PetroChina reviews multi-billion-dollar push to produce LNG used in transport -sources (updated)

Kunlun Energy

19/08/2014 01:00

(Repeats item issued late Monday with no change to text) 
    By Chen Aizhu 
    BEIJING, Aug 18 (Reuters) - China's biggest energy firm 
PetroChina  601857.SS  0857.HK  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  0135.HK  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 
say.  
    "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  RDSa.L  last 
year agreed to run LNG fuelling lanes at up to 100 major truck 
stops along U.S. interstate highways.  ID:nL5N0IP2I1  
    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 
surged. 
    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.  ID:nL4N0PS1ZE  
    A PetroChina spokesman did not respond to Reuters questions. 
Kunlun Energy's investor relation chief was not available for 
comment. 
     
    PLANT SHUTDOWNS 
    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 
said. 
    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.  ID:nL4N0QI2TI  
    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) 
 ((aizhu.chen@thomsonreuters.com; +8610 66271211; Reuters 
Messaging: aizhu.chen.reuters.com@reuters.net)) 
 
Keywords: PETROCHINA KUNLUN ENERGY/LNG