Pressure builds for natural gas price reform
By Richard Fu |
November 7, 2012, Wednesday
|
Print Edition
Print Edition
AS gas losses of Chinese energy companies continue to increase along with rising imports, the urgency of natural gas pricing reform grows.
But analysts and industry officials said long-expected reforms might take longer than the market anticipates because of their wide implications. That assessment comes despite the announcement from China's top industry planner of a pilot pricing project in the tightly regulated market at the end of last year.
Price reforms will have major implications not only for gas importers led by PetroChina Co, domestic wellhead gas prices, and foreign gas producers selling to China, but also will affect the affordability and industrial competitiveness of related sectors.
Demand to double
In addition, the timing and scale of any reform rollout could decide whether the changes will accelerate imports or stimulate domestic production, according to Neil Beveridge, an analyst at Sanford C. Bernstein & Co.
"We think change will take longer and be more gradual than the market currently expects,ó he said. "It's hard to see any material reform being implemented in the next two quarters, and we believe that implementation of new prices will only happen in 2013 at the earliest.ó
Gas use in China has been rising rapidly as the government tries to reduce pollution from coal burning and reliance on oil imports. Demand for cleaner-burning gas is expected to double to 260 billion cubic meters by 2015, when about 35 percent will be supplied by imports, from 129 billion cubic meters last year, when China imported 21 percent of its needs.
A price reform delay could mean gas-related losses will worsen in the near term at PetroChina, which last week reported a third-quarter operating loss of 752 million yuan (US$120.3 million) in its natural gas and pipeline division, the second consecutive quarterly loss in that segment.
The company currently imports piped gas from Central Asia to supply cities along China's second west-to-east pipeline linking the northwestern region of Xinjiang with the southern province of Guangdong. The pipeline is expected to be extended into Hong Kong at the end of this year. PetroChina also unloads liquefied natural gas at several receiving terminals along the east coast.
Those shipments are expected to rise because Central Asia gas imports have yet to peak and another pipeline from Myanmar isn't due to start until next year. LNG imports will triple to 15 billion cubic meters as PetroChina starts new coastal terminals in Jiangsu, Liaoning and Guangdong provinces.
As a result, the company's annual imports are expected to rise from 30 billion cubic meters to 65 billion cubic meters by 2014, Beveridge estimated. He said most of PetroChina's gas imports are underpinned by long-term contracts, leaving little flexibility.
CNOOC faring better
PetroChina is currently losing at least 1 yuan for every cubic meter of gas it imports, with LNG losses likely to be larger than that of pipeline gas, according to analyst estimates.
Still, in response to the unprofitable gas import business, PetroChina was reportedly considering slowing construction on some planned LNG facilities along the eastern shore.
Another key gas buyer is CNOOC Ltd parent China National Offshore Oil Corp, which is the pioneer and dominant player in China's LNG imports business. China National Offshore is believed to be faring better in LNG imports than PetroChina, thanks to the offshore focus of its business and lower import costs.
In 2003, China National Offshore signed China's first long-term LNG purchase contract with Australia at an estimated price of about US$3 per million British thermal units. That was before prices in the industry soared.
That compares with China's average LNG import price of US$12.60 per million BTUs in September, exclusive of value-added tax and mainly driven by expensive Qatar gas, according to UBS estimates.
The National Development and Reform Commission, China's main planning agency, last week released an industry policy paper that groups the use of gas into several categories, such as "preferentialó and "restricted.ó The paper is aimed at encouraging more efficient and reasonable use of the precious fuel by managing the demand side as consumption rises.
Besides homes and utilities, the planner for the time included the transport sector as a preferred user of gas.
Some analysts read it as a signal encouraging price reform in the gas market because that is a sector better able to deal with any price increases.
The commission also re-emphasized that it will promote gas price reform. It said it aims to establish a link between prices of natural gas and alternative fuels, and introduce a seasonal pricing system.
But it didn't give any timetable, as it had for many years.
"This will take a relatively long period of time, not one year or two,ó an unidentified senior official was quoted as saying by The Economic Observer.
The pilot reform introduced late last year in Guangdong and Guangxi provinces establishes a link between prices of natural gas and imported fuel oil and liquefied petroleum gas.
Natural gas is increasingly replacing the two fuels in power generation and in cooking in China.
But analysts and industry officials said long-expected reforms might take longer than the market anticipates because of their wide implications. That assessment comes despite the announcement from China's top industry planner of a pilot pricing project in the tightly regulated market at the end of last year.
Price reforms will have major implications not only for gas importers led by PetroChina Co, domestic wellhead gas prices, and foreign gas producers selling to China, but also will affect the affordability and industrial competitiveness of related sectors.
Demand to double
In addition, the timing and scale of any reform rollout could decide whether the changes will accelerate imports or stimulate domestic production, according to Neil Beveridge, an analyst at Sanford C. Bernstein & Co.
"We think change will take longer and be more gradual than the market currently expects,ó he said. "It's hard to see any material reform being implemented in the next two quarters, and we believe that implementation of new prices will only happen in 2013 at the earliest.ó
Gas use in China has been rising rapidly as the government tries to reduce pollution from coal burning and reliance on oil imports. Demand for cleaner-burning gas is expected to double to 260 billion cubic meters by 2015, when about 35 percent will be supplied by imports, from 129 billion cubic meters last year, when China imported 21 percent of its needs.
A price reform delay could mean gas-related losses will worsen in the near term at PetroChina, which last week reported a third-quarter operating loss of 752 million yuan (US$120.3 million) in its natural gas and pipeline division, the second consecutive quarterly loss in that segment.
The company currently imports piped gas from Central Asia to supply cities along China's second west-to-east pipeline linking the northwestern region of Xinjiang with the southern province of Guangdong. The pipeline is expected to be extended into Hong Kong at the end of this year. PetroChina also unloads liquefied natural gas at several receiving terminals along the east coast.
Those shipments are expected to rise because Central Asia gas imports have yet to peak and another pipeline from Myanmar isn't due to start until next year. LNG imports will triple to 15 billion cubic meters as PetroChina starts new coastal terminals in Jiangsu, Liaoning and Guangdong provinces.
As a result, the company's annual imports are expected to rise from 30 billion cubic meters to 65 billion cubic meters by 2014, Beveridge estimated. He said most of PetroChina's gas imports are underpinned by long-term contracts, leaving little flexibility.
CNOOC faring better
PetroChina is currently losing at least 1 yuan for every cubic meter of gas it imports, with LNG losses likely to be larger than that of pipeline gas, according to analyst estimates.
Still, in response to the unprofitable gas import business, PetroChina was reportedly considering slowing construction on some planned LNG facilities along the eastern shore.
Another key gas buyer is CNOOC Ltd parent China National Offshore Oil Corp, which is the pioneer and dominant player in China's LNG imports business. China National Offshore is believed to be faring better in LNG imports than PetroChina, thanks to the offshore focus of its business and lower import costs.
In 2003, China National Offshore signed China's first long-term LNG purchase contract with Australia at an estimated price of about US$3 per million British thermal units. That was before prices in the industry soared.
That compares with China's average LNG import price of US$12.60 per million BTUs in September, exclusive of value-added tax and mainly driven by expensive Qatar gas, according to UBS estimates.
The National Development and Reform Commission, China's main planning agency, last week released an industry policy paper that groups the use of gas into several categories, such as "preferentialó and "restricted.ó The paper is aimed at encouraging more efficient and reasonable use of the precious fuel by managing the demand side as consumption rises.
Besides homes and utilities, the planner for the time included the transport sector as a preferred user of gas.
Some analysts read it as a signal encouraging price reform in the gas market because that is a sector better able to deal with any price increases.
The commission also re-emphasized that it will promote gas price reform. It said it aims to establish a link between prices of natural gas and alternative fuels, and introduce a seasonal pricing system.
But it didn't give any timetable, as it had for many years.
"This will take a relatively long period of time, not one year or two,ó an unidentified senior official was quoted as saying by The Economic Observer.
The pilot reform introduced late last year in Guangdong and Guangxi provinces establishes a link between prices of natural gas and imported fuel oil and liquefied petroleum gas.
Natural gas is increasingly replacing the two fuels in power generation and in cooking in China.
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