State-owned integrated oil and gas giant PetroChina posted a 23% increase in losses in its imported natural gas segment for 2019 on the back of expensive oil-linked contracts, which could not be offset by its downstream prices.
The trading losses underscore the impact of long-term contract pricing on national oil companies, and signal lesser price pressure in 2020 as the price spread between oil-linked and Platts JKM spot prices has narrowed due to the oil price collapse.
PetroChina posted a net loss of Yuan 30.7 billion ($4.3 billion) in its imported natural gas business for 2019, including both pipeline gas and LNG, which was 23.3% or Yuan 5.8 billion higher year-on-year, Chief Financial Officer Chai Shouping said in the company’s annual financial results briefing late Thursday.
He said PetroChina currently imports natural gas under more than ten long-term contracts, including pipeline gas and LNG, whose prices are mainly linked with crude oil.
“We hope our natural gas import cost will go down along with the decrease in crude prices, which will enable us to reduce the losses and even make a profit in the next heating season,” Chai said, but noted that it prefers to contain losses mainly by optimizing gas imports and sales in the longer run, rather than relying on a decrease in crude prices.
“On the import side, we will try to contain losses by improving the import structure and timing, and conducting price renegotiations with suppliers based on the affordability of the domestic market,” he said, adding that on the sales side PetroChina will rely on better pricing policies developing end-user demand.
China has a complicated downstream gas pricing policy, under which the city-gate prices for domestically produced natural gas and imported pipeline gas are mostly regulated by the government, while the city-gate prices for imported LNG and unconventional gas have been liberalized.
The regulated city-gate prices tend to be lower than the price of imported pipeline gas, and imported LNG prices, although unregulated, are much higher than spot LNG prices imported by other sellers in the market. This means PetroChina has to sell contracted gas at the market level to remain competitive, but incurs losses.
DOMESTIC NATURAL GAS
Meanwhile, PetroChina posted a profit of Yuan 14.6 billion for its domestically produced natural gas business, which was Yuan 5.8 billion or 65.3% higher year on year, Chai said.
PetroChina produced 3.908 Tcf of natural gas in 2019, up 8.3% year on year. Out of the total, 3.633 Tcf was produced domestically, up 9.3% year on year, executive director and president Duan Liangwei said, adding that this was the company’s highest annual gas production in five years.
“We will make sure there’s continuous growth in natural gas production in 2020,” he said, but did not disclose a volume target.
PetroChina is the largest natural gas producer in China and produces nearly 70% of China’s total gas output.
The company sold 259.1 Bcm of natural gas in 2019, up 19.5% year on year, of which 171.4 Bcm was sold in the domestic market, up 7.4% year on year, Duan said.
City gas is the strongest driver in China’s domestic gas sales, accounting for 37% of total gas demand and posting 14.7% growth in 2019.
PetroChina’s pipeline transmission business, its largest segment, posted a profit of Yuan 36.6 billion, although it grew by only 0.7% year on year.
The company’s pipeline assets are expected to be spun off into the new National Pipeline Company which could affect the company’s financial results.