NEW YORK WHOLESALE

Chinese consumers may buy natural gas at more than five times current U.S. futures prices as the government eases control over domestic costs, opening the world’s biggest energy market to more overseas sellers.

Wholesale, or city-gate gas, in China’s Guangdong and Guangxi provinces, where the country is running a pilot program linking prices to oil, cost as much as 2.74 yuan (43 cents) a cubic meter since December, according to the National Development and Reform Commission. That’s about $12 per million British thermal units, or five times more expensive than benchmark U.S. futures in New York.

China plans to extend the pricing nationwide in two to three years, according to the official Xinhua News Agency, potentially boosting imports from North America, where Henry Hub futures contracts fell to a 10-year low in April. While China seeks to boost the use of cleaner fuels such as gas, retail price caps are discouraging energy companies from increasing supplies because they have to pay international rates and sell at a loss on the domestic market.

“The price reform helps to create an environment that supports a high cost of gas,” Gavin Thompson, a manager at Wood Mackenzie Ltd. in Beijing, said in a telephone interview May 30. “U.S. pricing will be attractive to the Chinese buyers. Looking at our view of delivered cost into east coast China and Henry Hub gas prices, U.S. Gulf Coast exports look competitive.”

Executives from the world’s biggest gas companies including Royal Dutch Shell Plc, Exxon Mobil Corp., OAO Gazprom and PetroChina Co. are likely to discuss the prospect of rising North American exports to Asia when they meet in Kuala Lumpur this week for the World Gas Conference. Shell Chief Executive Officer Peter Voser last month called gas “the fuel of the future.”

U.S. LNG

The U.S. may export about 40 million metric tons of liquefied natural gas a year by 2022 as low-cost supplies from shale deposits encourage shipments to Asia, Jen Snyder, a Boston-based analyst at Wood Mackenzie, said May 22. LNG is natural gas chilled to minus 260 degrees Fahrenheit (minus 162 degrees Celsius), liquefying it for shipment by tanker.

U.S. exports will cost Asia buyers $9.35 per million Btu, based on a Henry Hub price of $3 and after accounting for freight rates, according to a May 29 presentation by Cheniere Energy Inc. (LNG), the Houston-based company that’s developing the nation’s largest LNG export terminal in Louisiana. That compares to $11.08 per million Btu that China paid on average in April, according to customs data.

Price Slump

Gas futures slumped to $1.91 per million Btu on the New York Mercantile Exchange on April 19, the lowest price since September 2001. The contract for July delivery was at $2.348 per million Btu today in New York.

“China will be seriously importing gas from North America as it offers potentially lower prices compared to other sources,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said in a telephone interview May 30. “There is a lot of interest from Asian buyers, but the question is very much a political one in terms of how much the U.S. will allow to export.”

If China’s gas pricing reform is rolled out nationwide, retail gas prices could double to as much as 5 yuan per cubic meter, from 2.5 yuan currently, Beveridge said in a May 9 report. Wellhead prices would be three times those implied by U.S. forward price curves, according to Beveridge.

Import Surge

China may purchase an additional 10 million tons of LNG a year by 2030 from overseas markets, including North America, South America and Africa, on top of a further 10 million tons from traditional sources in Asia and the Middle East, Fereidun Fesharaki, the Singapore-based chairman of Facts Global Energy, said in a report last month.

China, which aims to double gas use in five years by 2015, increased overseas purchases of LNG by 31 percent to a record 12.2 million tons last year, according to Chinese customs. Purchases may more than double to 30 million tons by 2015 and rise fourfold to 50 million tons by 2020, according to Bernstein.

The nationwide implementation of the pricing system may make gas too expensive for some industries and reduce China’s competitiveness, according to Beveridge, who forecasts the country’s prices may rise by 50 percent in the next two to three years as the government extends the trial.

Gas in Guangdong and Guangxi is linked to a benchmark price in Shanghai that’s based on the cost of imported fuel oil and liquefied petroleum gas in the city, the National Development and Reform Commission said Dec. 27. Transportation costs are added to the Shanghai price to reach the final price for the regions, according to NDRC.

Political Sensitivity

While market prices in China may be attractive to overseas suppliers, exporting low-cost fuel to a strategic competitor may be politically sensitive for the U.S., said Thompson at Wood Mackenzie. China may also view U.S. LNG supplies as relatively risky because export terminals require government approval, creating uncertainty, he said.

While future gas demand will be met with supplies from shale reserves, U.S. exports are likely to remain limited to keep prices from declining, according to Christophe de Margerie, chief executive of Total SA, Europe’s third-largest energy company. De Margerie will be in Kuala Lumpur this week.

Consideration of licenses to export gas from the U.S. will have to wait until at least the third quarter, when a study is completed after a delay of several months, according to the U.S. Energy Department. The assessments were initiated after complaints from some U.S. lawmakers, who said sales overseas might increase prices at home.

To contact the reporters on this story: Winnie Zhu in Singapore at wzhu4@bloomberg.net; Dinakar Sethuraman in New Delhi at dinakar@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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