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CNPC Faces Problems Raising Offers

SCI99

2019-08-09

CNPC Faces Problems Raising Offers

In response to the foundation of National Pipeline Company (NPC), CNPC intended to increase the natural gas offers in the slack season (spring and summer). However, downstream enterprises showed strong resistance, and CNPC failed to achieve its primary goals.

According to the instructions of NDRC and NEA, the growth rate of PNG price cannot exceed 20% each time. After the 2019 Spring Festival, CNPC announced it would raise the PNG retail price by 20% in the slack season. After months of negotiation, most downstream users signed the new supply & purchase contracts with CNPC, but the growth rate of price was smaller than 20%. And the city gas companies in China’s two biggest cities of Beijing and Shanghai still refused to accept such increase.

CNPC used two reasons to defend for its intention: the gas shortage and CNPC’s losses. Ling Xiao, Vice President of CNPC and Chairman of Kunlun Energy, told the press that CNPC had suffered losses of over RMB 230 billion since 2011 in the natural gas import business due to the price gap between the import price and the gate benchmark price. He also emphasized that China-Russia Pipeline could only fulfil 1/5 of the increase of the demand, and China would still face gas shortage in the next few years. Industry insiders said Ling’s speech was nothing but only to release the signal of the price increase. Meanwhile, the growth of China’s gas demand slowed gradually. The LNG price in the Chinese market also kept decreasing. The conflict is obvious: upstream enterprises are facing losses due to the high import cost and low wholesale prices while downstream enterprises are impacting by the high gas price.

As China’s biggest company in the upstream sector of the natural gas industry, CNPC has strong bargaining power and could affect the trend. According to multiple sources, in the new contracts, the retail price (less than or equal to the contracted volume) in the slack season will increase by 20% based on the provincial benchmark price, and that in the peak season will increase by 20&-45%.

CNPC’s growth rate of the price was far more than the expectation of downstream users. These enterprises began lobbying to seek help from local authorities. CNPC was forced to adjust terms after four months. Although most users have signed the new contracts, the growth rates of the price were generally less than 20%. For instance, the offers for Tianjin Gas increased by 12% in the slack season. Due to Beijing’s special position, Beijing Gas has more bargaining power than other city gas companies and shows extremely high resistance to CNPC’s new offers. The negotiation between these two companies started in March and was moving forward difficultly. Beijing Gas requires the price growth rate to be no more than 12.7% and the total supply volume to be 18.5 bcm, while CNPC is asking for a 20% increase with the total volume of 16.5 bcm. The negotiation between CNPC and Shenergy (located in Shanghai) is facing the same situation.

In addition to the increase of the contracted offers, CNPC also raised the starting price in the PNG auctions in SHPGX. From January to June 2019, the total PNG transaction volume in SHPGX was 19.54 bcm, and the average price was RMB 2.34/cbm, up 17.82% Y-O-Y.

Although the natural gas price trended upwards in recent years, it’s still quite abnormal for CNPC to raise offers in the slack season. The foundation of NPC urges CNPC to do this. The pipeline system could bring CNPC not only the stable cash flow, but also influence on the downstream users. When the pipeline is divested from CNPC, the net income of CNPC’s natural gas sector will become negative instantly. According to CNPC’s annual report, in 2018, the interest of its natural gas and pipeline sector was RMB 25.52 billion, up 62.6% Y-O-Y; and that of its imported gas sales was RMB minus 24.91 billion. Although the opening ceremony of NPC is coming soon, how to compensate CNPC and how to share the loss are still left to be solved. A large part of CNPC’s losses was caused by the high-price contracts the company signed for the gas security in the previous winters. To fulfil China’s rapidly increasing gas thirst, CNPC has to finish this political task with expensive imported cargoes.

CNPC’s new contracts are not only to share its losses, but also to gain more shares in the downstream market. Sources said that some downstream users who couldn’t afford CNPC’s price growth had to be invested by CNPC, or even controlled. However, SCI still holds the negative attitude to CNPC’s attempt, as the competitions in the downstream market will be even fiercer amid the opening-up to foreign capital.

CNPC’s market value at the peak may exceed RMB 8.2 trillion in about 13 years ago. However, the latest market value was just a little more than RMB 1 trillion.