Pricing reforms in China's power sector will be a key factor in determining the country's gas demand growth rate over the short- to medium term, a Beijing-based analyst said Thursday.
China will have about 220 billion cubic meters/year (21.3 Bcf/d) of available gas supply in the next three years, comprising domestic gas production and LNG contracts that have already been firmed up, Bradley Way, analyst at investment bank Renaissance Capital told a gas conference in Beijing.
This will in effect be what the country consumes, as gas demand is still a function of supply in most end user segments, he said.
The power sector, however, has the ability to unlock significant additional "hidden demand" should electricity producers switch from using coal as a feedstock to gas.
But Way said that although there was plenty of optimism when China signed its first few LNG contracts five to six years ago, the volume that power plants have used has been much less than originally expected.
"We're likely over the mid-term to either be well supplied or over supplied. The key reason behind that is, we don't have power plants offtaking the quantity of gas that they were theoretically going to offtake years ago when contracts were being signed, and that's an issue of the economy not being able to sustain high power prices," he said.
Way used to head BNP Paribas' corporate finance energy team and has been in Beijing for the last decade. His view is contrary to many analysts who have been very bullish on China's gas demand, based on the rationale that the government has set ambitious low carbon goals for climate change mitigation.
"Demand could hit a wall at 220 Bcm or it could continue to grow, it's hard to tell what it will be like in the longer term," Way told Platts.
China's power sector tariffs are controlled by the government and power producers frequently suffer losses because the on-grid tariffs, or wholesale electricity prices, are often not high enough to even cover the rising cost of coal, which is the cheapest and most abundant fuel in China.
Gas has therefore gone into the transport sector as CNG in cars or LNG in ships, where it is a much cheaper alternative to oil.
However, infrastructure such as regasification stations, CNG pumping stations and CNG-compatible vehicles has been slow to be introduced, meaning the rate of gas sales is slower than the supplies that are being made available to the market, said Way.
Gas-fired power plants in Guangdong province have access to cheap LNG from China National Offshore Oil Corporation's Dapeng receiving terminal, which imports 3.7 million mt/year of LNG from Australia's North West Shelf project. The contract was inked in 2004 with a maximum delivered price of $3.36/MMBtu based on a $25/barrel oil price ceiling.
However, LNG prices in subsequent contract negotiations have spiked, maintaining their link to near oil parity.
Guangdong's industrial customers can afford to pay spot prices of up to $18/MMBtu, but LNG prices linked to $130/b oil are not realistic for China's power sector, Way said. The impact is already evident, he added.
PetroChina, which last year lost over $3 billion on gas pipeline and LNG imports, is slowing deliveries of gas from Turkmenistan via the Central Asia-China pipeline network and all three state companies could request for a delay to deliveries under LNG contracts that have been firmed up but have not yet commenced, Way said.
In addition, the government could become more involved in future price negotiations for foreign gas supplies. "You'll see the government more active in pricing negotiations ... trying to set the caps for what [pricing] slopes are acceptable in new LNG contracts," he said.