The Era of Natural Gas and the Natural Gas Market in China

Oct. 10, 2012

Dear Mr. Chairman, honorable guests and distinguished friends!

I feel honored to attend the GASEX at the invitation of its organizing committee.
Excellent speeches delivered by specialists attending the GASEX have provided me
with many great inspirations. I am grateful to the organizing committee for setting up

this excellent platform for us to meet and sit down to discuss issues affecting the
whole industry. I hope to take this opportunity to share with you my view on the
development of the natural gas market in China and throughout the world.

I. The World Will Enter on an Era of Natural Gas, and Consumption in the
Asia-Pacific Region Grows in a Robust Manner

The world is going through the transformation during which natural gas

replaces petroleum to become the dominating energy in the world. The flooding in
of unconventional natural gas resources -- such as coal bed methane and shale gas --
laid a solid material foundation for accelerating the development of the world natural

gas industry. The development of natural gas resources has brought about momentous
development of the industry of natural gas transportation and storage. The expansion
of the market and utilization of natural gas has created the original driving force for

rapid development of the natural gas industry.

According to a forecast published by the International Energy Agency (IEA),
the world annual demand for natural gas will grow by 1.4% before 2035. It is

predicted that natural gas will account for 28% of the world consumption of

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nonrenewable energy, replacing petroleum as the dominating energy. Natural gas is
gradually becoming the most important energy in the world, and the 21st century will

be an era of natural gas.

The supply and demand model has generally taken shape, with glaring
cross-regional differences in the model. A calculation based on the data for 2010

shows that the "Russia-Central Asia-Middle East" high-yielding zone in the east
hemisphere accounts for 40% of the global output while the high-yielding zone in the
west hemisphere -- which mainly comprises the United States and Canada -- accounts

for 30%. Europe, North America and Asia account for 38%, 28% and 20% of the
global consumption respectively. Thus, the global consumption pattern is
characterized by "two zones and three centers". Globalization and regionalization

coexist in the world supply and demand pattern of natural gas. Differences in
regionalization led to differences in supply chains, industrial chains and values chains.
Despite the imbalance in the development of the natural gas industry throughout the

world, it is still certain that the use of natural gas will make the air cleaner, make us
less dependent on coal and petroleum, and lead us towards a community of renewable
energy.

The demand of natural gas in the Asia-Pacific region is increasingly strong,

providing great prospects of the development of the natural gas industry around
the world. Along with the shift of the global economic focus, the focus of natural gas

consumption has also gradually moved to the Asia-Pacific region. Driven by the
increasing demand in countries in this region -- such as Japan, India and China -- the
overall growth of the demand for natural gas in this region is 11.5%, much higher than

the production growth during the same period of time. The annual consumption of

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natural gas in this region doubled during the past 10 years, up from less than 300
billion cubic meters to 630 billion cubic meters, and accounting from 12% to 20% of

the global consumption. It is predicted that the consumption of natural gas in this
region will be multiplied during the next two decades. This region is very likely to
replace the United States and Europe to become the largest natural gas consumer in the

world.

II. Huge Potential for the Development of the Natural Gas Market in China

(I) The Demand for Natural Gas Persistently Grows Rapidly.

Sustainable, rapid and steady development of the Chinese natural economy has
brought about rapid growth of the public demand for natural gas, and the year-by-year
growth of natural gas consumption. The annual growth rate of natural gas

consumption over the past 10 years averages at least 16%, much higher than the 3%
world average. Due to rapid growth of the size of the Chinese natural gas market, the
apparent natural gas consumption in China was 130.7 billion cubic meters in 2011,

accounting for 5% of renewable resource consumption.

In terms of the trend of demand growth, the demand for natural gas in China is
obviously growing. Although the financial crisis in 2008 brought some negative

influences on the demand growth, the demand still grew energetically in 2010.
The "demand-driven consumption" model is gradually replacing the
"supply-driven consumption" model to become the characteristic of the model of

natural gas consumption in China. The three driving forces -- i.e. economic growth,
environmental protection and urbanization -- push up the demand for natural gas and
then rapid development of the natural gas industry.

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 1. Sustainable and Steady Growth of the Chinese Economy Pushes Up the
Demand for Energy

China's current healthy economic growth and its sustainable and steady growth in
the future require more energy, pushing up the demand of natural gas. China's GDP

grew by 9.2% in 2011. The government work report at the NPC in 2012 clearly stated
that China aims to increase its GDP by 7.5%. This percentage still qualifies China as
the country of fastest economic growth in the Asia-Pacific region. According to

China's "12th Five-Year Plan", China's demand for natural gas will grow annually
about 23% during "12th Five-Year Plan" period. The consumption of natural gas
during this period will be 1.0143 trillion cubic meters, 2.5 times as that during the

"11th Five-Year Plan" period, accounting for 8.3% of fossil energy.

2. Requirements on Environmental Protection Will Optimize the Natural

Gas Demand and the Energy Structure

Given global warming, green economy and low-carbon economy have become the

trend of global economic development, and energy conservation and emission

reduction have constituted one of important policies upheld in China. At the
Copenhagen climate summit in 2009, the Chinese government promised to reduce its

carbon dioxide emission per-unit GDP by between 40 and 45% by 2020, compared
with that of 2005, and to include this promise in its mid and long-term national
economic and social development plan as a binding criterion. The Chinese government

regards the adjustment of the energy structure, the enhancement of environmental

protection, construction of a harmonious society and promotion of sustainable
development as the starting point for national development. The government regarded

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vigorous development of the natural gas industry as a long-term development strategy.
The government also launched a series of policies to encourage development of the

domestic natural gas industry and to spur imports of foreign natural gas resource,
having proved highly effective.

3. Increasingly Higher Level of Urbanization Continuously Strengthens

Demand for Natural Gas

According to the data from the Office for National Statistics, the urban population
accounted for more than half of the natural population in 2011, with 51.27% of the
people living in cities or towns. This is the first time for the urban population to be

bigger than the rural one.

Continuous acceleration and improvement of urbanization will continuously
increase the demand for natural gas in urban areas. China has achieved rapid

development and accomplished great achievements in gas supply and size of

consumption. Construction of gas supply networks and utilization of natural gas. It is
predicted that by the end of the "12th Five-Year Plan" period, the natural gas

consumption in the urban areas will total 178.2 billion cubic meters, up 113%
compared with the end of the "11th Five-Year Plan" period.
China is inferior to other countries in terms of both the quantity of natural gas

consumption and the portion of natural gas in primary energy consumption. Thus,
there is wide room for China to develop the natural gas industry.
(I) A Combination of Various Sources to Guarantee Natural Gas Supply

In order to meet the increasing demand for natural gas and ease the resource
shortage, on the one hand China should enhance its exploration and exploitation of

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natural gas -- particularly the development and utilization of unconventional oil and
natural gas resources -- such as shale gas, coalbed methane, oil sands mine, oil shale

and flammable ice. On the other hand, China should enhance its overseas exploration
and purchases.
Domestic natural gas production, imports of natural gas through on-shore

pipelines as well as imports of LNG will greatly increase the natural gas supply to the
Chinese market. China will link up natural gas pipeline networks throughout the
country so that they will "run west to east and south to north and cross the borders to

foreign countries". In this way, these networks will constitute a national natural gas
pipeline network, which regards the transportation pipeline networks in the four
natural gas regions (Xingjiang, Qinghai, Shaanxi Gansu Ningxia, and Sichuan

Chongqing), pipeline networks that carry natural gas from foreign countries to China
as the major components, and is connected to offshore natural gas pipelines and to
pipelines to transported imported LNG.. When this national network is in place, China

will face a multiple-natural gas source situation characterized by domestic on-shore

resources, domestic off-shore resources, imported LNG and natural gas imported
through pipeline networks. (p11)

I. PetroChina Kunlun Gas Company Ltd. (short for Kunlun ) creates Green
PetroChina

CNPC is the largest producer and supplier of natural gas in China. Environmental

friendliness and low carbon are intrinsic requirements contained in CNPC's

sustainable development strategy. At present, CNPC accounts for roughly 75% of the
reserves and output of natural gas in China. It owns 60,000 km of natural gas

transportation pipelines, accounting for at least 70% of the national mileage. Its

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natural gas business has been continuously expanding over recent years. Its portion of
the domestic oil and gas production equivalent rose from 12.3% in 2000 to 36% this

year. CNPC will continue to regard its natural gas business as a strategic and growing
project, try to account for half of the natural gas and oil supply in 2015, and struggle to
continue to hold at least 70% of the domestic market.

During the "12th Five-Year Plan" period, CNPC focuses its efforts on making
itself green, internal and sustainable. The natural gas business is pivotal for making the
company environmentally friendly. As its exclusively-owned subsidy, Kunlun

struggles to integrate upstream and downstream business in the field of natural gas and
turns CNPC into a green company.
Kunlun was founded in 2008. Its main businesses include the construction of

urban gas pipeline networks, urban gas distribution, natural gas and LPG sales and
after-sales service and other related businesses. During the development of past three
years, this company has adhered to the principle of mutual benefits and side-by-side

development. It has adopted many methods -- such as forming strategic alliances,

establishing joint ventures and exchanging resources -- to actively promote high-level
and strategic cooperation with its domestic peers as well as local and

non-government-funded enterprises, and to jointly fulfill the responsibility for

guaranteeing China's energy security. This company has now become an enterprise
group with 168 subsidiaries in various forms. The urban gas and LNG business has

covered 28 provincial-level regions throughout China, being one of the largest LNG
sellers and largest cooking gas companies in China.
Compared with developed countries, China's market penetration rate for natural

gas is 10.7%, much lower than the world average. One forecast says that this rate will

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rise to 12.9% in 2015. The per capita natural gas consumption in China is far lower
than the world's average and cannot meet the requirement that must be met to promote

socioeconomic development in China. Thus, dedication is a strategic choice that China

must make to develop the natural gas industry. As a bridge and a tie that connect
CNPC with its natural gas users, Kunlun upholds the corporate philosophy of

"providing energy and strengthening harmony"; carefully fulfills its three major
responsibilities -- economic, political and social responsibilities -- and provides green
energy and excellent services in persistently stable manner.

We hope to work together with our peers at home and abroad to maintain
harmony and prosperity in the global natural gas market, and make greater
contributions to clean development, sustainable development, energy conservation and

emission reduction throughout the community.