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| China natural gas price rise, long awaited, finally near |
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Saturday, August 15, 2009
BEIJING: An influx of costly central Asian natural gas into China looks like it will force Beijing to confront a regime that has long underpriced the clean fuel, with a hike in domestic natural gas prices expected soon.
While Chinese authorities probably won’t go as far as allowing the global market to direct domestic prices, as it has done this year for motor fuels, a price hike would deliver an immediate revenue boost for top producers PetroChina and Sinopec Corp and possibly stoke demand for more imported liquefied natural gas (LNG).
The trigger will be the arrival in November of the first pipeline gas from central Asia, which will cost more than double competing local supplies. “A price increase in the third quarter is realistic. If there’s nothing by the end of the year I will be very surprised,” said Gavin Thompson, Beijing-based gas specialist with consultancy Wood Mackenzie.
Chinese wellhead prices at $3.5 to $4 per million British thermal units (mmBtu) are now comparable with US onshore gas prices and spot LNG cargoes, but still half of term LNG supplies signed last year for delivery beyond 2012, estimated at $8-$10.
While the cheapness of gas has made it a favoured choice for power plants compared to fuel oil, it has done little to encourage import deals or drilling during a near four-fold rise in demand in the last decade. By raising prices, Beijing will provide an incentive to increase supplies while gradually getting industries used to paying the market rate for raw materials, part of Beijing’s drive for a greener economy and prominent role in global climate talks.
“The government has moved up one ladder on CO2 emission cuts, putting energy efficiency on a higher agenda. The falling LNG price also offers a good window to raise gas prices,” said Chi Zhang, China chief economist at BP. Analysts were reluctant to forecast an exact price rise, but expected it to be at most similar to the previous one on November 2007 when Beijing raised prices by 0.40 yuan per cubic metre, or nearly 30 per cent.
But don’t expect any change on gas as drastic as the world’s No 2 energy user implemented with fuel. Beijing has changed fuel prices five times under a new pricing scheme in place since the beginning of 2009 that closely tracks global crude markets.
Unlike oil, of which China must now import over half of its needs, the bulk of gas consumed in China is pumped domestically by state energy giants PetroChina, Sinopec and CNOOC Ltd. It was only three years ago that China started to ship in super-cooled liquefied natural gas from Australia. “I don’t expect much change to the existing system. It’s not that oil companies are losing money in the gas sector.
The government wants to ensure they make reasonable profit but not too much,” said Jiang Xinmin of Energy Research Institute, a government think-tank on energy policies.
That system, put in place at the end of 2005 with a link to prices of alternative fuels like coal and crude, has seen only two price increases in nearly four years, oblivious to volatile energy markets that saw crude near $150 in July 2008 and spot LNG prices collapse from a $22 peak. Beijing’s last price hike only affected industrial and chemical users while sparing the more price-sensitive residential and fertiliser sectors. Whatever the change, international gas suppliers will be watching closely.
Currently meeting only 3 per cent of China’s total energy needs, gas is set to grow at a 10 per cent compound annual rate from 7.3 billion cubic feet per day (bcf/d) to 18 bcf/d by 2020, Bernstein Research estimates, transforming China into the third largest single market after Russia and the United States. Beijing was widely seen as preparing to increase prices last September, only to be walloped by the world’s worst economic crisis in decades. It held off, fearing the industries that consume two-thirds of its gas wouldn’t cope.
But as prices of imported LNG slumped and with Turkmen gas set to flow in through the landmark Pan-Central Asia project, Beijing’s policy-makers face an opportune window to further normalise the cheap clean fuel.
Turkmenistan gas will be priced at 2 yuan per cubic metre at the border point in Khorgos, sharply above the average 0.79 yuan for local gas flowing in China’s flagship West-East pipeline, China’s leading financial magazine Caijing reported in March.
The $30-billion Central Asian project will feed into the West-East pipes and eventually pump 30 bcm a year by 2011, or nearly 40 per cent of China’s current total domestic output, to China’s southern and eastern shores. Both projects are operated by PetroChina.
“The huge price gap is not conducive to importing foreign gas. It will also add contradictions to optimising use of domestic and foreign gas in the future,” Ma Fucai, ex-PetroChina chairman, was quoted by Caijing as saying. The Turkmen gas, linked to Brent crude when the contract was signed in July 2007 under a 30-year pact, is also 56 per cent higher than the ex-factory price Beijing set in July for China’s Puguang, a new gasfield operated by Sinopec in the south western province of Sichuan.
Timing is good for an energy price hike, China’s economy is recovering with the help of heavy state spending and is under little inflationary pressure, while policy-makers ponder raising state-set power tariffs to boost gas use for power.
But analysts’ consensus is for another moderate hike, as too drastic a move would hurt growth in use of the fuel. “China is the middle of rapid demand expansion, too high a price would hurt growth. The government will still opt for a steady increase rather than drastic,” said ERI’s Jiang.
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ISSN 1563-9479 
