China Gas Deal May Boost Prices

An analysis by Michael Lelyveld
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China's President Xi Jinping (back right) and Russia's President Vladimir Putin (back left) attend a giant energy agreement signing ceremony in Shanghai on May 21, 2014 with Gazprom CEO Alexei Miller (front left) and CNPC Chairman Zhou Jiping (front right).
China's President Xi Jinping (back right) and Russia's President Vladimir Putin (back left) attend a giant energy agreement signing ceremony in Shanghai on May 21, 2014 with Gazprom CEO Alexei Miller (front left) and CNPC Chairman Zhou Jiping (front right).

Updated at 10:45 a.m. EST on 2014-06-10

China's massive natural gas deal with Russia could drive the government to speed pricing reforms, spurring a significant rise in household rates.

Nearly three weeks after the two sides signed the U.S. $400-billion (2.5-trillion yuan) export deal in Shanghai, the terms remain a commercial secret, but most analysts have cited a starting price of U.S. $350 (2,186 yuan) per thousand cubic meters.

The Russian export price, which is subject to periodic increases under a formula tied to oil and oil products, would be higher than the cost of gas from Central Asia but lower than Russia's prices for Europe or China's imports of liquefied natural gas (LNG).

First supplies from Russia's state-owned Gazprom under the 30-year contract are not expected before 2019, but the starting price suggests that rate increases will be needed to avoid losses for China National Petroleum Corp. (CNPC).

Current charges in Beijing stand at 2.28 yuan (U.S. $0.36) per cubic meter for households and 3.23 yuan (U.S. $0.52) per cubic meter for industrial and commercial use, the official Xinhua news agency reported.

The rates suggest that CNPC would face growing losses on residential service after pipeline costs, distribution, and delivery are taken into account.

CNPC losses

With industrial costs already at European levels, there may be little room for increases, leaving regulators with the choice between raising consumer prices or subsidizing consumption by letting CNPC losses pile up.

The state-owned company has struggled to squeeze profits from its gas business as the government tries to shift a greater share of China's energy mix from high-polluting coal while preserving price controls over gas and power.

Last year, CNPC PetroChina registered a profit of 28.9 billion yuan (U.S. $4.62 billion) on its gas and pipeline business after losing 2.1 billion yuan (U.S. $336 million) in 2012.

The turnaround came after the government allowed a 15-percent rise in wholesale rates for non-residential use last July, approving the first increase since 2010. Household charges remained unchanged, leaving industrial users to offset the costs.

CNPC has complained for years that it loses money on gas imports from Central Asia and overseas LNG, a problem that is likely to be aggravated when Russian gas comes on line.

The company's losses recorded in 2012 included a 41.9-billion yuan (U.S. $6.7-billion) deficit from sales of imported pipeline gas and LNG, according to state media.

Tiered pricing

The government has repeatedly pledged to promote market-based energy pricing, but so far its top planning agency has taken only half-measures on gas.

In March, the National Development and Reform Commission (NDRC) announced a three-tiered pricing structure for households with higher rates for greater consumption, noting that less than 5 percent of homes use nearly 20 percent of residential gas.

The reform will leave rates unchanged for 80 percent of consumers but raises prices by 20 and 50 percent for the two higher steps of gas use.

The tiered system to be implemented by 2015 is similar to those introduced in recent years for power and water, which have also been criticized for exempting the vast majority of consumers from price pressures to encourage conservation.

The government has not said how long the tiered mechanism will remain in force before the next stage of price reforms takes place, but judging from previous adjustment periods, broader market-based pricing seems unlikely before 2017.

Conflicting forces

Officials may be caught between a series of conflicting forces as the government tries to implement its anti-smog plan for cities and double the share of gas in China's energy mix to 10 percent by 2020.

The goal may be hard to achieve without higher prices to provide incentives for producers and importers, but both households and industrial users including power companies may resist greater costs, particularly if economic growth slows.

Philip Andrews-Speed, a China energy expert at National University of Singapore, said the government may be relatively well-insulated from public pressure over consumer gas costs.

"At present, China's energy policy is driven by concerns relating to security of energy supply and the need for clean air. The other priorities of economic efficiency and social equity are considered marginally less important," said Andrews-Speed.

"In other words, economic losses can be tolerated and a growing proportion of the population can pay the higher gas prices," he said.

Andrews-Speed argued that most households in China do not consume large volumes of gas directly.

Most direct use is for cooking. In the north, gas is used increasingly for district heating, but electricity provides heating in the south, said Andrews-Speed.

Since most households feel only the indirect effects of higher gas prices, the political risk of raising rates is "relatively low," he said.

Cautious pricing reforms

That assessment may mean that the government is being unnecessarily but characteristically cautious about implementing energy pricing reforms.

Despite the high costs of growing energy consumption and pollution, officials have shied away from "big bang" solutions like full-scale price decontrol, preferring partial measures over a period of years.

The government is likely to manage natural gas prices in the same way that it has handled reforms for motor fuel, "by incremental adjustments that share the pain between producers and consumers," Andrews-Speed said.

On the Russian side, the high costs of developing new resources and infrastructure in eastern Siberia remain a concern, although the contract to supply China with 38 billion cubic meters of gas per year has been hailed as a breakthrough.

An expected advance payment of $25 billion (156 billion yuan) from China has yet to materialize, leaving the question of financing up in the air.

PetroChina CEO Wang Dongjin said the payment was not part of the contract, calling it a "complicated issue that needs approval of government agencies," the official English- language China Daily reported, citing the news website

Last week, Russian President Vladimir Putin suggested "recapitalizing" Gazprom with government funds to pay for the Siberian development and pipeline costs, Interfax reported.

The estimated $55-billion (344-billion yuan) cost of development on Russia's side of the border is equal to more than half of Gazprom's current market capitalization of $97 billion (606 billion yuan), based on its share price, the news agency said.

CORRECTION: An earlier version of this story provided an incorrect yuan to U.S. dollar conversion for current prices in Beijing per cubic meter of natural gas.

Comments (3)

Anonymous Reader

Oh, yes, freedom. Like in the US where homeless people have the freedom to sleep under any bridge they choose.

Jun 10, 2014 11:18 AM

Anonymous Reader

Isn't that nice? At least they have a choice.

Jun 13, 2014 09:32 AM

Anonymous Reader

Your Yuan-US dollar conversion is accurate for all figures except in for this sentence "Current charges in Beijing stand at 2.28 yuan (US$3.64) per cubic meter for households and 3.23 yuan (US$5.16) per cubic meter for industrial and commercial use, the official Xinhua news agency reported." 2.28 yuan is only 36.4 US cents and 3.23 yuan is only 51.6 US cents

Jun 10, 2014 11:10 AM

Anonymous Reader

Right! Chinese consumer pays higher prices. The Communist Party needs more money to spend on stopping Chinese citizen from gaining freedom. My Chinese friends are not happy seeing the Communist Party wasting money on freedom prevention.

Jun 09, 2014 02:37 PM





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