China natural gas: counting the cost

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One industry’s gain is often another industry’s loss. Consider gas price reform in China. The country’s top economic planning body has just said that it will raise natural gas prices at the city gate for industry by 15 per cent to Rmb1.95 ($0.32) per cubic metre from July 10. This is the first big rise in three years and it pushed the share price of China’s largest producer and importer of natural gas, PetroChina, to gain 7 per cent on Tuesday. Meanwhile, the shares of one of the country’s biggest distributors, Hong Kong and China Gas, fell 1 per cent.

As China turns to cleaner energy to try to reduce the city smog, its dependence on natural gas is growing. Policy makers aim for a 10th of China’s energy needs to be met from gas by 2020, from under 5 per cent today. The problem, however, is one of economics. For consumers, even before the latest rise, the gas price in China is 50 per cent higher than in the US. Yet producers continue to make losses on imports, the growth of which is accelerating as production growth from China’s own natural gas reserves slows. Bernstein notes that PetroChina was making a loss of Rmb1 for every cubic metre of natural gas it imported before the price adjustment. The latest price rise is enough only to narrow the losses on those imports.

China’s city gas distributors have been the beneficiaries of the caps on the gas price. Over the past five years the return on equity for the likes of gas distributors such as ENN has almost doubled to 20 per cent, while PetroChina’s has almost halved to 9 per cent. Shares in China Gas have gained 280 per cent over that period while PetroChina’s have lost more than one-tenth.

China has no choice but to go on lifting the gas price if it wants its producers to meet its supply targets. That is better news for the nation’s gas producers than for its distributors.

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