China Confronts Natural Gas Costs

An analysis by Michael Lelyveld
china-gas--may2013.gif Gas tankers leaving a refill station of China's largest offshore oil and gas producer China National Offshore Oil Corporation (CNOOC) in Dapeng, Shenzhen in southern China, May 23, 2013.
CNOOC via EyePress

China has taken a modest step toward energy reform with an increase in the price of natural gas, experts say.

Under the price hike that took effect on July 10, gas charges for industrial uses have risen by an average of 15 percent to 1.95 yuan (U.S. $0.32) per cubic meter, the National Development and Reform Commission (NDRC) said.

Rates for residential use remain unchanged, state media reported.

Shares of PetroChina, the listed arm of China National Petroleum Corp. (CNPC), jumped 6.3 percent on the first trading day after the announcement, according to the official Xinhua news agency.

Ordinarily, the big gain would mean an expectation of higher profits, but in the case of gas rates, it may only mean that CNPC losses will be less.

China's state-owned oil giant has complained for years about losing money on gas sales under the system of government-controlled prices.

In 2012, PetroChina's natural gas and pipeline business lost 2.11 billion yuan (U.S. $343 million), the company said in March. It lost 41.9 billion yuan (U.S. $6.8 billion) from selling costly pipeline imports and liquefied natural gas (LNG) at lower domestic rates.

Even with the rate increase, the resulting retail prices of gas for industry will still be slightly lower than pipeline supplies from Central Asia when they enter the country, said market analyst Clyde Russell in a Reuters report.

The retail charge would be 3.5 percent less than LNG landed at China's ports, so that PetroChina may still lose money on every cubic meter it distributes and sells.

Sixty percent less

According to July prices for Asian markets cited by Platts energy news service, the new retail rates may be as much as 60 percent less than imported LNG.

Although China's gas costs are far higher than those in the United States, higher rates may be needed to encourage supplies under price controls.

The government's goal is to double the share of gas in China's energy mix to 10 percent by 2020 from roughly 5 percent now, helping to reduce the impact of high-polluting coal.

But the calculations behind the price rise are complex, since the government is also trying to discourage inefficient uses of gas.

"The price reform sends a clear signal to industrial users that you have to give more thought to whether or not to launch low value-added projects," an unidentified NDRC pricing official told China Daily.

Last year, China's non-residential gas consumption reached 112 billion cubic meters (3.9 trillion cubic feet), said the official English-language paper. That was some 78 percent of the country's total gas use, according to BP Statistical Review of World Energy.

The country's apparent gas consumption in the first half of this year rose 13.1 percent to 81.5 billion cubic meters, the NDRC said in a statement last week.

Increase supplies, ease shortages

The announcement of the first price rise in three years came a week after the NDRC urged China's oil companies to increase gas supplies and ease shortages.

"Local gas users should coordinate and negotiate with gas suppliers in advance, set their gas consumption based on supply and strictly adhere to Beijing's natural gas usage policy by restricting their consumption from rising too sharply," the NDRC said in a notice quoted by International Oil Daily.

Power plants with fuel-switching capability should have plans ready for shifting to coal or oil, the NDRC said.

Under its price plan, the NDRC has set higher rates for industries that consume more gas than they did in 2012, but the incremental use should account for only 9 percent of this year's sales, Shanghai Daily reported.

Philip Andrews-Speed, a China energy expert at the National University of Singapore's Energy Studies Institute, suggested that the complex measure could have the opposite of the intended effect by pushing some industries back into cheaper coal.

"Potential incremental users of gas will need to decide if they can afford to buy gas at the higher price or, alternatively, use coal or not invest," said Andrews-Speed.

While the reform may help to stem losses, it is still a far cry from ending price controls and opening the market to forces of supply and demand.

"This step represents a move toward the market in that rates are now closer to international prices, but at the same time, the price is still set by the government and not through market competition," Andrews-Speed said.

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