The mainland's natural gas sector is a tale of two industries: a downstream distribution business where operators are enjoying record profits thanks to rising gas demand and stable margins and an upstream supply trade whose profit has been seriously eroded by losses on contracts for long-term imports.
With Beijing dragging its feet on raising the price of gas, the sustainability of the situation whereby resource producers subsidise consumers is increasingly being questioned.
"While [industry regulator] National Development and Reform Commission (NDRC) tries to encourage gas use in China, the gas [supply] chain is increasingly unstable," wrote analysts at American brokerage Sanford C. Bernstein. "The government may not like it, but either gas prices will need to rise or supply and consumption will slow."
To address worsening air pollution in major cities, Beijing wants to raise gas consumption by an average 16.4 per cent from 2012 levels to 230 billion cubic metres (bcm) by 2015.
If realised, it would raise the contribution of gas to total primary energy consumption to 7.5 per cent in 2015 from 4.6 per cent in 2011.
It would also cut carbon dioxide emissions by 520 million tonnes each year from 2011 to 2015 as less coal would be consumed, according to the 12th five-year plan.
This amounts to 6.1 per cent of the 8.5 billion tonnes of greenhouse gases emitted by the mainland in 2011, according to estimates by the International Energy Agency, an intergovernmental policy adviser to 28 mostly developed nations.
Beijing has not lifted gas prices on a nationwide basis since mid-2010. It had been expected to do so last year but did not.
Gas imports have more than doubled from 17 bcm in 2010 to 36.6 bcm last year, an annual growth rate of 46.7 per cent. Mainland end-user prices remain at least 40 per cent below the usual levels in Asia, which have been closely linked to crude oil prices due to tight supply. Imports are expected to continue to rise rapidly, since state-backed oil and gas firms have signed contracts that will see imports hit 93.5 bcm in 2015, or 40 per cent of consumption, up from 25 per cent last year, according to the NDRC.
State-backed PetroChina, which produces some 70 per cent of the nation's natural gas, racked up losses of 41.9 billion yuan on gas imports last year and 14.5 billion yuan in the first quarter. The losses were a major cause of the firm's lower profits over the past two years.
Its return on shareholders' equity dropped from 14.9 per cent in 2010 to 10.8 per cent last year. By way of comparison, the return of ENN Energy Holdings, the fourth-biggest Hong Kong-listed gas supplier by sales, hovers around 17 per cent.
Weak profitability and rising debt prompted PetroChina earlier this month to offer a 50 per cent stake in some of its key gas pipelines to asset managers Taikang Asset Management and Beijing Guolian Energy Industry Investment Fund. The three companies will operate a joint venture with PetroChina's gas pipelines and 60 billion yuan from the two asset managers.
The NDRC acknowledged in its industry development plan for 2011 to 2015 that losses do not encourage companies to import more gas at a time when domestic output can hardly meet demand.
But it also said it takes time to rationalise gas pricing given "users' limited capacity to absorb price hikes".
Bernstein's analysts said the low profitability of industrial users amid the economic slowdown made Beijing reluctant to raise gas prices. Industry accounted for just under half of the nation's gas demand in 2011, they noted.
They projected well-head gas prices to rise 10 per cent to 15 per cent annually between 2013 and 2015.
"We think the gas distributors will start to feel the pressure from their municipal joint-venture partners and customers to take some of the pain in the form of a lowered gross margin per cubic metre," they said, adding that distributors' demand growth expectations were "overly optimistic".
ENN and fellow gas distributors China Resources Gas Group and Towngas China projected gas sales to grow 12 per cent to 20 per cent this year, saying they were confident local governments would allow them to pass on any upstream gas price rise to end users.
"We are moderately wary of distributors in the short term," said analysts at Jefferies Securities. "Any hiccup in passing through gas price increases could send shares sliding ... [but] we believe ultimately prices will be passed through and rather automatically."
They projected PetroChina's losses on gas imports to almost vanish by 2016, with well-head gas prices rising on average 18.7 per cent annually between 2013 and 2016.
PetroChina is China's dominant oil and gas producer.