http://www.atimes.com/atimes/Central_Asia/ML01Ag01.html

By Robert M Cutler

MONTREAL – Turkmenistan has agreed to increase future natural gas exports to China from the already planned 40 billion cubic meters per year (bcm/y) to 65 bcm/y, or more than half of China’s total consumption of natural gas.

President Gurbanguly Berdimuhamedow of Turkmenistan is in Beijing this week to sign over a dozen agreements with his Chinese counterpart, Hu Jintao, including several that will provide also for increased Chinese investment and sales of drilling equipment in the energy sector, and loans for those purchases.

The agreements that Berdimuhamedow signed in Beijing provide for further Chinese investment in the South Yolotan gas field, which is the world’s second-largest, with estimated reserves between 13 trillion and 21 trillion cubic meters. Other agreements

will cover such areas as police training, and counterterrorism. Berdimuhamedow will also hold meetings with Premier Wen Jiabao and chairman of the People’s National Congress Standing Committee Wu Bangguo.
On Thursday, Berdimuhamedow will attend ceremonies marking the inauguration of a US$22 billion pipeline that will carry his country’s gas to southern China. This is the second West-East Gas Pipeline (WEGP). The first was completed in 2004 and, with a length of 4,000 kilometers, was at the time one of China’s largest energy projects. Originally carrying 12 bcm/y from the Tarim Basin in Xinjiang to Shanghai on the eastern coast, its volume was increased to 17 bcm/y through the addition of more compressors and upgrading of the industrial plant.

When gas from Turkmenistan came on line via the Turkmenistan-Uzbekistan-Kazakhstan-China natural gas pipeline in 2009, it was put into the first WEGP. The gas that originally fed it, from Xinjiang’s Tarim Basin and secondarily from Changqing (Shaanxi province), is now held in reserve for that purpose in case of emergency. The second WEGP’s western segment has been operating for roughly two years. Berdimuhamedow’s visit was timed for the ceremonial opening of the eastern segment, although it had been operating already for several months.

The second WEGP cost nearly four times as much as the $5.7 billion that the first one cost, partly due to increase expense for the raw materials required to manufacture the pipe. Its main line inside China runs 4,843 km from Khorgos in northwestern Xinjiang to Guangzhou, the capital of Guangdong province. If one begins measuring at the source of the gas in Turkmenistan, one gets an impressive length of 9,102 km, although the WEGP designates only the internal Chinese leg.

The second WEGP has a design capacity of 30 bcm/y, which may be upgraded to 40 bcm/y in order to receive gas contracted also from Kazakhstan, through which the pipeline runs. In the beginning, the Kazakhstani gas will come from Aqtobe in the west of the country, whence a feeder pipeline runs to Kyzl-Orda and then to Shymkent in the south.

The Chinese have been active in Aqtobe for well over a decade in anticipation of this opportunity, and the pipeline inside Kazakhstan will make the southern part of the country independent of imports (mainly from Uzbekistan) for the first time in its history. The pipeline will then turn east towards Almaty and the Chinese border.

Work on a third WEGP has begun. This pipeline will start in Xinjiang and take mainly Central Asian gas to the Yangtze and Pearl River deltas in Fujian province in the southeast. It looks to be roughly as long as the second WEGP. A fourth WEGP is on the drawing boards, and even a fifth is being talked up.

The Russian newspaper Kommersant quoted an unnamed Chinese diplomat as saying that “Beijing will do its best to make sure the Trans-Caspian [Gas] Pipeline project [from Turkmenistan to Azerbaijan] is not developed,” because China does not want Turkmenistan to use European prices to bargain for an increase in prices to China.

Consequently, China will “contract more and more gas volumes in Turkmenistan” as the Chinese gas market expands, and as soon as possible, in order to draw supplies away from a possible Western direction for Turkmenistan’s exports.

Russia already wishes to charge European prices to China for Siberian gas that has been under discussion between the two sides since 2004. The gas would have two routes, one in western Siberia (30 bcm/y) and one in the east (38 bcm/y). A Siberian contract could be worth as much as $1 trillion, but whereas China has preferred that the former route be developed first, Russia concentrated on the latter and opened the Sakhalin-Khabarovsk-Vladivostok pipeline two months ago.

Russia shares with China the wish to prevent Turkmenistan’s gas from reaching Europe, so that Gazprom may maintain its already large market share, which is set to grow further if the capacity of the Nord Stream pipeline under the Baltic Sea to Germany is doubled, as has been bruited.

However, one result of the China’s increasing purchase contracts with Turkmenistan may be a further diminution in Chinese interest in Russian gas from Siberia, which Kommersant cites sources as saying is offered by Moscow at $400 per thousand cubic meters (tcm). The price of Ashgabat’s gas to Beijing, according to the newspaper, is about $250/tcm. A Chinese press leak a year ago had put the difference between the two sides in the range of $100/tcm.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

http://uk.reuters.com/article/2012/05/09/uk-china-gas-idUKBRE84803T20120509

A worker performs a routine check to the valves at a natural gas appraisal well of Sinopec in Langzhong county, Sichuan province March 1, 2011.

Credit: Reuters/Stringer

By Charlie Zhu

HONG KONG | Wed May 9, 2012 6:39am BST

HONG KONG (Reuters) – China‘s big state companies, confident on the outlook for domestic natural gas reforms, are buying up local distributors and raising fresh capital – and making gas the hottest prospect for energy investment in the world’s top energy consumer.

The prospects for expansion and acquisitions also have China’s natural gas distributors trading like growth stocks, instead of bog-standard utilities.

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China is pushing energy price reforms and spending billions of dollars on gas imports and infrastructure to cut the use of coal, which supplies over 70 percent of its energy but has made it the world leader in mine accidents and greenhouse emissions, and among the worst in air pollution.

While nuclear power and renewables such as solar and wind are also benefiting from the shift, for now gas looks set to gain the most, since plentiful supplies and its use in industrial production and conventional thermal power plants mean it can be developed quickly and efficiently.

“Natural gas is clean energy that is enjoying a lot of state policy support,” said Liu Yang, chief investment officer of regional fund house Atlantis, which manages $4 billion (2 billion pounds) and holds shares of Hong Kong-listed Chinese city gas distributors.

“The city gas sector has been under-invested and is just about to take off,” she said.

Shares of Hong Kong-listed distributors, which include ENN (2688.HK), China Gas Holdings (0384.HK), China Resources Gas (1193.HK), Kunlun Energy (0135.HK) and Beijing Enterprises (0392.HK), have risen as much as 37 percent over the past 12 months.

The sector, with a combined market value around $32 billion, boasts valuations of more than 20 times historical earnings, and investors and analysts remain upbeat about its prospects.

STATE FORAY

State oil giants such as Sinopec (0386.HK) and PetroChina (0857.HK) are also swooping in on the sector, threatening to squeeze out non-state firms such as China Gas that entered the business more than a decade ago and have since dominated it.

Sinopec and ENN recently made a $2.2 billion cash bid for China Gas and a bidding war may be brewing with state-run conglomerate Beijing Enterprises Group — parent of Hong Kong-listed distributor Beijing Enterprises Holding.

Beijing Enterprises snapped up about 9 percent of China Gas in deals on Monday and last Friday, including buying a 5.4 percent holding from Oman Oil, to take its stake to 12.65 percent.

The bid for China Gas, which also counts SK Holdings (003600.KS) and Gail India (GAIL.NS) among its key shareholders, will spark further consolidation in the sector, bankers say.

Kunlun, PetroChina’s gas distributor arm, has just raised $1.3 billion via an international share sale to expand its LNG distribution business, partly via acquisitions.

By leveraging their financial muscle and grips on upstream supplies, Chinese oil majors, which also include CNOOC Group, parent of offshore producer CNOOC Ltd (0883.HK), are well-placed to take over more smaller rivals, including unlisted companies.

“All the small city gas companies will be swallowed up by PetroChina or Sinopec one day,” said an executive at a Hong Kong-listed gas distributor. He requested anonymity as his company purchases natural gas from PetroChina.

Smaller players such as Tian Lun Gas (1600.HK) and Binhai Investment (8035.HK), which serve regions in north China, may find it hard to expand beyond their home turf and end up as acquisition targets, analysts say.

Kunlun, which has vowed to become China’s largest gas distributor, has spent heavily buying pipelines and LNG terminals from its state parent, including a gas transmission facility in Beijing it bought in 2009 for $2.85 billion.

GROWTH STOCKS

China is moving to double the share of gas in its overall energy supply to more than 8 percent by 2015, when consumption should reach 260 billion cubic metres (bcm), while coal will be cut to just over 60 percent. By 2030, gas use will hit 500 bcm, about what the European Union consumes today, according to industry forecasts.

The lion’s share of that additional supply will go to new gas-fired power plants.

China’s installed gas-fired capacity will more than quadruple to 220 gigawatts by 2020 from 40 gigawatts last year, creating a gas power equipment market worth 26.5 billion yuan ($4.2 billion) a year for 2011-2020, nearly seven times the average size of the market in the prior five years, Barclays estimates.

That would benefit a host of domestic and foreign manufacturers, including General Electric (GE.N), Siemens (SIEGn.DE), Shanghai Electric (2727.HK), Dongfang Electric (1072.HK) and Harbin Electric (1133.HK), it said.

China also has vast gas supplies to tap both at home, where coal bed methane and shale could boost its resources to among the world’s largest, and abroad, where it has a pipeline to Turkmenistan and has been importing liquefied natural gas (LNG) from Australia, Indonesia, Malaysia and Qatar. Gas will also be flowing to China next year via a pipeline to a Myanmar field.

The gas sector was virtually non-existent in China until the late 1990s, and while billions of dollars have been poured into construction of pipelines and terminals over the past decade, more than two-thirds of China’s 600-plus cities still have no access to gas supplies.

Driving the state firms’ push into the gas distribution sector is a government decision to bite the bullet and start freeing up state-controlled domestic prices, to encourage gas importers and producers.

Gas prices are linked to crude oil in the Asia market but inside China have been strictly controlled – like electricity and petroleum product prices – since the authorities fear volatile energy costs could hinder industrial development and create hardships for households.

But rising crude oil prices have saddled state-run energy companies with losses on gas they buy abroad and supply into the domestic market, making them reluctant to expand their business.

PetroChina (PTR.N)(601857.SS), which has been lobbying Beijing to reform the domestic gas pricing system, lost $3.4 billion in its gas importing business last year. In the first quarter of this year, the loss reached $1.62 billion.

PILOT SCHEME

In December, China launched a pilot scheme in Guangdong and Guangxi provinces, which include southern China’s export-focused manufacturing heartland, to link city-gate natural gas prices with prices of imported fuel oil and liquefied petroleum gas.

Analysts say this will inevitably boost gas prices, which had already been raised sharply in recent years but in some major Chinese provinces are still 30 to 50 percent below crude oil-linked prices for LNG or pipeline gas from Central Asia.

Analysts and industry executives, including PetroChina President Zhou Jiping, believe price reforms will gradually work their way across China, although prices may be held low and raised only gradually for certain regions or for households.

Price increases will likely come sooner for industrial and commercial users, making shares of distributors serving that sector such as China Resources Gas and ENN a safer bet, analysts said. They also doubted higher prices would dent demand, with gas likely to remain affordable for industrial users even with 20 to 30 percent price increases.

Helping to spur the drive for reform will be a steady rise in gas imports, which the Chinese government is encouraging to reduce the country’s reliance on coal.

The energy majors, as state-owned companies, are obliged to cooperate with government policy, but have been dragging their feet on boosting imports due to the losses from the price gap, and are stepping up the pressure for reforms.

“If the import of generally more expensive LNG and this fairly expensive piped gas continues to rise, the government will finally face up to the problem of increasing the price of domestic onshore gas,” said Al Troner, president of Houston-based Asia Pacific Energy Consulting.

In a virtuous circle, higher prices will also encourage more imports, which are forecast by industry experts to account for half of China’s total natural gas consumption by 2030, compared with 30 percent now. That would likely make China the world’s largest importer of natural gas, displacing Japan.

Rising prices will also encourage China to produce more gas domestically, where its proven reserves were 2.8 trillion cubic metres (tcm) at the end of 2010, similar to Australia’s 2.9 tcm and Indonesia’s 3.1 tcm, according to BP. Shale gas reserves could boost that sharply, with China’s Ministry of Land and Resources revealing in March that China may hold 25.08 tcm of potentially recoverable shale gas resources.

“You will have much more motivation for the incumbent, whether it is Sinopec, PetroChina or others, to develop the vast domestic reserves faster,” said James Hubbard, head of Asia oil and gas research at Macquarie.

(Editing by Edmund Klamann)