China Chokes on Gas Price Controls
The world is awash in cheap LNG, China's cities are choking on fine dust from power stations, and its government is in the middle of closing about 2,000 coal mines over two years. So why does the country still use so little natural gas?
While a flood of cheap, relatively-clean gas has damaged prospects for coal-fired electricity generation in the U.S. and in Europe, the same isn't happening in China. Imports of LNG actually fell last year, even if not quite as precipitously as the decline in coal shipments.
The problem is price. Natural gas at Henry Hub, the U.S. benchmark, cost about $1.71 per million British thermal units at the end of February. That was markedly cheaper than you'd pay to generate the same amount of heat from Chinese coal 1 :
Of course, China can't buy natural gas direct from the Henry Hub. Even after you've liquefied the stuff and shipped it around the world, you're confronted with the antiquated way that Beijing controls the price of energy. Those cheap U.S. prices more than double to $4.23 per million Btu once they're on an LNG tanker floating around Asia, before more than doubling again to $9.99 on China's national market. That's about four times what you'd pay to generate the same amount of energy from domestic coal.
In truth, it's something of a misnomer to call China's system of pricing natural gas a ``market". While the U.S. lets gas producers and consumers work out market-clearing prices that balance supply and demand -- best expressed in the Henry Hub benchmark -- China uses a complex regulated formula linked to the price of imported fuel oil and LPG and designed in part to limit demand for new supplies of imported gas:
The formula helps increase profits for the state-owned companies that dominate China's gas supplies -- PetroChina alone gained about 31 billion yuan ($4.8 billion) in 2013 from the gap between import and wholesale prices, according to an academic study last July -- but does little to advance the country's plans to reach peak carbon emissions in 2030, or cut the concentrations of particulate pollution from coal generators drifting into the lungs of city-dwellers. To get a sense of quite how distorting this formula is, have a look at what happened when China reduced the price of natural gas last November:
Beijing is due to shut its last coal-fired power plant this year and replace it with gas, but until the country moves to something closer to a market-based pricing regime, it's going to miss out on the flood of cheap energy in the region as LNG terminals in Australia and Papua New Guinea ramp up and exports from the U.S. begin.
China had less LNG import capacity than Spain at the end of 2014, and the situation isn't changing in a hurry. The key market for U.S. LNG exports in the near term is likely to be not Asia but Europe, where declining domestic production and a desire to diversify away from dependence on Russia is stoking demand. Asia Vision, the LNG tanker that carried the first-ever exports of shale gas from the U.S. last month, went to Brazil. Vision is exactly what's lacking.
Energy coal is graded according to the amount of energy that can be released from burning it. A ton of coal graded at 5,000 kilocalories per kilogram will release about 5 million kilocalories. Natural gas is typically measured in British thermal units, which are equivalent to the energy produced by burning a match. There's about four kilocalories to each British thermal unit, so the same ton of 5,000 kcal/kg coal produces energy equivalent to about 20 million Btu of gas.
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