Analysis: China gas tax rebate may nudge spot LNG imports up


(Reuters) - A tax rebate on natural gas imports may accelerate China's purchases of liquefied natural gas, but only marginally given high prices for spot supplies and the nation's policy of using long-term contracts.

Spot LNG prices in the Pacific have risen over 50 percent since March to more than $15 per million British thermal units (mmBtu), well in excess of the $8.28/mmBtu average price China paid for LNG imports in July.

"Reducing or removing the tax helps to incentivize, to some extent, more purchases of spot LNG, but it's still expensive gas -- removing or reducing VAT doesn't impact the fundamentals of relatively expensive spot gas in Asia," Gavin Thompson, an analyst with Wood Mackenzie in Beijing, said.

Even without higher prices, China's role in the spot LNG market in the short to medium term was expected to be minimal due to a government policy that requires all LNG terminals to lock in the bulk of the supplies they will need in long-term deals with suppliers in Qatar, Australia and Papua New Guinea.

"China is the overall gas growth story... but through to around 2017, beyond the contracted volume, China will be a much smaller player in the incremental LNG demand market than other Asian players -- particularly Japan, South Korea, and India," Thompson said.

China's LNG imports, which hit a record 1.18 million tonnes in July, are expected to reach over 30 million tonnes a year by 2015, and the nation is expected to surpass South Korea as the No. 2 LNG importer by around 2020.

The tax rebate could boost LNG imports during seasonal peak demand periods and during power shortages when the national oil companies are under pressure to import more fuel, often at a loss.

China last raised benchmark onshore well-head gas prices in June 2010 to roughly $4.46 mmbtu, so that companies such as Sinopec (0386.HK) and CNOOC (0883.HK) importing LNG or gas from central Asia at more than $8/mmBtu in July are making a hefty loss on domestic sales.

"If there are power shortages, I don't think China National Petroleum Corporation or the other national oil companies will have any excuse to stop imports -- they will have to try their best to get the fuel to supply the domestic market," Liutong Zhang, an analyst with FACTS Global Energy in Singapore said.

But some analysts said the rebate is just a temporary solution to a long-term problem.

"This rebate is essentially a substitute for broader gas price reform and takes the pressure off reform by subsidizing gas imports," PFC Energy analyst Natalie Bravo said.

"With the new rebate lasting to 2020, this worsens the outlook for reform."

And although the rebate will make a dent in Chinese oil company losses, LNG importers will still be left taking a hit.

"The impact is going to be relatively small compared to the magnitude of losses," said Neil Beveridge, an analyst with Bernstein Research in Hong Kong.

"Any company importing LNG is still going to be reliant on either finding customers that can afford that high price gas or further pricing reform from the government."


In the longer term, China's appetite for LNG imports could be stymied by the growth of unconventional gas including coal bed methane, shale gas and tight gas.

But China has a lot of groundwork to do before it sees a U.S.-style boom and experts say they do not expect to see significant shale gas development before 2020, with coal bed methane likely to be come first.

Progress on Russia-China gas pipeline deals will also play a key role in determining China's LNG demand in the latter part of this decade.

In June, Russian state-controlled gas export monopoly Gazprom (GAZP.MM) and China National Petroleum Corp (CNPC) failed to agree on the terms of a 30-year supply deal that could be worth up to $1 trillion due to a gap in price terms, despite five years of talks.

If the two nations cannot finalize a deal, China would require at least 30 million cubic meters more gas in the latter part of the decade, with LNG set to play a greater role, consultancy Wood Mackenzie said last month.

Under early terms agreed over five years by negotiators, Russia would deliver 30 billion cubic meters (bcm) per year from fields on the Arctic Yamal peninsula, the same fields which supply Europe, via pipeline through the Altai region to northern China.

China would also like to contract an additional 38 bcm from yet untapped fields in East Siberia.

"On a fundamentals basis, China needs Russian gas in this decade. We can't see a scenario where the development of unconventional gas in China is so aggressive that it pushes out the need for Russian gas by the end of this decade," Woodmac's Thompson said.


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