Long-term bullish natural gas prices

Natural gas price reform in China has been in the works for nearly six months, with gradual implementation of the plan leading to noticeable changes. The government aims to adjust domestic natural gas prices by the end of the "Twelfth Five-Year Plan" period. Experts estimate that domestic natural gas prices could rise by as much as 80% in the coming years. On December 12, Dai Jiaquan, deputy director of the Petroleum Market Research Institute at the China National Petroleum Institute of Economics and Technology, spoke at the 7th China-Japan Oil Market Research Results Exchange Meeting. He noted that while energy price reforms continue, the price gap between imported and domestic natural gas is gradually narrowing. According to estimates, natural gas prices in China are expected to increase by 77% in 2015, which would place them about 30% lower than gasoline and diesel. This reduction in price advantage may affect the competitiveness of natural gas in the market. China's natural gas prices have long been regulated, yet domestic consumption has grown rapidly, outpacing both GDP and total primary energy growth. From 2000 to 2012, apparent natural gas consumption rose from 25.4 billion cubic meters to 147.1 billion cubic meters, with an average annual growth rate of 16.1%, far exceeding the 10.1% GDP growth and 7.9% energy consumption growth. During this time, natural gas's share of primary energy consumption increased from 2.2% to 5.2%. As demand surged, domestic production alone could no longer meet needs, prompting China to start importing LNG in 2006. By 2012, natural gas imports reached 42.4 billion cubic meters, a 34.9% year-on-year increase. Of this, 22 billion cubic meters came via pipelines, and 14.68 million tons were imported as LNG. For the first time, pipeline gas surpassed LNG imports, and import dependency climbed to 28.8%. Despite rising imports, the gas sector faced significant losses due to the sharp price discrepancy between imported and domestic gas. Dr. Wang Haibo from the PetroChina Institute of Economics and Technology explained that, in addition to high contract prices, factors like import VAT, gasification costs, and pipeline losses led to severe financial losses for importers. These losses threatened the reliability and motivation of suppliers. For example, in Jiangsu, the 2012 LNG import price was 4.16 yuan per cubic meter, while the city gate price was as low as 2.42 yuan. In 2012, China Petroleum (601857.SH) reported a loss of RMB 41.9 billion in its natural gas business—equivalent to 36% of the company’s net profit. In June 2013, the National Development and Reform Commission issued a notice to adjust natural gas prices, effective July 10. The policy aimed to differentiate between existing and incremental gas, adjusting the latter to match the cost of alternatives like fuel oil and LPG. Existing gas prices were also adjusted gradually, with the goal of full alignment by the end of the "Twelfth Five-Year Plan." Since the July 2013 price adjustment, the impact was quickly reflected in the performance of domestic oil and gas companies. In the first three quarters of 2013, CNPC’s natural gas and pipeline segment earned 23.438 billion yuan in operating profit, up from 885 million yuan in the same period the previous year. This increase was largely attributed to the new pricing mechanism. Cheng Ruifeng, an analyst at Oriental Oil and Gas Network, told the First Financial Daily that factors such as higher non-residential gas prices, increased environmental regulations, and expanded pipeline infrastructure in the southwest have boosted profitability in other segments. As a result, natural gas is expected to become a major growth driver for the company. Over the past decade, China’s rapid natural gas growth has been driven by economic expansion, environmental pressures, underdeveloped storage and transportation systems, and long-term price advantages. However, with slower economic growth and diminishing price benefits, environmental protection will likely become the main driver of future demand. According to a report from the PetroChina Economic and Technology Research Institute, natural gas demand is projected to grow significantly. Under a baseline scenario, consumption is expected to reach 205.9 billion cubic meters in 2015, 306.4 billion in 2020, and 466.9 billion in 2030, accounting for 6.4%, 8.5%, and 11.9% of total primary energy use respectively. However, Wang Haibo emphasized that further price reforms must address issues like the dual pricing system for existing and incremental gas, the rationality of linking prices to alternatives, and how to effectively convey market signals.

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