Gas Imports Inflate Prices

China hikes gas prices, citing "huge losses" on Central Asian imports.
By Michael Lelyveld
Workers seal the pipe laid along China's transnational natural gas pipeline in Henan province, Dec. 11, 2008.

BOSTON—Massive financial losses suffered by Chinese authorities importing natural gas from Central Asia are driving up prices in the world’s biggest energy consuming nation.

On Sept. 25, the National Development and Reform Commission (NDRC) said China National Petroleum Corp. (CNPC) has suffered "huge losses" on imports through the country's new 2,000 km (1,240 mile) pipeline from Turkmenistan to Xinjiang, Reuters reported.

Two days later, the official Beijing Daily announced a series of double-digit price rises for non-residential users starting on Sept. 28.

The increases are some 20 percent for most industries and 17-23 percent for heat and power producers, the paper said.

The sudden jump is seen as symptomatic of the problems with government price controls that CNPC faced when it opened China's first pipeline for gas imports last December.

Despite its U.S. $20 billion investment in pumping gas from Central Asia, CNPC was not given a guaranteed price for profitable sales in eastern cities, said Philip Andrews-Speed, a China energy expert at Scotland's University of Dundee.

"This is not what we would normally call a commercial project," he said.

As a result, gas rates have been playing catch-up to head off steep losses.

On June 1, the NDRC authorized a 25-percent rise in wholesale prices, which was followed by a wave of retail increases in cities and provinces.

But with the latest jump to 2.84 yuan (U.S. $0.42) per cubic meter for industries in the capital city, prices are rising to the level of European rates.

So far, households have been spared a new rate hike, but domestic users are already paying 2.05 yuan (U.S. $0.30) per cubic meter in Beijing.

Pipeline imports

In the meantime, CNPC appears reluctant to use the full capacity of the Central Asia pipeline until the question of profits and losses becomes clear.

In the first eight months of the year, the pipeline through Uzbekistan and Kazakhstan carried 2.38 billion cubic meters (bcm) of gas to China, the NDRC said.

At that rate, it would supply only about 3.5 bcm in 2010, far less than CNPC's projection of 6 bcm and the line's current capacity of 9 bcm.

CNPC has said it expects to import 17 bcm from Central Asia next year, while the pipeline will reach full capacity of 40 bcm in 2012-13 as more compressor stations are added.

In June, Chinese officials reportedly suggested to Kazakhstan that capacity should be raised even higher to 60 bcm per year, the Interfax news agency said.

The bigger volumes still appear likely because of CNPC's huge investment in Turkmen gas fields, but pricing problems may have to be straightened out first to avoid snowballing losses.

China consumed 87.4 bcm of the clean burning fuel last year as the government tried to ease reliance on high-polluting coal. The growth of gas and renewables in China's energy mix is considered key to its efforts to meet environmental goals.

Price controls

Andrews-Speed said the price problem with gas may be a rerun of the government's experience with trying to keep fuel prices in check when world oil prices soared three years ago.

From 2005 to 2008, the government paid billions of dollars in subsidies to refiners after price controls forced them to sell fuel below cost.

The squeeze led to shortages as refiners slowed sales to avoid bigger losses. The same thing may be happening with gas imports from Central Asia now.

"They may be playing the same game as the refiners used to play, which is if they don't get a good price, they're not going to put any gas in the pipeline," said Andrews-Speed.

China's state-controlled energy giant is likely to see its loss as the government's problem, since it was following the official "go out" strategy to secure Central Asian gas supplies, Andrews-Speed said.

The government may be belatedly facing the true cost of piping gas some 7,000 km from Central Asia to the eastern cities, which are also served by domestic supplies and liquid natural gas (LNG) from abroad.

But it could already be walking a fine line with retail prices. Andrews-Speed said that gas-fired power plants continue to sit idle because their costs are higher than coal-fired generators.

Higher prices also conflict with the government's promise to keep inflation in check.

Capping prices

In August, the State Council considered a draft regulation to cap prices charged by monopoly industries including public utilities. The gas hikes may already have thrown that effort off track.

CNPC has not disclosed the price it pays Turkmenistan for gas exports, but industry reports have cited costs of U.S. $200 per thousand cubic meters or less.

China's insistence on low prices has been an obstacle to striking a deal with Russia on gas sales.

During Russian President Dmitry Medvedev's three-day visit to China last week, the two sides failed to reach agreement on pricing despite years of talks.

According to a source cited by the official Xinhua news agency, CNPC offered to buy gas from Russia's Gazprom for only $150 per thousand cubic meters and only on condition that it would be an investor in the import pipeline.

The bid, which is far below Gazprom's contract prices for Europe, would be equal to about half the retail charge for Beijing households.


Add your comment by filling out the form below in plain text. Comments are approved by a moderator and can be edited in accordance with RFAs Terms of Use. Comments will not appear in real time. RFA is not responsible for the content of the postings. Please, be respectful of others' point of view and stick to the facts.