Monday, August 17, 2009

China Gets the Memo

There is much conjecture that China will allow the country's natural gas prices to rise later this year. China is in a somewhat similar position to the U.S. in that it imports about half of its oil and it is beginning to be concerned with pollution issues, so it sees the benefit of transferring a portion of its energy consumption to natural gas. While natgas currently only represents 3% of China's energy consumption, that figure is expected to rise in coming years, making China the third largest gas worldwide consumer, behind only Russia and the U.S. China is unlike the U.S. in that certain energy prices are set centrally and the prices for natgas was below market rates (the U.S. used to set wellhead prices but thankfully hasn't since the '70s).

Much of China's natural gas is produced domestically but it is starting to receive shipments from Turkmenistan via PetroChina's Pan-Central Asia pipeline project and from LNG imports. Wellhead prices in China are on par with those in the U.S. but are about half those of imported gas. While China is unlikely to allow free market pricing, the goal of increasing wellhead costs is to normalize the price difference between the domestic and imported gas.

The price increase will improve profitability for domestic producers and make the imported gas more appealing. While there will be some pain for gas users, the timing for the change seems good. Because China's economy is improving and natgas prices are currently very low, a price increase won't drastically harm users.

Ultimately, the goal is to increase the use of natural gas because it burns cleaner and will lessen China from some of the political issues associated with importing oil. Does any of this sound familiar? China is seldom the first nation to think and act progressively, but when it does take a step in the right direction, it usually does it in a big way.

On a side note: a price change in China should make it a more attractive LNG destination, and I'm certainly in favor of anything that prevents LNG dumping on U.S. shores.

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