--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, July 3 It's not often
that increasing the price of something will boost demand, but
China's reforms to its natural gas markets are an exception.
While much of the focus on China's energy markets is on
crude oil and coal, major changes have been happening in gas
markets and these could have a profound impact in coming years.
After three years of unchanged prices and mounting losses
for state-controlled energy giants such as PetroChina
, the government has finally raised gas charges.
The National Development and Reform Commissioned last week
said that gas prices would rise by 15 percent to 1.95 yuan (32
cents) per cubic metre from July 10. The increase is for
non-residential users, with households, which account for
one-fifth of total demand, continuing to receive cheaper
It's also likely that the next jump in prices won't take
three years to arrive, given the government's goal to establish
market-linked pricing for gas supplies.
Even the latest hike won't eliminate the losses incurred by
PetroChina in supplying gas, but it will cut the unsustainable
$6.83 billion loss the company made selling gas below cost in
The logic behind raising prices is that this will encourage
increased supply, which in turn will first alleviate pent-up
demand, but then go further and start to promote the expansion
of gas consumption.
Currently gas only meets about 5 percent of China's energy
needs, and the government target is for that to rise to 8
percent by 2015.
However, it will have to rise substantially from that level
to reach the international average of 24 percent, meaning there
is substantial scope for gas markets to grow.
And grow they will, as the best way for China to cut its
carbon emissions and lower the pollution that chokes cities,
including the capital Beijing, is to boost gas-fired electricity
generation and industry use far faster than that for coal.
The trick is to get the kind of momentum going that makes
the process self-perpetuating, and the key to this is to make
prices conducive to increased supply, without being too high as
to render gas massively uncompetitive with coal, or even
renewables and nuclear.
Getting this balance right will be key for China, as much of
the additional supply will have to be met by increased domestic
production of unconventional resources such as coal-bed and
shale, or by pipeline and liquefied natural gas imports.
PRICE GAP TO IMPORTS NARROWS
The latest price increase isn't enough to make pipeline and
LNG imports profitable, although the gap has narrowed
China paid an average $8.79 per million British thermal
units (mmBtu) for pipeline imports from Turkmenistan and
Uzbekistan in May, and an average $9.07 per mmBtu for LNG
cargoes, with major suppliers being Qatar, Australia, Indonesia
The new domestic price translates roughly into $8.76 per
mmBtu, and while this looks close to pipeline costs, it must be
remembered that the domestic cost is retail, while the pipeline
and LNG costs are landed and still have to incur storage,
transport and other charges.
A further factor is that China's LNG costs are going to rise
in coming years as cheaper deals with Indonesia, Australia and
China paid Qatar $18.77 per mmBtu for LNG in May, compared
with $7.98 to Malaysia, $3.87 to Indonesia and $3.54 to
Also, the seven LNG plants under construction in Australia
will also be selling at higher, oil-linked prices, when they
come on stream.
Any deal to buy pipeline gas from Russia will also most
likely be at oil-linked prices, meaning China faces higher
import costs for gas.
It's also unlikely that cheap domestic shale gas can come to
the rescue, with the gradual realisation that tapping the
nation's enormous reserves of 25 trillion cubic metres is going
to be far more difficult than it was in the United States.
China's reserves are deeper and more scattered, meaning that
exploration wells costs more than double to drill compared to
the United States.
China also lacks the pipeline infrastructure needed to
transport much of the shale production, and it also has
relatively small storage capacity.
Storage capacity is currently around 3 billion cubic metres,
equivalent to 2.1 percent of last year's consumption, according
to the June edition of Asia Gas & Power, published by Argus
By comparison, Japan's storage capacity is 7.2 percent of
annual demand and the European Union's 21 percent.
While China has started to expand its gas storage, this will
take time to come on stream.
Increased storage will allow China to buy LNG when prices
are seasonally lower, rather than be locked in buying when
demand, and therefore the cost, is high.
The increase in gas prices is a significant step in the
process of increasing the share of the cleaner-burning fuel in
China's energy mix.
Further price increases and investment in gas infrastructure
will show if China, the world's biggest polluter, is willing to
pay the price of higher energy costs in exchange for cutting
emissions from cheaper coal.
(Editing by Michael Perry)