State-owned PetroChina has refuted local reports that it restricted natural gas supplies in some areas of northern China in order to force the government's hand in raising prices and accelerating gas pricing reforms.
Local media, including Xinhua news agency, on Tuesday reported that PetroChina's Huabei subsidiary had restricted gas supplies to customers by 25% from May 2 in a bid to urge the central government to raise natural gas prices. The reports said gas customers in some provinces including Shandong, Shanxi and Hebei had received notices about the lack of gas supplies.
"There has been some shortage, but the reason has nothing to do with pricing," a source at PetroChina said. "Because of chronic pollution problems, many local power plants have been encouraged to switch from coal to cleaner natural gas, boosting demand."
The problem has been made worse because supply has been curbed during the second and third quarters of the year, when demand is typically lower compared with the colder winter months.
In the past few years, PetroChina and other state companies have restricted their domestic production during Q2 and Q3 as demand tapers off, because they are locked into take-or-pay clauses and have little flexibility in reducing term imports of pipeline gas from Central Asia and LNG along the eastern coast.
"This is the low season, but we are now making adjustments to boost supplies," the source said, adding that the company would increase output from its domestic fields.
"We don't set prices, so restricting supply would not have any impact on the prices," he added.
PetroChina and its peers have been lobbying the National Development and Reform Commission for the past two years to raise domestic gas prices as they have been losing money on gas and LNG imports.
In a report discussing China's Q1 energy needs on its news website Tuesday, PetroChina's parent China National Petroleum Corp. said there was some gas supply tightness in the quarter, largely because domestic gas prices were significantly lower than the cost of imported gas.
"[This] not only impacted the eagerness of companies to produce and import gas, but also affected distribution and rational allocation of supplies. In the long run, this will affect healthy and stable development of the natural gas sector," the report said.
PetroChina's operating profit at its natural gas and pipeline division tumbled 45% year on year to Yuan 1.1 billion ($179 million) in the first quarter, mainly because of costly gas and LNG imports. The company said its LNG import losses totaled Yuan 14.5 billion during the period.
PRICING REFORMS SEEN AS 'POLITICALLY DIFFICULT'
In June 2010, the NDRC raised onshore natural gas wellhead prices across the country by Yuan 0.23/cubic meter, or roughly 25%.
Then it introduced a new pilot pricing mechanism in southern Guangxi and Guangdong provinces in December 2011, linking the price of natural gas to that of LPG and fuel oil traded in Shanghai. The previous method took into account pipeline and other tariffs.
The government has repeatedly said it is committed to extending the reforms to other parts of the country although it has been increasingly concerned about the impact of the cost of switching to cleaner fuels on the economy.
Bernstein Research said it believes pricing reform will remain "politically difficult" in China, given stable oil prices and also because domestic natural gas prices are already higher than US prices, by about 50% last year.
"We believe reform will continue to be difficult [in the] near term due to flat crude prices, low US gas prices, and industrial customers already facing thin operating margins," Bernstein said in a report Tuesday.
Instead, it expects wellhead gas prices to increase by 40% over the next three years in a gradual manner -- 10% this year, 15% in 2014 and another 10% in 2015. This would put wellhead gas prices at an average Yuan 1.54/cu m by then, up from Yuan 1.16/ cu m last year.
