PetroChina shuts two liquefaction plants as it reviews LNG push

Investment into using gas to refuel trucks and ships hit by rising costs and slowing economy

PUBLISHED : Tuesday, 19 August, 2014, 11:29am
UPDATED : Wednesday, 20 August, 2014, 12:36am

Energy firm PetroChina is reviewing its multibillion-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 is reconsidering its investment because of rising costs and the mainland's slower economic growth, two sources said.

The mainland, which controls energy prices to curb inflation, has increased wholesale natural gas prices by 33 per cent since the middle of last year 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, the mainland's economic slowdown has been deeper than expected, eroding end-user demand for LNG as a transport fuel.

The sales prices for LNG could not catch up with those of feed gas

Analysts say the challenges faced by Kunlun show that the impact of price reforms - as the mainland moves from a centrally planned economy to a market-driven one - can produce an unintended effect.

"It's a combination of price reform and the slowing economy. The sales prices for LNG could not catch up with those of feed gas," said Diao Zhouwei, a Beijing-based gas market analyst at research firm IHS Energy.

The mainland has built dozens of small-scale onshore gas liquefaction facilities since 2001 to tap marginal gas fields 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, spending billions of dollars on a dozen LNG plants, mainly in western and northern parts of the mainland, and building more than 600 gas refuelling stations.

But a Kunlun executive, who declined to be named, said since the second half of last year utilisation rates at some plants had fallen below 50 per cent.

In July, barely a month after the start of trial production, Kunlun shut a 1.2 million tonne per year liquefaction plant in Huanggang, Hubei, the sources said.

The plant, the largest of its kind in China, had aimed to supply LNG to vessels along the Yangtze River.

A second plant, in Ansai, Shaanxi, was closed a month ago. Neither plant has a clear date for a restart, the sources said.