China's domestic natural gas prices will continue to rise 10% a year at the wellhead over the next five years, driven up by expensive imports and further reform of wellhead prices in the country as the government seeks to encourage local gas development over imports, according to a research note published Wednesday by Bernstein Research.
"Urban disposable income growth will continue to outpace end-user gas price growth, meaning residential customers can afford higher gas prices ... Despite inflationary concerns, we expect domestic gas prices in China will continue to rise by 10% [a year on an annualized basis] at the wellhead and 7% [a year on an annualized basis] for end-users over the next five years," said Neil Beveridge, a senior analysts at Bernstein Research.
State-owned oil and gas company PetroChina will start up the second West-to-East pipeline, the world's second largest pipeline, which will transport 30 billion cubic meters of gas every year from Turkmenistan to cities in east China.
"While this will help ease supply shortages which China experienced last winter and is likely to experience again this year, the imported gas is not cheap with a price tag of $11-12/Mcf at Shanghai's citygate," Beveridge said.
And with current citygate gas prices at $7-8/Mcf in Shanghai, Bernstein Research believes that domestic gas prices will have to be hiked when gas imports are blended into the mix or importers will suffer losses.
"The key investment controversy is: will the government allow PetroChina to pass through these costs to customers and/or raise domestic gas prices to compensate for import losses. Fundamentally, we believe that it is not in China's interests to subsidize gas imports," he added. GAS STILL CHEAPER THAN OTHER FUELS Even though Turkmen gas imports will push up end-user prices in China by $1-2/Mcf, natural gas prices remain competitive to alternative household fuels such as liquefied petroleum gas and electricity, suggesting that consumers will still have a preference for gas as a cheaper alternative.
"Moreover, the convenience of piped gas means that re-substitution to LPG is unlikely unless gas prices become significantly higher than LPG prices," he said.
In addition, residential gas customers actually have very high affordability and gas share of wallet will decrease as urban disposable income growth outpaces gas price growth.
"Assuming per capita disposable income will continue to grow at 10% [a year on an annualized basis] while end-user gas price growth will average 7% with higher priced imports taken into consideration, we estimate that gas share of wallet will continue to decline from the current 1.5% to close to 1% over the next five years," the analyst said, adding that this suggests increasing affordability in the residential segment even with higher priced gas imports being blended into the supply mix.
For industrial customers, natural gas remains extremely competitive to key alternative fuels including diesel and electricity. In addition, gas also cannot be substituted for electricity for key industrial applications, which makes industrial gas demand inelastic to pricing.
"As China's energy policy continues to shift to natural gas and gas network reaches more industrial zones, we expect industrial users will continue to switch to gas as a clean and cheaper form of energy," Beveridge said.
Still, given the obvious cost savings in switching to gas, the take up rate of gas is much dependent on the availability of gas infrastructure and access, plus the cost of connection fee which could be significant over a multi-year supply agreement, Beveridge said.
In transportation, compressed natural gas is currently priced at $16/Mcf which is substantially discounted to gasoline at $25/MMbtu on an energy equivalent basis, the analyst said.
"As a result there is a strong incentive for commercial transport companies to convert to gas and the market to provide this service," he said.
"Urban disposable income growth will continue to outpace end-user gas price growth, meaning residential customers can afford higher gas prices ... Despite inflationary concerns, we expect domestic gas prices in China will continue to rise by 10% [a year on an annualized basis] at the wellhead and 7% [a year on an annualized basis] for end-users over the next five years," said Neil Beveridge, a senior analysts at Bernstein Research.
State-owned oil and gas company PetroChina will start up the second West-to-East pipeline, the world's second largest pipeline, which will transport 30 billion cubic meters of gas every year from Turkmenistan to cities in east China.
"While this will help ease supply shortages which China experienced last winter and is likely to experience again this year, the imported gas is not cheap with a price tag of $11-12/Mcf at Shanghai's citygate," Beveridge said.
And with current citygate gas prices at $7-8/Mcf in Shanghai, Bernstein Research believes that domestic gas prices will have to be hiked when gas imports are blended into the mix or importers will suffer losses.
"The key investment controversy is: will the government allow PetroChina to pass through these costs to customers and/or raise domestic gas prices to compensate for import losses. Fundamentally, we believe that it is not in China's interests to subsidize gas imports," he added. GAS STILL CHEAPER THAN OTHER FUELS Even though Turkmen gas imports will push up end-user prices in China by $1-2/Mcf, natural gas prices remain competitive to alternative household fuels such as liquefied petroleum gas and electricity, suggesting that consumers will still have a preference for gas as a cheaper alternative.
"Moreover, the convenience of piped gas means that re-substitution to LPG is unlikely unless gas prices become significantly higher than LPG prices," he said.
In addition, residential gas customers actually have very high affordability and gas share of wallet will decrease as urban disposable income growth outpaces gas price growth.
"Assuming per capita disposable income will continue to grow at 10% [a year on an annualized basis] while end-user gas price growth will average 7% with higher priced imports taken into consideration, we estimate that gas share of wallet will continue to decline from the current 1.5% to close to 1% over the next five years," the analyst said, adding that this suggests increasing affordability in the residential segment even with higher priced gas imports being blended into the supply mix.
For industrial customers, natural gas remains extremely competitive to key alternative fuels including diesel and electricity. In addition, gas also cannot be substituted for electricity for key industrial applications, which makes industrial gas demand inelastic to pricing.
"As China's energy policy continues to shift to natural gas and gas network reaches more industrial zones, we expect industrial users will continue to switch to gas as a clean and cheaper form of energy," Beveridge said.
Still, given the obvious cost savings in switching to gas, the take up rate of gas is much dependent on the availability of gas infrastructure and access, plus the cost of connection fee which could be significant over a multi-year supply agreement, Beveridge said.
In transportation, compressed natural gas is currently priced at $16/Mcf which is substantially discounted to gasoline at $25/MMbtu on an energy equivalent basis, the analyst said.
"As a result there is a strong incentive for commercial transport companies to convert to gas and the market to provide this service," he said.
