World’s costliest gas clouding China campaign for blue skies

Bloomberg

China has promised to make its skies blue again, but having some of the world’s most-expensive natural gas isn’t helping.
The biggest energy consumer on earth wants to use more of the cleaner-burning fuel in place of the coal that’s choking its skies and causing pollution far exceeding the World Health Organization’s daily recommended limit. China has the ability to increase imports and is seeking to raise domestic production, but high prices risk suppressing demand growth and jeopardizing the country’s ambitious targets.
The challenge is that producers, importers and distributors in China need the government-controlled prices to be high enough to make money. By cutting them too much, the state risks hurting their margins, threatening investment in future production and the country’s energy security. But be too generous to the industry, and the nation’s health is at stake.
“It’s a balancing act for the government that requires on one side stimulating gas demand to increase the percentage of clean fuels,” said Miaoru Huang, a Beijing-based energy analyst for Wood Mackenzie Ltd. “On the other hand, it needs to ensure reasonable returns for upstream players and transmission and distribution companies that are needed to ensure sustained investment so China can maintain its growth in domestic gas production.”
The Chinese government has set a goal of getting as much as 10 percent of its energy from gas by 2020 and 15 percent by 2030, up from 6 percent in 2015. To achieve this, demand will have to grow by about 15 percent a year through the rest of the decade, according to UBS Group AG.
After consumption growth slowed to well below that pace for the past few years, it is once again booming, increasing at a rate of 13.2 percent so far this year. These graphics tell the story of how that’s happening and what the future may hold. The world’s sixth-biggest producer of gas, China gets about 64 percent of what it needs domestically, according to Bloomberg calculations based on government data. It imports the rest by pipelines from Central Asia and Myanmar, as well as on seaborne tankers as liquefied natural gas.
The Ordos Basin in Shaanxi Province is the largest gas-producing area in the country, according to Sino Gas & Energy Holdings Ltd. It’s where China drilled its first oil well more than 100 years ago. The nation’s experience with petroleum dates back 900 years, when the scientist Shen Kuo found near the Yan River oil seeping out of the rocks, which he noted could be used for lighting, according to China National Petroleum Corp.
In the modern era, the National Development and Reform Commission, the country’s top economic planner, traditionally set gas prices at the well, making sure they were high enough to cover drilling costs and a small profit for companies.
Even as production exploded over the last decade, China couldn’t keep up with booming demand, so the nation’s big three energy companies — CNPC, China Petrochemical Corp., known as Sinopec, and China National Offshore Oil Corp. — became gas importers. CNPC built a pipeline connecting gas fields in Turkmenistan, Kazakhstan and Uzbekistan to western China, while a link from Myanmar started in 2013. CNPC signed a deal on Tuesday to start receiving gas from Russia on a Siberian pipeline in 2019. The country also has more than a dozen terminals on its eastern and southern coasts to receive LNG cargoes.
But buying the gas overseas proved costly. The companies inked supply deals at prices linked to the cost of oil, so when crude rose into the $100-a-barrel range, the cost of importing ballooned to levels higher than the energy giants were allowed to sell domestically. PetroChina, the country’s largest listed energy firm, has lost money on gas imports every year going back to at least 2013, according to company filings.
The NDRC responded in 2013 and 2014 by raising prices to a level that was high enough to encourage production and help cover the cost of imports. But that increase had an immediate impact on demand, snapping the run of double-digit percentage growth every year from 2003 to 2013.
In 2015, the government cut wholesale prices. By December 2016, gas was cheaper on a wholesale basis than other fuel sources such as fuel oil or propane, a liquefied petroleum gas typically used for heating and cooking, according to UBS analysts including Ken Liu. However, the final cost to industrial users was still higher because of large margins for distribution companies.
So now the government is taking a knife to the middlemen companies that transport the gas from the state-run giants and sell it to individual users, firms like ENN Energy Holdings Ltd., China Gas Holdings Ltd. and China Resources Gas Group Ltd. The NDRC last month capped investment returns for natural gas distributors at 7 percent.
In January, China’s latest five-year plan called for using gas instead of coal in industrial boilers throughout four major urban areas: the greater Beijing region, northeast China, the Yangtze River Delta around Shanghai and the Pearl River Delta in Guangdong province.