China Walks Tightrope over Natural Gas Prices

Posted by Joseph Keefe
Thursday, August 21, 2014

China's natural gas dilemma was neatly illustrated by two recent announcements, the first a price increase and the second the closing of two gas-processing plants.

The two developments show the tightrope Beijing is trying to walk by increasing natural gas prices to the level where increased exploration, production and imports are viable, but not so much so as to crimp demand.

Natural gas prices for bulk buyers and non-residential users will be raised effective on Sept. 1 about 20 percent, or 0.4 yuan ($0.065) a cubic metre, to a national average of 2.35 yuan a cubic metre.

The increase serves to keep reform of the sector on track by making natural gas prices more accurately reflect the cost of production, transport and storage.

However, on Aug. 18, PetroChina, the nation's largest oil and gas company, said it was shutting two inland gas liquefaction plants and reviewing its strategy to use liquefied natural gas (LNG) to fuel trucks and ships.

PetroChina unit Kunlun Energy Co has spent billions of dollars building small-scale LNG plants to tap marginal gas fields, mainly in the country's west and north.

These plants were planned to provide LNG as a replacement for diesel in powering trucks and river vessels, but the 33 percent rise in gas prices since 2013 has rendered them unprofitable by increasing feedstock costs.

While small in the overall scheme of natural gas usage, Kunlun's problems illustrate the challenges of raising natural gas prices while still trying to boost the use of the cleaner-burning fuel.

Pollution has become a major social issue in China and natural gas is seen as the best alternative to burning coal for power generation, and also to diesel and fuel oil as a transport fuel.

A gas-fired power plant produces on average about half the carbon dioxide emissions of a coal plant. More importantly for pollution control it emits less than a third of nitrogen oxides and a mere 1 percent of sulphur oxides.

Natural gas use has been rising in China, and accounted for 5 percent of primary energy consumption in 2013, up from 2 percent in 2000, according to an Aug. 20 report by consultants FGE.

While this is low compared to many developed nations, FGE forecasts that natural gas demand will grow by an average 7.5 percent a year to reach 8 percent of energy consumption by 2030.

This additional gas demand will be met by a combination of rising domestic output, mainly from shale, increased pipeline imports, mostly from Russia, and higher LNG imports.


But key to the growth of China's natural gas demand will be pricing, and striking the balance between incentivising domestic output and imports, and disincentivising consumption through high prices.

Right now, it looks like China is starting to get the balance correct.

The latest price increase takes the domestic price for bulk users to about $10.64 per million British thermal units (mmBtu), roughly on par with the current Asian spot price for LNG <LNG-AS> at $10.80 per mmBtu and the reported price of around $10 per mmBtu for the Russian pipeline deal.

This situation may change over time, however, with spot LNG now at the lowest level since March 2011, and likely to rise with the coming seasonal demand of the northern winter.

There are hopes among LNG buyers that prices have moved structurally lower given the additional supply that is coming onstream in the next three years, led by the seven projects under construction in Australia and the likelihood of a further five being commissioned in the United States.

But even if a viable long-term price of LNG is around $12-$13 per mmBtu, this still implies Chinese domestic prices have to rise by about 20 to 30 percent.

While the Russian pipeline deal, slated to begin in 2018, is attractively priced compared to LNG, the reported cost is for delivery at the Chinese border. Transporting the gas to major markets such as Beijing may add another $3-$4 per mmBtu.

If Chinese gas prices were raised to closer to $13 per mmBtu, and for all customers, including residential, it would mean pipeline and LNG supplies wouldn't be loss-making and domestic producers would be incentivised.

So far, though, China's efforts to ramp up shale gas production have largely disappointed, despite the country technically having the world's largest reserves.

Higher prices may be just the spur that companies need to boost their exploration efforts, but it also seems that realism about shale's prospects is setting in, with the government halving its target output to 30 billion cubic metres by 2020, according to an Aug. 7 report.

While lower shale gas output may cheer LNG producers, the fact remains that championing the use of natural gas over cheap coal remains a major challenge for China.

Ultimately, the Chinese authorities will have to decide how much they are prepared to pay to use the cleaner-burning fuel, and work out whether that means subsidising natural gas or taxing coal more, or maybe a combination of both.

By Clyde Russell


Maritime Reporter September 2014 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds


De Beers Orders Specialized Ship from Kleven

Kleven signed a contract with diamond company De Beers Marine Namibia, part of De Beers Group, on the building of a highly specialized vessel for deep water mineral exploration.

Kalmar 5th Generation Gloria Reachstackers Enter US

Kalmar, part of Cargotec, is launching its highly acclaimed range of reachstackers, called Gloria into the Americas. The eagerly awaited launch follows the successful

NewLead Fixes Newcomer, "Newlead Castellano"

NewLead Holdings Ltd. announced today that it has entered into a time charter contract for the recently delivered Handysize vessel, the "Newlead Castellano".


Oversupply, Ebola Fears Drive Oil Below $86

* Middle East supply remains strong * Equities fall on confirmed case of Ebola in New York * Economists see gloomy 2015 for China, euro zone - Reuters

New Oil Field Found in British North Sea

GDF SUEZ E&P UK Ltd and BP today announced a new exploration discovery in the UK Central North Sea. The discovery, which spans GDF SUEZ operated block 30/1f

Foster Wheeler & MDM Engineering Merged

Foster Wheeler AG announced today that an indirect wholly owned subsidiary of the Company has completed the acquisition of MDM Engineering Group Limited (“MDM”)


Fredriksen eyes Takeover of Flex LNG

Shipping tycoon John Fredriksen is aiming to take control of Oslo-listed Flex LNG following his purchase of 12.7 million shares that brought his stake in the firm to 43.

Technip & Fluor Bag RAPID UIO Project

Technip, in a joint venture with Fluor, was awarded an engineering, procurement and construction management contract by PRPC Utilities and Facilities Sdn. Bhd.

VT Halter Begins Building LNG-powered ConRo Ships for Crowley

VT Halter Marine, Inc., a subsidiary of Vision Technologies Systems, Inc. (VT Systems), has commenced construction on the first of two liquefied natural gas (LNG)-powered,


UASC Targets Expansion to Beat Container Market Blues

UASC expects to reach volume of 2.35 mln TEU in 2014 Global carriers still struggling with weak conditions United Arab Shipping Company (UASC) is on a major expansion drive,

Ecoships Claims 15% Ship Efficiency Gain

Ecoships introduced a customized version of the Six Sigma DMAIC approach to process and performance evaluation in order to optimize the energy-efficiency of the vessels under its management.

Oversupply, Ebola Fears Drive Oil Below $86

* Middle East supply remains strong * Equities fall on confirmed case of Ebola in New York * Economists see gloomy 2015 for China, euro zone - Reuters

People in the News

Total CEO Plane Crash: Russian Prosecutors Detain More Suspects

Russian prosecutors detained four Moscow airport workers and denied bail to the driver of a snow plough which hit a private jet killing the CEO of French oil company Total earlier this week,

Chief of Naval Personnel Visits Naval Special Warfare

Chief of Naval Personnel (CNP) Vice Adm. Bill Moran visited Naval Special Warfare (NSW) Sailors during an all hands call on Joint Expeditionary Base Little Creek-Fort Story, Oct.

EUCAP Nestor Train 30 Somali Coast Guards

On 21 October, the European Union’s Maritime Capacity Building Mission in the Horn of Africa and Western Indian Ocean (EUCAP Nestor) celebrated the successful completion of a two month Mentoring,

Government Update

Gazprom to Counter Negative Global Market Trends

The Gazprom Board of Directors took note of the information on the Company's financial strategy under the conditions of negative trends in the global financial

Sea Dispute Sparks China Diplomat to Vietnam Visit

China's top diplomat to visit Vietnam again amid sea dispute   China's top diplomat will visit Vietnam next week, China said on Friday, five months after he last

A History of U.S. Oil Export Controls

On Oct. 20, 1973, King Faisal of Saudi Arabia imposed a total embargo on oil shipments to the United States among other countries in response to their support for Israel during the Arab-Israeli war.


Singapore Bunker Meter Mandate Targets 'Frothy Fuel'

Singapore, the world's biggest bunkering port, plans to end the so-called "cappucino effect" in ship fuelling through new meters designed to stop suppliers from short-changing customers,

Antwerp Port Achieves Highest Throughput

The port of Antwerp handled a freight volume of 148,344,168 tonnes during the first nine months of this year. That’s 3.7% more than the same period last year. Both

Containers, Cruises Help Boost Marseilles Fos

Container throughput at French port Marseilles Fos reached 876,711 teu for the period January to September, an increase of 6% on the first nine months last year.

Maritime Careers / Shipboard Positions Maritime Contracts Maritime Standards Navigation Pipelines Salvage Ship Electronics Ship Repair Ship Simulators Winch
rss | archive | history | articles | privacy | terms and conditions | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.1868 sec (5 req/sec)