China's oil companies are trying to recover their losses from natural gas sales as they brace for the uncertainties of the next step in energy sector reforms.
Last month, Reuters reported that the PetroChina subsidiary of state-owned China National Petroleum Corp. (CNPC) had raised wholesale gas prices in the spring season, when demand usually falls, hoping to offset huge losses from importing the cleaner-burning fuel.
The struggle over pricing is one of the consequences of the government's campaign to cut reliance on cheaper coal and reduce smog in urban areas with a combination of gas and non-fossil energy sources including wind, solar and nuclear power.
The government's gas push backfired badly in the winter of 2017-2018 when officials summarily banned coal for heating in northern areas before gas and electricity networks were complete, creating a price spike and leaving some homes in the cold.
The campaign fared better last winter, in part because of milder weather and in part because the central government warned provincial officials not to repeat the mistakes of the previous heating season. A softer economy also contributed by easing some pressure on demand.
But gas consumption still rose 18.1 percent to 280.3 billion cubic meters (9.9 trillion cubic feet) last year, topping the 15.3-percent growth rate of 2017.
About 44.5 percent of supplies had to be imported, either by pipelines from Central Asia or as liquefied natural gas (LNG) by ship. In either form, the imports cost more than state oil companies could recover from sales at government- controlled rates.
According to Reuters, PetroChina lost nearly 25 billion yuan (U.S. $3.6 billion) on imported gas sales last year. The burden was lighter in the first quarter of this year with losses of 3.3 billion yuan (U.S. $478 million), but sales were still far from profitable.
"Gas importers have been losing money for years, especially from imports of Central Asian gas, as well as from some LNG at different times," said China energy expert Philip Andrews-Speed at the National University of Singapore's Energy Studies Institute.
On Friday, the Paris-based International Energy Agency (IEA) released its annual medium-term report on the global gas market, forecasting that China's gas demand will reach 450 billion cubic meters (bcm) by 2024.
Production falls behind demand
"Domestic production in China has not been able to keep up with demand growth, which is why imports have been playing a more important role in recent years," the IEA said in its Gas 2019 report.
The IEA estimated that the share of domestic production in China's total gas supply fell from 80 percent in 2011 to 57 percent last year. The share is expected to decline to 54 percent in 2024, the agency said.
China's national oil companies (NOCs) have been unable to take full advantage of this year's plunge in Asian LNG prices on the spot market because of commitments to longer-term contracts, said a commentary in April by the Oxford Institute for Energy Studies (OIES).
PetroChina has been trying to make up the difference by seeking agreements with buyers on a 6.4-percent increase over fixed "city-gate," or pre-distribution, prices for domestic conventional gas and pipeline imports, Reuters reported.
The company had sought rates as high as 20 percent over city-gate prices but met with resistance, the report said.
The NOCs are facing an uncertain impact from the proposed spinoff and merger of their gas pipelines into a "National Oil and Gas Pipeline Network Company," expected in the next several months.
In February, state media reported that the merger of infrastructure belonging to CNPC, China Petroleum & Chemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC) was "likely ... around the middle of this year."
The plan, which has been discussed in various versions for several years, would deprive the companies of revenues from pipeline operations and potentially a portion of their monopoly powers.
"Anticipating the launch of the national pipeline group in the third quarter that will take away a business with massive guaranteed revenues, the company (PetroChina) wants to bide the time paring losses in the gas import business," Reuters quoted an unidentified NOC official as saying.
One of the main goals of the pipeline merger is to clear the way for independent exploration and development by ensuring third-party access to pipelines, which NOCs have been reluctant to grant.
"The government hopes that unbundling and third-party access will stimulate investment in onshore gas exploration," said Andrews-Speed.
But access to pipelines may not be enough to ensure investment in production if the gas business remains only marginally profitable due to low prices and government-set rates.
Links with pricing
In his OIES commentary, senior visiting research fellow Stephen O'Sullivan highlighted the links between gas pricing and the pipeline merger plan.
So far, the government's interest has been to keep gas prices down to make fuel switching from coal possible, forcing NOCs to sustain losses on imports. That calculation could change with the pipeline spinoff plan.
"The government's broader aim, of course, is to stimulate gas demand and it wants lower consumer prices as a way of achieving that," O'Sullivan wrote.
"In the past, it has simply enforced price reductions, but now—with its proposal to create a national pipeline company—it seems to be turning its attention seriously to reducing the actual costs of the industry and promoting more aggressive competition between suppliers as a way of getting prices down and stimulating gas demand," O'Sullivan said.
But the scope and details of the new pipeline monopoly have been far from transparent, raising questions about whether they may be subject to further change.
Last year, reports of the merger plan surprised analysts because they included both oil and gas pipelines, unlike previous versions that covered oil pipelines alone.
In retrospect, the expansion of the plan appears to have been driven by concerns about the gas shortage and price spike in the winter of 2017-2018, but some analysts have been concerned that the merger would simply create a new monopoly with state controls in another form.
NOC control and compensation also appear to be issues that are not fully settled.
Last June, Bloomberg News reported that the plan called for drawing state and private funds into the new company to lower the combined shares of the NOCs to "about 50 percent." Whether that share straddles the line between influence and control remains unclear.
Even a successful pipeline merger may do little to resolve the basic conflict between NOC interests in raising gas prices and the government's goals of competition and keeping them low.
Third-party access could take years to boost domestic production, which rose 7.5 percent in 2018, or less than half the rate of consumption, while more costly imports soared 31.9 percent.
In the first four months of this year, apparent consumption of natural gas increased 11.4 percent, domestic output rose 9 percent and imports climbed 16.4 percent from a year earlier, according to official data.
In five-month customs figures reported by Xinhua on Monday, total gas imports rose 13.4 percent from a year earlier to 39.43 million metric tons, the equivalent of 53.6 bcm.
O'Sullivan cautioned in his commentary against expectations of rapid change from the pipeline merger, citing a host of unresolved issues.
"Despite the recent statements by the government, we should not expect overnight progress on the creation of a functioning national pipeline company, even if the legal establishment of the company does take place this year," he said.
The goal of reducing coal's dominant role, which now stands at 59 percent of China's energy mix, will also depend on continuing government support, said Andrews-Speed.
"Whatever happens, gas will continue to be an expensive source of energy in China relative to coal, and will require some subsidy depending on the source of supply and the end- user, until such time as a robust carbon price is in place," he said.