(Adds details on China's natural gas price reforms)
By Chen Aizhu
BEIJING Aug 18 China's biggest energy firm
PetroChina is reviewing its
multi-billion-dollar push to produce liquefied natural gas (LNG)
to fuel trucks and ships in place of diesel, shutting two major
gas liquefaction plants, sources said.
Seen just a year ago as a fast-growing profit engine,
PetroChina unit Kunlun Energy Co Ltd is now
reconsidering its investment in the niche business after being
wrongfooted by rising costs and China's slower economic growth,
two sources with direct knowledge of the situation said.
China, which controls energy prices to curb inflation, has
announced hikes in wholesale natural gas prices totalling 33
percent since mid-2013 as part of its long-term market reforms.
That has raised the cost of gas feedstock for Kunlun, which
sources the fuel from small producing fields or pipelines
tapping large onshore basins.
While the price reforms have been well-flagged, China's
economic slowdown has been deeper than expected, eroding
end-user demand for LNG as a transport fuel. The challenges
faced by Kunlun show that the impact of the country's price
reforms - as China transitions from a centrally planned economy
to a more market-driven one - can be magnified by deteriorating
economic circumstances to produce an unintended effect, analysts
"It's a combination effect of price reform and the slowing
economy. The sales prices for LNG couldn't catch up with those
of feed gas," said Diao Zhouwei, Beijing-based gas market
analyst at research firm IHS Energy.
LNG is increasingly being seen as a potential transport
fuel, and can nearly treble a vehicle's driving range over rival
compressed natural gas (CNG). Royal Dutch Shell last
year agreed to run LNG fuelling lanes at up to 100 major truck
stops along U.S. interstate highways.
LNG is cleaner and nearly a third cheaper than diesel,
China's main transport fuel. Oil firms had an ambitious goal
back in 2011 to replace 10 percent of automotive diesel
consumption with gas by 2015, industry officials have said.
Led by the private sector, China has built dozens of
small-scale onshore gas liquefaction facilities since 2001 to
tap marginal gas fields located off the national pipeline grid,
filling a supply gap as demand for lower-carbon producing LNG
Kunlun, a relative latecomer, emerged as a leader of the
business, having spent billions of dollars on a dozen LNG
plants, mainly in the country's west and north, and building
over 600 gas refuelling stations. The company separately
operates two multi-billion-dollar LNG import terminals on
China's east coast.
It also helped put nearly 80,000 LNG vehicles on the road by
the end of 2013 by working with auto makers and truck fleet
owners, said a Kunlun executive, who declined to be named as he
was not authorised to talk to the media.
But since the second half of 2013, Kunlun has seen
utilization rates at some of its plants fall below 50 percent,
he said, amid a broad economic slowdown and as Beijing rolled
out a gas price reform that pushed up prices of feed gas.
An anti-corruption probe of top PetroChina executives,
including Kunlun's former chairman Li Hualin - a protege of
China's ex-security chief Zhou Yongkang who is now officially
under investigation - added to uncertainty about the company's
business strategy, said the Kunlun executive.
A PetroChina spokesman did not respond to Reuters questions.
Kunlun Energy's investor relation chief was not available for
In July, barely a month after the start of trial production,
Kunlun shut down a 1.2 million tonne per year (tpy) liquefaction
plant at Huanggang in the central province of Hubei, the sources
The plant, the largest of its kind in China, had aimed to
supply LNG to vessels along the Yangtze, China's longest river.
A second plant at Ansai in northern Shaanxi province was
closed a month ago. Neither plant has a clear date for a
restart, the sources said.
Kunlun is now test-running a new 600,000-tpy facility in
Tai'an, in the eastern province of Shandong, following some
early technical glitches.
"For the (Tai'an) plant, the day it starts running is the
day it begins incurring a loss," said an official at PetroChina
parent China National Petroleum Corp (CNPC), who was involved in
building all the three projects, which had a combined cost of
about $1.3 billion.
Beijing introduced a new pricing scheme in July 2013 aimed
at converging its domestic natural gas prices with the cost of
imported gas by end-2015, to encourage domestic production and
more imports by ship and pipeline.
Wholesale gas prices were raised by 15 percent last July,
and the government earlier this week announced a fresh hike of
about 18 percent to take effect from September.
The changes have pushed up the price of the gas feedstock
for LNG, but the slower economy has meant producers have been
unable to pass on the increased costs to consumers.
Kunlun's plants that started after mid-2013 are paying the
so-called "incremental" gas prices that are linked to the cost
of imported fuels, although some smaller LNG facilities are
still paying lower "existing volume" prices, due to agreements
with local governments, the sources said.
A slowdown in construction, coal mining and transportation
sectors is also taking away the incentive for trucks to switch
to gas as it involves an upfront additional cost that normally
takes some eight months to pay back.
The CNPC official said PetroChina has temporarily put a ban
on expanding its onshore LNG business while it studies the
economics of its existing plants.
(Additional reporting by Beijing news room; Editing by Richard
Pullin and Ryan Woo)