China's gas firms attempt to pass on high spot LNG prices to end-users

Chinese gas companies are finding ways to pass on high gas import costs to end-users amid soaring global energy prices and the country's tight regulated price environment, which is largely designed to keeping a lid on inflation and keeping gas affordable for critical sectors like winter heating and residential use.

At its third quarter results briefing Oct. 29, state-owned PetroChina's chief financial officer Chai Shouping said it plans to pass through the higher cost of spot LNG to buyers to help minimize losses.

"For natural gas cargoes which have been sold [we] will stick to the contract prices, while the spot cargoes will be sold based on market prices," Chai said, but also noted that most of the national oil company's gas supply was under term contracts both with domestic buyers and global suppliers.

China's Shandong province has recently allowed city gas distributors to sell their spot LNG cargoes at market prices to non-residential users, according to a notice by Shandong Development and Reform Commission Oct. 22.

The state regulator's move is expected to provide more purchasing options for non-residential users as well as encourage city gas companies to meet additional gas demand from this segment, especially during peak demand, market participants said.

City gas companies can already sell spot LNG to non-residential users at cost plus a gas distribution fee, but only if volumes exceed the annual or seasonal gas supply contracts, the SDRC said. Other restrictions also apply to prevent profit making and ensure stable supply.

The sales prices of pipeline gas for city gas distributors are regulated by the government, and can only be raised 20% on the basis of the provincial benchmark city-gate price.

City gas companies sign purchase contracts with upstream suppliers based on downstream demand, but when residential demand increases in peak season, they have to divert supply from non-residential users. Gas companies are unlikely to purchase spot cargoes to meet the shortfall, causing some supply uncertainty for non-residential users.

The ability to pass on the higher purchasing cost of spot LNG will encourage gas companies to sell more spot LNG cargoes to non-residential users and ease margin pressures for gas companies. "At least they can earn the delivery fee, though they are not allowed to make any profit from trading," a source in Shandong said.

Limited impact

Moves by various energy companies to pass on high import costs to end-users have emerged in the backdrop of the ongoing global energy crisis, and will help China's gas and power sectors move toward more market-oriented balancing mechanisms.

However, the impact on the current natural gas sales structure may be limited as spot LNG accounts for less than 5% of total sales by city gas distributors, domestic energy information provider SCI said.

This is despite growing gas consumption.

China consumed 29.47 billion cubic meters of natural gas in August, up 15% year on year, latest data released by the National Development and Reform Commission showed Oct. 29. This was a 3.9% increase from July, the first month-on-month growth after consumption fell for two consecutive months in June and July, S&P Global Platts calculations showed.

Although China's August natural gas production edged up only 0.6% month on month, the country's imports rose 11.8% month on month in August, which supported its higher gas consumption. China imported 10.44 million mt or 14.4 Bcm of natural gas in August, which accounted for 49% of total gas consumption in the month.

Over January-August, China consumed 240.62 Bcm of natural gas, up 16.8% year on year, the NDRC data showed. The growth shrank from the 17.1% seen for the first seven months this year.

PetroChina also started operations at two ethylene plants that use natural gas as feedstock instead of oil-based products in the third quarter. The plants in northwest China were built by PetroChina using indigenously developed technology and are aiming for an annual investment return of around 9%-11%, Chai said.

The 800,000 mt/year Lanzhou Petrochemical Changqing ethane to ethylene project in Gansu province produced on-spec product Aug. 3, while the 600,000 mt/year Dushanzi Petrochemical Tarim ethane to ethylene project in the Xinjiang Uygur autonomous region produced on-spec product Aug. 30, according to PetroChina.