Opinion

Little impact seen from expired LNG deal

By Lin Boqiang (China Daily)
Updated: 2010-01-07 08:02

The expired $40 billion liquefied natural gas (LNG) deal between PetroChina and Woodside Petroleum of Australia should be seen as an individual case and is unlikely to have any serious market repercussions or impact on bilateral ties.

While it is difficult to comment on what prompted the decision, it does raise some concerns considering the recent shortages of natural gas in the country.

Though China is not a major gas consumer, use of natural gas has been rising steadily at an average 17.6 percent annually in the past five years, far above the country's GDP growth. Even when the rest of the world was grappling with the financial crisis in 2008, China's natural gas consumption rose 15.8 percent year-on-year, compared with 2.5 percent growth worldwide.

The Energy Research Institute of the National Development and Reform Commission predicts the country's natural gas consumption may reach 250 billion cu m by 2020. A lower estimate of 210 billion cu m was given by the China Center for Energy Economics Research at Xiamen University.

The country's gas output, however, is expected to be around 170 billion cu m by that time, leading to a shortfall of around 40 to 80 billion cu m.

In 2007, nearly 73.3 percent of China's natural gas was used for industrial purposes whereas household use accounted for just 19.2 percent. With the country's urbanization drive and the government's favorable policies, households gas usage is certain to increase over time.

China's domestic natural gas output rose from 27.2 billion cu m in 2000 to 76.1 billion cu m in 2008, clocking a 15 percent annual growth. But the limitations are obvious.

The country relies mainly on three gas fields: Tarim, Changqing and Chuanyu, and for years there have been no major discoveries. That means China has to import more natural gas from other countries.

So far, China has made deals to import 24-billion-cu-m LNG by 2011 through long-term contracts and plans to import another 40 billion cu m of gas from Turkmenistan through pipelines.

These projects are expected to secure the nation's gas supplies for many years to come, and in this regard we can view the Woodside case as a small setback in China's exploration of gas resources abroad.

While imported natural gas is fueling the country in an increasingly important manner, its impact on China's gas price system is also apparent. Under a traditionally highly self-sufficient supply system, China's natural gas price has been disconnected from the international market for years. Change will now be necessary as China increases its imports of gas, liquidized or through pipelines.

The surge in international gas prices during 2007 and 2008 has raised concerns over the gap between domestic and world gas prices and the comparison between the gas prices and the prices of other substitutable energy sources.

The growing imports of natural gas have also provided the impetus to reform the gas pricing system. It is believed that the National Development and Reform Commission has recently submitted a reform proposal to the State Council, wherein it intends to opt for a market-oriented mechanism that would peg the gas prices with international oil prices. The proposal is likely to be approved in the first quarter of this year.

Although there still remain some technical issues, such as the end retail pricing and the subsidies to industries that may be affected by price adjustments, it is obvious that of natural gas prices are set to increase in China.

The author is director of the China Center for Energy Economics Research at Xiamen University.