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China's gas price reform unlikely to cut demand
By Fitch Ratings |
March 21, 2013, Thursday
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Print Edition
Print Edition
WE believe that pricing reform in the Chinese gas sector is unlikely to materially impact gas distributors' margins, and low gas prices in the US are unlikely to materially influence the price at which gas is transacted in the Asia-Pacific region in the medium-term. These were among the key points of discussion during recent round-table meetings with international investors based in Hong Kong and Singapore.
Investors cited China's gas pricing reforms and their implications for China's city gas distributors as a key uncertainty in the Asia-Pacific energy and utilities sector. Fitch expects China to gradually implement pricing reform in the energy sector, including how gas is priced domestically. Currently gas prices are controlled by the state which has led China National Petroleum Corporation to generate losses due to high costs of natural and liquefied natural gas (LNG) imports.
Fitch believes demand for natural gas from industries and households will continue to be strong notwithstanding likely higher costs to consumers following the price reforms. This is because natural gas is substantially more cost-effective than alternative sources. At the same time, Fitch believes that city gas companies should be able to pass on cost increases to consumers leaving the profitability of gas supply operations largely intact, although some compression of margins can be expected initially.
Increased pressure
Investors also raised the possibility for Asia-Pacific gas prices to decouple from global oil prices in the medium term. Fitch believes there is increased pressure from buyers to link Asia-Pacific gas prices to a broader benchmark that captures significantly lower gas prices currently available in the US - around US$4 per mmbtu (million British Thermal units) versus US-dollar mid-teens in Asia-Pacific.
Fitch expects Asia-Pacific gas transactions to gradually track a "basket of global gas prices," but does not expect a material change to Asia-Pacific gas prices in the medium-term, particularly not before the region starts to see meaningful quantities of shale gas exports from the US. Export of gas from the US is facing a number of headwinds including opposition from environmental groups and slow government approvals to convert unused gas import terminals into gas liquefaction facilities. Higher gas exports from Russia to Asia over the medium-term will also exert some downward pressure on gas prices in Asia-Pacific.
The article was based on a Fitch Ratings report released on March 19. The opinions expressed are those of Fitch Ratings.
Investors cited China's gas pricing reforms and their implications for China's city gas distributors as a key uncertainty in the Asia-Pacific energy and utilities sector. Fitch expects China to gradually implement pricing reform in the energy sector, including how gas is priced domestically. Currently gas prices are controlled by the state which has led China National Petroleum Corporation to generate losses due to high costs of natural and liquefied natural gas (LNG) imports.
Fitch believes demand for natural gas from industries and households will continue to be strong notwithstanding likely higher costs to consumers following the price reforms. This is because natural gas is substantially more cost-effective than alternative sources. At the same time, Fitch believes that city gas companies should be able to pass on cost increases to consumers leaving the profitability of gas supply operations largely intact, although some compression of margins can be expected initially.
Increased pressure
Investors also raised the possibility for Asia-Pacific gas prices to decouple from global oil prices in the medium term. Fitch believes there is increased pressure from buyers to link Asia-Pacific gas prices to a broader benchmark that captures significantly lower gas prices currently available in the US - around US$4 per mmbtu (million British Thermal units) versus US-dollar mid-teens in Asia-Pacific.
Fitch expects Asia-Pacific gas transactions to gradually track a "basket of global gas prices," but does not expect a material change to Asia-Pacific gas prices in the medium-term, particularly not before the region starts to see meaningful quantities of shale gas exports from the US. Export of gas from the US is facing a number of headwinds including opposition from environmental groups and slow government approvals to convert unused gas import terminals into gas liquefaction facilities. Higher gas exports from Russia to Asia over the medium-term will also exert some downward pressure on gas prices in Asia-Pacific.
The article was based on a Fitch Ratings report released on March 19. The opinions expressed are those of Fitch Ratings.
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