China’s Natural Gas Shortages

China’s Faces Nat Gas Shortages, Price Hikes Xina Xie and Michael J. Economides

China has a new energy headache: natural gas shortages and price spikes. And those shortages are likely to persist for the foreseeable future.

Unseasonably cold weather, including heavy snow in northern China, has resulted in a natural gas shortfalls of as much as 40%. Industrial facilities, office buildings, and even hotels have been closed to save gas and those closures have occurred in cities in the south — Changsha, Nanjing, Hefei — as well as in northern cities like Beijing, Harbin and Xian. Rather than close, some industrial users have begun using diesel fuel to keep their factories running.

In Wuhan, industrial gas supply has been curtailed in order to assure adequate supplies to the residential sector. Taxis using natural gas as fuel, a proud accomplishment of the city, have been directed to start using gasoline, with about $15 per day of government subsidies. In gas-producing Chongqing in Sichuan Province, the waiting time to re-fuel natural gas tanks for cars has been more than 3 hours with the queues for fuel stretching nearly 1 kilometer. In Hanzhou, the famous “entertainment” businesses were closed to save gas and for the rest of the city, the suggested indoor air temperature was no higher than 18°C (64°F).

The shortages began nearly two weeks ago. On November 13, PetroChina which produces 70 percent of domestic gas in China, issued an emergency announcement to its gas distributors saying that it would limit supplies. Sinopec also started to apply similar gas supply restrictions on the same day.

Today, China Petroleum Daily, a publication of CNPC, the parent of PetroChina, predicted that the gas shortages will continue through December and January, with shortages reaching about 300 million cubic feet per day in the north, and about 200 MMcf/d in the south.[1]

“Ostensibly this natural gas supply crisis is caused by the weather. In fact, the crisis is caused by a lack of gas supply,” said Dong Xiuchen, a professor at China Petroleum University. The root of the problem “is the natural gas price control by the government. To oil and gas industries, if there is no profit for their businesses, they then don’t have the resources and motivation to explore for more oil and gas reservoirs. The ongoing rough pricing negotiation for imported natural gas makes it hard for foreign gas to flow into the country.”

China’s gas pricing has become a critical issue since China started to import large amount of foreign gas in 2008. The current China’s natural gas pricing system set by the country’s powerful National Development and Reform Commision has put the domestic gas producers in an untenable pricing situation. For example, there is a $6.25 per thousand cubic feet price cap on gas sold in the domestic market. But LNG imported from Qatar costs as much as $14.60 per mcf.

Reforming the gas pricing system has been discussed widely and may be inevitable. But, on November 19, the NDRC, mindful of possible consumer discontent, indicated that natural gas prices would not be increased in 2009. However, the agency did order that electricity rates for industrial users be increased by $3.70 per megawatt-hour. Residential rates will not be affected.

Although natural gas only provides about 3.4% of China’s total primary energy  (compared to the world average of 24.1%), shortages of natural gas are likely to persist. The China Social Science Academy recently predicted that the country will have a shortage of at least 1 trillion cubic feet in 2010 and more than 3 tcf in 2020.[2]

In the meantime, poor residents in southern China, even patients in hospitals, are shivering in rooms at close to freezing temperature. It will be a long, cold winter in China.