China has slashed natural gas prices to boost consumption of the cleaner-burning fuel, but the move may come as a shock to producers who have been struggling with low demand growth this year.
On Nov. 20, China's top planning agency cut wholesale gas prices for non-residential users by an average of 28 percent, reducing the charge by 0.7 yuan (U.S. 11 cents) per cubic meter.
The price break will save industrial and commercial consumers over 43 billion yuan (U.S. $6.7 billion) annually, the National Development and Reform Commission (NDRC) said.
The NDRC has been under pressure for months to revise its policies as high gas prices have discouraged demand and efforts to curb reliance on high-polluting coal.
While coal prices have plunged by over 20 percent in the past year, the growth of gas use has slumped to 2.1 percent in the first half from 5.6 percent last year and a 13-percent annual pace in 2012 and 2013.
After the years of higher demand drove up gas prices in the Asian market, China's regulators have been slow in adjusting to the dropoff and the country's economic slowdown.
Double Europe's prices
In October, Reuters estimated that wholesale gas prices on China's southern coast were double those in Europe and over four times higher than U.S. rates.
The big cut in "city gate," or pre-distribution, prices follows major declines in world energy costs and Asian spot market rates for imported liquefied natural gas (LNG).
Before the NDRC announcement, benchmark gas prices in Shanghai were 59 percent higher than Asian spot LNG, The Wall Street Journal said.
Lower prices could speed fuel switching by power producers and industry, easing smog and carbon emissions. The government's goal is to boost the gas share of China's primary energy mix to 10 percent by 2020 from 5.7 percent last year.
The target is seen as critical to meeting China's pledges to fight climate change.
But the huge price cut, coming after a smaller adjustment in April, will leave some segments of the gas market reeling, raising doubts about whether the policy can be sustained.
"Domestic producers and importers of gas will certainly be hit with losses of billions of U.S. dollars, and these are mainly the large national oil companies," said Philip Andrews-Speed, principal fellow at the National University of Singapore's Energy Studies Institute.
PetroChina, the listed arm of state-owned China National Petroleum Corp. (CNPC), lost 10.6 billion yuan (U.S. $1.68 billion) on gas imports in the first half, according to the industry publication Upstream.
The wholesale price cut is expected to crimp profits from domestic production and make it harder to cover the losses this year.
The dim earnings outlook may have been a factor in PetroChina's announcement on Nov. 27 that it will sell a half-interest in its Trans-Asia Gas Pipeline Co. to a state- owned management entity for 15.5 billion yuan (U.S. $2.4 billion).
While some analysts hailed the sale to China Reform Holdings Corp. as a step toward demonopolizing PetroChina, it reflected pressure on the company to shore up its balance sheet, The Wall Street Journal said.
In its announcement, the NDRC said it would allow an upward "float" of as much as 20 percent from the new benchmark gas price, but it is unclear how it will affect final commercial rates.
In 2014, imports accounted for nearly a third of China's gas consumption. LNG imports by ship provided about 46 percent of the imports with the balance coming by pipeline through the Trans-Asia system, mainly from Turkmenistan.
The changes could have far-reaching consequences, particularly if consumption does not respond to the price cut, leaving producers with high development costs and low sales.
LNG suppliers from Australia to Indonesia and Qatar are likely to feel the pinch after years of heavy investment in projects to meet China's previous high-priced demand.
The weighted average price of LNG imports in September was 7.7 percent below the new city gate price thanks to low spot market rates, according to Platts energy news service.
But some LNG cargoes under long-term contract prices were as much as 28 percent higher, suggesting the potential for major losses for producers.
In the first three quarters, China's LNG imports fell 4 percent as a result of high prices and weak demand.
LNG producers have been shadowed for months by reports that China's importers have been trying to resell their cargo commitments into a glutted market with the risk that they might default on their contracts.
Turkmenistan is also expected to feel the effects of China's sudden price drop.
During President Gurbanguly Berdymukhammedov's visit to Beijing on Nov. 12, President Xi Jinping pledged to "push cooperation on energy ... to a new high," the official English-language China Daily reported.
But Turkmenistan is likely to have come under pressure to reduce export prices in preparation for the NDRC cut.
While the two sides have not disclosed prices since pipeline supplies started in 2009, the International Monetary Fund recently forecast a 36-percent drop in Turkmenistan's hydrocarbon export revenue this year and a further 23-percent decline in 2016.
Despite the disruptions, China may see few alternatives to steep price cuts if it wants to keep its gas and climate goals on track.
"The top priority seems to be to increase the use of natural gas in order to clean the air. With coal prices very low and no carbon price in place, the government has no choice but to reduce the city gate prices," Andrews-Speed said by email.
But after years of controlling prices, the government has been forced to make a large and abrupt adjustment that might have been avoided by earlier reforms.
"This step seems typical of the Chinese approach to energy price adjustments, changing the price at one end of the supply chain and working out later what to do about the other end," Andrews-Speed said.
The new price structure may also threaten projects for future supplies.
On Nov. 18, Russia's Interfax reported that monopoly Gazprom and CNPC will have to find a new model for cooperating on a planned western pipeline for Siberian gas due to low energy prices, according to minutes of an intergovernmental meeting last month.
Moscow has promoted the western gas route to Xinjiang as a faster and cheaper alternative to pipelines from eastern Siberia that would serve China's industrial northeast.
There are signs that Russia's main eastern route known as the Power of Siberia is also in trouble.
On Nov, 20, Interfax said Gazprom has cut its investment in the project this year by nearly 38 percent, although the company insisted the reduction is due to "optimization of delivery times" and installations scheduled for 2016-17.