China Raises Natural Gas Prices, Still Searching for More Supply

On July 10 China will increase the price of natural gas for non-residential use, the country’s top economic planner, the National Development and Reform Commission (NDRC), announced on Friday.

Xinhua, quoting the NDRC, said that the average price of non-residential natural gas will rise from 1.69 yuan ($0.27) to 1.95 yuan ($.032) per cubic meter. The commission said the change was made in accordance with market mechanisms and reflects the true supply and demand situation.

Even with the adjustment, prices will be well below what China pays for supplies from abroad. Platts said the price of liquefied natural gas (LNG) for July delivery to Asia was $14.49 per million British thermal units (Btu), or roughly $0.54 per cubic meter.  That’s a price differential of $0.22 per cubic meter.

And, it’s the price differential that has caused so many problems for China’s state-owned national oil companies (NOCs), which claim that low profit margins at home forces them to turn to more lucrative exports to make up profit loses.

The NDRC said that although low prices will promote natural-gas consumption in the short term, it will hurt the supply of natural gas in the long term. Not only did the NDRC not adjust residential prices, it said it would take steps to help some sectors of the economy bear the higher burden.

The commission said it may increase subsidies to farmers and encourage local governments to provide temporary subsidies to taxi drivers whose vehicles are natural-gas powered to ease the impact of higher prices. In addition, the price of natural gas used to make fertilizer won’t rise by more than 0.25 yuan per cubic meter.

In response, the first trading day after the disclosure PetroChina’s stock rose more than 7% in Hong Kong (its largest gain since May 2009). While the NDRC’s price increase will help offset profit losses and bring in more revenue, the boost may be temporary since the increase is piece-meal and doesn’t include residential usage.

The last time the NDRC raised natural gas prices for all users was in 2010. In 2011 the commission announced pilot reforms for natural gas prices in parts of southern China where prices were some of the highest in the country.

The Wall Street Journal said China is trying to double the share of natural gas in its energy mix to 10% by 2020 from less than 5% now. Parts of these efforts include building more LNG import terminals.

China’s LNG ambitions

On June 13, a Shell China said that Royal Dutch Shell signed a letter of intent with Guanghui Energy Co. Ltd., a private firm, to “explore the possibility of developing a liquefied natural gas import terminal” in eastern China’s Jiangsu province. Chinese media and international media ran the story the same day.

Reuters, quoting a company statement from early June, said that Guanghui plans to build LNG facilities in Qidong, Jiangsu province, starting with a 600,000 ton per year storage and transit plant. Then, the company plans to build a 1.5 million ton per year LNG import facility under a second phase and a 3.5 million ton per year import terminal in a third stage, pending regulatory approvals.

The Shell-Guanghui terminal would be part of at least seven other LNG terminals under construction or planned. Currently, China has five existing LNG terminals with a total regasification capacity of almost 1,000 Bcf/y (2.7 Bcf/d) as of mid-2012.

Once the new terminals are brought online, China’s total LNG regasification capacity will increase by at least another 2 Bcf/d, according to US Energy Information Agency (EIA) data. All of China’s LNG terminals are on the east coast, stretching north at Dalian, near the North Korean border, to south on Hainan Island, just northeast of Vietnam across the South China Sea.

China’s accelerated LNG plans are one key element in its approach to ensure natural gas security. Other elements include promoting domestic production from conventional and unconventional resources, expanding current reserves, constructing gas storage facilities and speeding up construction of interregional gas pipelines.

According to a June 20 International Energy Agency (IEA) report, China will account for 30% of the growth of global gas demand. Despite the country’s impressive progress on domestic production, says the IEA, this still puts China on a path of increasing import dependency. “In the next five years, China absorbs the entire production increase from Central Asia as well as one-third of the global increase in LNG supply.”

China’s need for more natural gas already intersects North American supplies. The country has already invested heavily in both Canada and the US to help those efforts, including CNOOC’s recent $15.1 billion acquisition of Calgary-based Nexen, and in the US Sinopec’s $1 billion joint venture with Chesapeake Energy (which is the second largest natural gas producer in the country) and also Sinopec’s $2.5 billion deal with Devon Energy in January 2012.

One unknown variable at this point in China’s gas equation is American LNG. Currently, the US Department of Energy (DOE) has approved just two projects, which would allow LNG exports to non free-trade agreement (FTA) countries, while 20 more projects are pending.

Even if other LNG projects are approved for export, its likely that Washington will do so slowly and sparingly and those projects will have eager bidders ready to secure gas supply deals, especially Japan and South Korea, the world’s number one and two LNG importers as well as India. These countries have already locked in supply agreements with either the Freeport LNG project or Cheniere Energy’s Sabine Pass LNG terminal in Louisiana. Both projects have DOE approval to export, while the Freeport facility is still subject to an environmental review and final approval.

Of course, China can help itself, not just by developing more of its own resources but also by allowing residential consumers to pay for non-price controlled and non-subsidized natural gas. As a result, higher prices reflecting the market would reduce gas demand and give the country help on the supply side of the equation.

(energytribune, edited by Topco)