.

China's demand for gasoline, diesel and jet fuel could collectively peak by 2025. The CPPEI expects demand growth to average just 0.9pc/yr in 2021-25 as displacement by alternative fuels increases.

Under the research arm's ‘moderate' scenario, gasoline demand growth averages just 1.1pc/yr and peaks around 2024, while diesel demand declines by 2.2pc/yr. But jet fuel demand, which has been decimated by the Covid-19 pandemic this year, rebounds by an average of 12.5pc/yr in the period to 2025.

The CPPEI expects product prices to be further deregulated. Beijing's role could become more one of supervision, as the government allows stronger price signals for oil products from the market and more efficient resource allocation. Top economic planner the NDRC currently sets gasoline and diesel pump prices based on a basket of crude prices.

Greater competition means state-controlled firms will likely need to improve their own product procurement management systems, the CPPEI said.

Chinese state-run firms will also face increasing challenges from the growing use of electric vehicles (EVs) in particular, although some other alternative fuels will have a slower adoption. Alternative fuels could displace some 20pc or 1.2mn b/d of apparent gasoline and diesel demand by 2025, compared with 13pc or 770,000 b/d last year. But if planned targets for EVs and hydrogen fuel cell cars are met, and if production of ethanol, biodiesel, methanol fuel and coal-to-liquids (CTL) grows stably, the displacement rate could rise to 40pc by 2030.

Beijing has already extended subsidies for new energy vehicles (NEVs) by another two years to mitigate the impact of the pandemic. This helped NEV output and sales increase year on year in July for the first time this year, with the gains extended into August.

Hainan has become the first Chinese province to set a target to ban sales of oil-fuelled vehicles through more NEV subsidies. The government has set a nationwide goal to achieve sales of 5mn units of NEV vehicles by the end of this year, 20mn in 2025 and 80mn by 2030.

Electric cars are gradually displacing compressed natural gas vehicles, the CPPEI said, while LNG is continuing to displace diesel in heavy trucks.

China has also pushed the development of methanol-fuelled cars in recent years but the CPPEI does not see this significantly displacing gasoline yet.

The threat to gasoline demand from ethanol is contingent on food reserves and import tariffs, while biodiesel is not competitive given current low oil prices, the institute said. China has already delayed the nationwide introduction of E10 gasoline — with a 10pc ethanol blend — this year as home-grown production slows.

CTL projects remain largely unprofitable when oil prices are below $70-80/bl and the utilisation rate for domestic projects is low.

The government also wants to push hydrogen fuel cell cars, although this is in an early stage of development. There were 6,000 such cars in China last year, exceeding a 2020 target of 5,000. But Beijing is aiming to increase this to 50,000 by 2025 and 1mn by 2030.

By Karen Teo