China Faces Gas Losses

Oil companies struggle with the high cost of price curbs.
An analysis by Michael Lelyveld
2011-08-29
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china-ngas-305.gif A Chinese worker at a natural gas plant in Suining, southwest China's Sichuan province, Nov. 15, 2010.
AFP CHINA XTRA

China's government will grant tax rebates to the country's natural gas importers as complaints rise over losses due to price controls.

On Aug. 22, the Ministry of Finance announced the tax breaks for government-approved imports of Central Asian gas as well as liquid natural gas (LNG) shipped through coastal ports, the official Xinhua news agency said.

The rebates represent an attempt to offset some of the high costs of foreign gas to state oil companies, which have been forced to sell it at a loss under government pricing restrictions.

In March, the PetroChina unit of China National Petroleum Corp. (CNPC) said it lost 3.7 billion yuan ($578 million) on gas imports of 4.3 billion cubic meters (bcm) last year, Reuters reported.

This year, the costs are expected to climb as China's gas use grows. China's imports have doubled to 16.8 bcm in the first seven months of 2011, the official English-language China Daily said.

CNPC is estimated to be losing as much as $130 on every thousand cubic meters of gas it imports from Turkmenistan through the 2,000-kilometer (1,242-mile) Central Asia Gas Pipeline that opened in 2009.

But although the government has promoted consumption of the cleaner-burning fuel, it remains reluctant to allow higher prices because inflation is already running well above the official 4-percent target.

Squeezed

Analysts say policy makers have been squeezed between inflation and pressure to raise rates.

"The domestic gas price in China is significantly lower than the international market," said Kevin Jianjun Tu, senior associate at the Carnegie Endowment for International Peace in Washington.

"This is a very difficult decision for the Chinese government because currently the inflation rate in China is pretty high."

In July, the consumer price index (CPI) jumped 6.5 percent from a year earlier, giving the National Development and Reform Commission (NDRC) little room to raise energy prices that it still controls without making matters worse.

China's big five power producers have also taken a hit because of fixed rates, which have not covered the largely- decontrolled cost of coal.

On Aug. 23, the China Electricity Council said company losses on coal-fired generation soared 166 percent to 18.1 billion yuan in the first seven months.

In the past, some of the companies have been able to offset the costs with other activities, including their own coal production. But now the disparities are so large that the industry has suffered an overall loss of 7.5 billion yuan, the council said.

The NDRC has been concerned that the losses may discourage production at a time when China faces a power shortfall. In the past, similar forces have been felt in the fuel sector.

In 2008, the government paid large subsidies to refiners to cover their losses from selling fuel at fixed prices and preventing a shortage.

Little choice

The government has frequently faced international criticism for such practices in the energy sector, because non-market prices do little to encourage conservation. But Tu said the NDRC feels it has little choice.

"In most developing countries and emerging economies, the government not only takes market facts into consideration. It also considers political stability as a very high priority," he said.

Tu expects more market-oriented energy measures in the longer term.

The tax rebates for gas appear to be a half-measure that may help importers, but they are likely to be too small to wipe out large losses without help from subsidies or higher rates, particulary for household use.

The refund of the 13-percent value-added tax (VAT) would have only a "marginal" effect on LNG costs, according to Reuters. Domestic well-head gas prices are only 53-55 percent of the delivered cost of Turkmen supplies or LNG, it said.

But the Ministry of Finance order also suggests some similarities with the retroactive subsidies that were previously paid to refiners.

The tax rebates will apply to imports through the Central Asia pipeline "before the end of last year," while other imports would enjoy the break on imports from last January through 2020, Xinhua said.

The government estimates that gas now accounts for 4 percent of China's primary energy consumption. Targets call for doubling the gas share in the energy mix by 2015.

Although China's patchwork of price controls in the energy sector is designed to shield the public from market shocks and minimize complaints, the recent drop in world oil prices has led to calls for a more flexible response.

A sharp drop in crude oil costs in August has left motorists paying for gasoline at higher-cost levels because of an NDRC mechanism that only adjusts prices after a 4- percent in a 22-day moving average, Xinhua explained.

"The National Development and Reform Commission has previously announced that it would lower prices as soon as this criteria was met," it said.


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