NOCs Criticised by State Media over Natural Gas Shortages in China

Supply Crunch

NOCs in China have been accused by state media of exploiting natural gas shortages in the northern and eastern areas of the country in areas such as Hebei, Henan, Jiangsu, and Zheijiang to achieve higher profits and to force an early adoption of a gas price hike planned for January 2010. The report was run by China Central Television (CCT) at the weekend, which also accused China National Petroleum Corp. (CNPC) and Sinopec of playing down public frustration with the shortages, citing their failure to provide updates of the situation on their websites. However, an unidentified CNPC manager denied that the companies had refused to increase production due to the low price of gas, saying that the problems should be attributed to the shortage of natural gas resources. A Sinopec spokesman also told CCTV that supplies were at historic highs and accusations that it was attempting to force a price increase were untrue.

The natural gas shortages have been triggered by an earlier-than-usual drop in winter temperatures that has increased demand for gas among residential users. Last week the cold weather reportedly caused demand for gas in Wuhan to jump to 210 mmcm/d, a 50% increase on its usual level for this time of year, which led to shortages of 600,000 cm of gas while Nanjing city in eastern China also had a shortage of 400,000 cm. To cope with the shortages many businesses in major cities such as Wuhan, Nanjing, Hangzhou, and Shijiazhuang have had their supplies cut to ensure supplies for residential consumers, although shortages continue to prevail in some areas. While the cold weather is an immediate trigger for the gas shortages, favourable supply potential coupled with increasing living standards and government policies to encourage residential use of gas have also exacerbated the supply crunch.

According to IHS Cambridge Energy Research Associates (CERA), China's gas demand is currently around 75 bcm/y but has been growing by over 10% per annum in recent years. China is highly prospective for natural gas as demonstrated by new discoveries of gas in Sichuan and Xinjiang provinces and in the South China Sea. Indeed, with China adding more proved and probable reserves than any other country in the world between 1998 and 2008 the government's increasing reliance on gas appeared logical. However, China's gas market is still not fully developed. Energy Tribune estimated in August this year that only around 200 out of China's 662 major cities were covered by natural gas pipelines and even in the cities that are supplied, capacity is rather limited. Following the surge in demand to 189 mmcf/d, CNPC/PetroChina announced on 18 November that most of its natural gas transmission lines had reached full capacity. The country’s NOCs also tend not to share gas transmission infrastructure, which can make it difficult to cover supply shortages during sudden demand surges. In addition, although the government has concentrated on boosting China's crude oil and fuel storage capabilities following the onset of the global economic slowdown, China's gas storage capacity remains limited, creating additional problems in accessing supplies quickly that may need to be derived from increasing production at existing fields or importing greater amounts of LNG from abroad.

The government's efforts to encourage gas consumption may also have contributed to the supply shortages. Gas currently accounts for around 4% of China's overall energy mix although increases in reserves of around 2 tcm over the last decade have encouraged the government to promote gas as a long-term alternative to coal and oil in the energy mix. To these ends the government has encouraged use of natural gas for taxis in some provinces while many residents in northern and eastern areas of the country, where winters are colder, have been installing gas-powered home heaters, which are becoming increasingly affordable due to the rise in living standards. The government has also regulated gas prices to encourage consumption growth. According to Energy Tribune, in 2008 the average natural gas price from domestic sources was only about US$3.80/1000 cf, equivalent to US$21/b of crude oil. With low regulated prices suppliers have less incentive to invest in expanding capacity and boosting production of gas while demand is encouraged. Indeed, according to the China Daily, the cost of sending natural gas generated from gas fields in west China's Sichuan to east China's Shanghai is 3 yuan/cm, although the retail price is around 2.5 yuan. This situation has led to suspicions that China's NOCs are deliberately restricting supplies to force price increases so they can boost revenues.

Outlook and Implications

However, whether they like it or not, NOCs have been working to maximise output following the shortages, undermining allegations that they have been restricting supplies. Petrochina announced that it has even cut its own industrial usage of gas by 10 mmcf/d to help secure supply to residents and heating systems in snowfall-hit cities while Sinopec has added 850,000 cm/d since the beginning of the fourth quarter to reinforce supply to residents and heating systems users and plans further output increases (see China: 17 November 2009: Sinopec Plans Gas Production Surge in 2010). Cao Changqing, director of the pricing department of the National Development and Reform Commission (NDRC) already announced on 19 November that the country's natural gas pricing reform would not be completed in 2009, putting paid to speculation that a pricing system reform would be put in place sooner as a result of the shortages.

The natural gas shortages have resulted in significant problems for a number of commercial users. Wuhan's largest gas consumer, Intex Glass, is on the verge of bankruptcy and has not been able to operate for over a week as it is only receiving around one tenth of its usual supplies. These shortages are likely to continue over the coming days, although the NDRC has indicated that tight supplies are starting to ease around the country and with measures put in place to use substitute fuels starting to take affect, the worst of the current shortages could have passed. However, Zhang Guobao head of the National Energy Administration (NEA) has said that gas demand is expected to exceed supply by 1 bcm this winter, which makes further shortages a danger. To deal with the eventuality, imports of gas will be stepped up, which could provide some lift to spot prices on the regional LNG market. Efforts to swiftly maximise production from existing fields are also likely to continue and PetroChina has already announced that it is increasing exploration of additional wells at the Kela-2 field in the high-potential Tarim Basin. The government may also be more disposed to increase investment in natural gas storage facilities to better protect supply security in winters to come, particularly as consumption growth is likely continue in China, which is fast on track to becoming the world's third-largest natural gas consumer by 2020.