Imports to spark gas pricing reform
By Richard Fu |
April 4, 2011, Monday
|
Print Edition
Print Edition
Last December, households in Hubei and Hunan provinces were the latest regions in China to be hooked up to Turkmenistan natural gas being imported by PetroChina through a pipeline that snakes nearly 2,000 kilometers through Central Asia.
The project, which first began pumping gas into China in December 2009, has already delivered the clean-burning fuel to the northwestern city of Urumqi and to Beijing. Eventually distribution will reach Shanghai to the east and Hong Kong to the south when construction of China's second west-to-east gas pipeline is completed.
As imports from China's first cross-border gas pipeline ramp up, so do the losses of PetroChina because the company is forced to sell the gas at low domestic prices. That has reignited calls for reforms in gas pricing so the market can find its own balance between supply and demand.
Energy prices are regulated in China by the government, which has to consider the affordability to the general public and inflationary concerns.
Gas price reform has lagged changes in pricing of other fuel products, which generally follows global markets with some government guidance. China's gas market has been isolated so far from international market forces.
However, with the increase in imports of piped Turkmen gas and cargoes of liquefied natural gas, that situation is expected to change.
"The increase in imported gas with higher prices has become the main focal point for China's gas price reform," said Lin Boqiang, an energy professor at Xiamen University in southeastern China.
Rising imports come as China pursues its goal to cut carbon emissions per unit of gross domestic product by as much as 45 percent by 2020 from 2005 levels. That goal requires more use of clean sources such as natural gas.
The government targets have prompted Chinese energy firms to boost domestic production, increase imports, seek overseas acquisitions, as well as explore for unconventional resources such as shale gas.
China is set to raise the share of gas from the current 3.8 percent to 10 percent of its primary energy mix by 2020. At that time, imports will account for about one-third or more of demand. Gas makes up 23 percent of energy usage in developed nations.
China's apparent gas consumption is expected to rise 77 percent to 230 billion cubic meters in 2015 from 130 billion cubic meters this year, according to a January report by the China National Petroleum Corp, PetroChina's state parent. "Apparent" demand takes into account domestic production and net imports but excludes stockpiles.
Market pricing
"I think with the fast development of the gas business, a market-oriented pricing mechanism will gradually evolve," Zhou Mingchun, chief financial officer of PetroChina, said last month in Shanghai. "But that will require a process and an opportunity."
Zhou said gas prices should take into account both international and domestic markets, and reflect the availability of energy resources. He declined to say whether pricing reform may occur as early as this year.
"We have full confidence in the business," he said. "Many things are only temporary."
According to Zhou, PetroChina lost 0.88 yuan (13 US cents) on the sale of every cubic meter of Turkmen gas in 2010, the first year of the cross-border pipeline's commercial operations.
The company received 4.3 billion cubic meters of Turkmen gas and sold 3.9 billion cubic meters last year, according to Zhou. That implies a loss of 3.4 billion yuan for the Turkmen gas business in 2010.
JP Morgan estimated in a March 23 report that the losses incurred from selling the Turkmen gas in February grew 40 percent from January to 1 billion yuan, as costs and volumes climbed.
The Central Asian country has said it aims to deliver 17 billion cubic meters to China this year, the equivalent of about 15 percent of China's projected domestic gas output in 2011.
Turkmen gas imports are set to reach 30 billion cubic meters in 2012 when PetroChina completes construction on more sections of the west-east pipeline, and then potentially increase by another 20 billion cubic meters, under to an agreement expected to be signed between the Chinese and Turkmen governments in the second half of 2011.
Still, analysts don't expect gas price reform that links import costs to domestic prices in the short to medium term.
"Considering the affordability to the general population, imported gas may continue to be sold at a loss and PetroChina will have to bear the losses," JP Morgan analysts Brynjar Eirik Bustnes and Sophie Tan wrote. "To stimulate demand, prices cannot be raised quickly and natural gas is key to meet China's lower carbon emissions targets in the next five years."
But with China delaying nuclear power project approval, pending safety reviews following the ongoing Japanese nuclear crisis, the government is now more likely to raise gas prices to encourage speedier development of gas exploration and development, said Gordon Kwan, head of regional energy research at Mirae Asset Securities.
China raised ex-factory onshore gas prices by 25 percent in June last year, the first increase in more than two years, to curb wasteful consumption. But despite the increases, prices still remained below import costs. By comparison, the government has adjusted refined fuel prices 13 times, including nine price hikes, since late 2008, when a new cost pass-through pricing mechanism was introduced.
The June increase in gas prices mainly applied to industrial and commercial users, such as chemical makers. Pricing authorities in several provinces across China were also told by the central government late last year to put the brakes on plans to raise residential gas prices, after inflation hit a 25-month high.
Changes in residential gas prices don't immediately follow ex-factory increases because they require public hearings.
The project, which first began pumping gas into China in December 2009, has already delivered the clean-burning fuel to the northwestern city of Urumqi and to Beijing. Eventually distribution will reach Shanghai to the east and Hong Kong to the south when construction of China's second west-to-east gas pipeline is completed.
As imports from China's first cross-border gas pipeline ramp up, so do the losses of PetroChina because the company is forced to sell the gas at low domestic prices. That has reignited calls for reforms in gas pricing so the market can find its own balance between supply and demand.
Energy prices are regulated in China by the government, which has to consider the affordability to the general public and inflationary concerns.
Gas price reform has lagged changes in pricing of other fuel products, which generally follows global markets with some government guidance. China's gas market has been isolated so far from international market forces.
However, with the increase in imports of piped Turkmen gas and cargoes of liquefied natural gas, that situation is expected to change.
"The increase in imported gas with higher prices has become the main focal point for China's gas price reform," said Lin Boqiang, an energy professor at Xiamen University in southeastern China.
Rising imports come as China pursues its goal to cut carbon emissions per unit of gross domestic product by as much as 45 percent by 2020 from 2005 levels. That goal requires more use of clean sources such as natural gas.
The government targets have prompted Chinese energy firms to boost domestic production, increase imports, seek overseas acquisitions, as well as explore for unconventional resources such as shale gas.
China is set to raise the share of gas from the current 3.8 percent to 10 percent of its primary energy mix by 2020. At that time, imports will account for about one-third or more of demand. Gas makes up 23 percent of energy usage in developed nations.
China's apparent gas consumption is expected to rise 77 percent to 230 billion cubic meters in 2015 from 130 billion cubic meters this year, according to a January report by the China National Petroleum Corp, PetroChina's state parent. "Apparent" demand takes into account domestic production and net imports but excludes stockpiles.
Market pricing
"I think with the fast development of the gas business, a market-oriented pricing mechanism will gradually evolve," Zhou Mingchun, chief financial officer of PetroChina, said last month in Shanghai. "But that will require a process and an opportunity."
Zhou said gas prices should take into account both international and domestic markets, and reflect the availability of energy resources. He declined to say whether pricing reform may occur as early as this year.
"We have full confidence in the business," he said. "Many things are only temporary."
According to Zhou, PetroChina lost 0.88 yuan (13 US cents) on the sale of every cubic meter of Turkmen gas in 2010, the first year of the cross-border pipeline's commercial operations.
The company received 4.3 billion cubic meters of Turkmen gas and sold 3.9 billion cubic meters last year, according to Zhou. That implies a loss of 3.4 billion yuan for the Turkmen gas business in 2010.
JP Morgan estimated in a March 23 report that the losses incurred from selling the Turkmen gas in February grew 40 percent from January to 1 billion yuan, as costs and volumes climbed.
The Central Asian country has said it aims to deliver 17 billion cubic meters to China this year, the equivalent of about 15 percent of China's projected domestic gas output in 2011.
Turkmen gas imports are set to reach 30 billion cubic meters in 2012 when PetroChina completes construction on more sections of the west-east pipeline, and then potentially increase by another 20 billion cubic meters, under to an agreement expected to be signed between the Chinese and Turkmen governments in the second half of 2011.
Still, analysts don't expect gas price reform that links import costs to domestic prices in the short to medium term.
"Considering the affordability to the general population, imported gas may continue to be sold at a loss and PetroChina will have to bear the losses," JP Morgan analysts Brynjar Eirik Bustnes and Sophie Tan wrote. "To stimulate demand, prices cannot be raised quickly and natural gas is key to meet China's lower carbon emissions targets in the next five years."
But with China delaying nuclear power project approval, pending safety reviews following the ongoing Japanese nuclear crisis, the government is now more likely to raise gas prices to encourage speedier development of gas exploration and development, said Gordon Kwan, head of regional energy research at Mirae Asset Securities.
China raised ex-factory onshore gas prices by 25 percent in June last year, the first increase in more than two years, to curb wasteful consumption. But despite the increases, prices still remained below import costs. By comparison, the government has adjusted refined fuel prices 13 times, including nine price hikes, since late 2008, when a new cost pass-through pricing mechanism was introduced.
The June increase in gas prices mainly applied to industrial and commercial users, such as chemical makers. Pricing authorities in several provinces across China were also told by the central government late last year to put the brakes on plans to raise residential gas prices, after inflation hit a 25-month high.
Changes in residential gas prices don't immediately follow ex-factory increases because they require public hearings.
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