High interconnection fees pose a bottleneck; coal-based natural gas is hard to sell

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High interconnection fees pose a barrier to the sale of coal-based natural gas; Author/Source: China Chemical Industry News, Date: 2018-02-01, Clicks: 4. Recently, the official website of the National Development and Reform Commission announced the launch of anti-monopoly investigations against several natural gas companies, including those affiliated with PetroChina. This might bring a glimmer of hope to coal-to-natural gas companies struggling to sell their product. Gas is available but hard to sell – all due to three \"networks.\" There are three networks for domestic natural gas, and it is these networks, which belong to different owners, that make it difficult to develop coal-to-natural gas production. The Datang Inner Mongolia Keqi Coal-to-Natural Gas Project is the **first demonstration project to be approved, constructed, and put into operation. In line with the planning objectives for this project as approved by the National Development and Reform Commission, the natural gas produced by the Keqi coal-to-natural gas project is supplied directly to Beijing, the capital city, serving as its second source of natural gas. An operations manager at Sino-New Energy Chemical Technology Co., Ltd. said in an exclusive interview with a reporter from China Chemical Industry News that after the project is completed and put into operation, the natural gas products produced will have to pass through three gas transmission networks to reach their destination markets: the first is a gas pipeline built by the company itself, stretching 317 kilometers from the production site in Keshiketeng Banner to Bashikying in Hebei Province ； Secondly, it must pass through the Shaanxi-Beijing Line 4 gas pipeline network, which runs for approximately 90 kilometers from Bashikying to Beijing Gas Group in Beijing, via CNPC ； Third, it must reach the end-users through the pipeline network of Beijing Gas Group. The aforementioned individuals said that although at the beginning of the project construction, Datang signed relevant agreements with Beijing Gas Group, stipulating that Datang’s gas pipelines could be directly connected to Beijing Gas Group’s pipeline network, during the construction phase itself, the Beijing municipal authorities signed a strategic agreement with CNPC whereby CNPC would be the sole supplier of natural gas in Beijing. Under this agreement, the natural gas required by Beijing can only be supplied by CNPC; the natural gas products of other companies are not allowed to enter the Beijing market directly. In other words, Beijing’s natural gas market is completely monopolized by CNPC. Based on this, Datang Keqi’s coal-to-natural gas project was required to be rerouted via CNPC’s Shaanxi-Beijing Line 4. In fact, passing through three filters is a common phenomenon encountered in coal-to-natural gas projects. “Our situation is almost the same as that of Datang Keqi’s coal-to-natural gas project; we also have to go through three filtration systems. ”A relevant official from Xinjiang Qinghua Coal-to-Natural Gas Company also expressed the company’s difficulties. The reporter also learned that the newly operational Xinjiang Xintian coal-to-natural gas project also requires passing three layers of inspection before its products can enter the market. The reporter also learned that for these three networks, in addition to the companies’ own gas pipelines, a fee has to be paid for each pipeline passed. Taking the coal-to-gas project in Keqi as an example, when natural gas passes through CNPC’s pipelines, a fee of 0.12 yuan per cubic meter is charged; once it enters Beijing Gas Group’s pipeline network, the fee rises to as much as 0.6 yuan per cubic meter before it can reach the end-users. It is evident that the fees associated with transporting coal-derived natural gas are extremely high. Lacking pricing power, it is difficult to allocate resources in the market. Interviews with several coal-to-natural gas companies revealed that these firms also face significant challenges when it comes to setting product prices. “The full cost of producing natural gas from coal in Datang Keqi is approximately 2.5 yuan per cubic meter, yet the price at which it is sold to CNPC is 1.78 yuan per cubic meter, resulting in a loss of 0.72 yuan per cubic meter sold. ”A relevant official from Sino-Singapore New Energy Chemicals Company said. Datang expressed its willingness to find customers on its own for sales, hoping that CNPC would agree to transport the product through its pipelines by charging only a handling fee, but progress was extremely difficult. The aforementioned individual told reporters that since the operation of Datang Keqi coal-to-natural gas project began, sales prices have been forced to decline continuously. As early as December 10, 2013, Datang Coal-to-Natural Gas signed a coal-to-natural gas purchase and sale agreement with CNPC valid for 30 years, under which the settlement price for natural gas was set at 2.75 yuan per cubic meter. However, this good situation did not last long; the agreement was in effect for only one and a half years. By February 26, 2015, CNPC cited the **Notice issued by the National Development and Reform Commission on Regulating the Prices of Natural Gas for Non-residential Use** as a reason to set a reduction of 0.44 yuan per cubic meter for the price of additional natural gas starting from April 1, 2015, thereby demanding that Datang Keqi’s coal-based natural gas production reduce its prices. After multiple discussions between Datang Coal-to-Natural Gas and CNPC, the two parties finally agreed on a settlement price of 2.52 yuan per cubic meter. On November 18, 2015, CNPC once again cited the price cuts imposed by the National Development and Reform Commission as a reason to decide that, starting from June 28, 2016, the price of natural gas produced from coal in Datang Keqi would be reduced to 1.82 yuan per cubic meter. It was also required that production be limited during the five months of summer, with the daily supply not exceeding 2 million cubic meters – which is half of the project’s capacity. Since July 1, 2017, as a result of the reduction in the value-added tax on natural gas from 13% to 11%, CNPC lowered the price of coal-based natural gas produced by Datang Keqi from 1.82 yuan per cubic meter to 1.78 yuan per cubic meter; this price has remained in effect ever since. In other words, since November 2015, Datang Keqi coal-to-natural gas has been sold at a loss. “\"We at Xinjiang Qinghua have always sold to CNPC at a price of 1.14 yuan per cubic meter; we have no other choice, and there is no room for negotiation on the price,\" said a responsible official from Xinjiang Qinghua Coal-to-Natural Gas Company to reporters, sounding resigned. Ran Ze, a senior analyst at China Energy Network, believes that on the one hand, there is a severe shortage of domestic natural gas resources ； On the other hand, the domestic natural gas sector, including pipelines, markets, and pricing, remains under monopoly control; market signals are severely ineffective, and resources are not allocated efficiently. Without reform, the situation will only continue to worsen. For the industry to develop, reforms are needed. Through interviews and observations, reporters have noticed that due to pipeline network and price monopolies, the Datang Keqi coal-to-natural gas demonstration project as well as the two Xinjiang Qinghua coal-to-natural gas demonstration projects have suffered severe losses, with no hope of resolving these issues. As a result, the vast majority of coal-to-natural gas projects have either stopped being built or their plans have been abandoned; those that are already in operation are considering switching to the production of other downstream products. “We are considering installing peak-shaving facilities, with plans to build projects such as a coal-to-natural gas plant in Keqi that will produce 800,000 tons of methanol per year. A supervisor from the Planning Department of Sino-New Energy Chemicals told reporters. “If the existing management system for natural gas pipelines and the mechanism for setting natural gas prices are maintained, China’s coal-to-natural gas projects might all fail to see fruition. ”Ran Ze said. Ran Ze believes that China’s current pricing mechanism for natural gas is somewhat unclear. According to the National Development and Reform Commission, the \"market net back value method\" is used for natural gas, meaning it is linked to international crude oil prices; however, in practice, it seems that this method is not being applied. For example, international crude oil prices have seen a certain degree of recovery this year, but natural gas prices have continued to drop, which dampens the enthusiasm of natural gas production companies. Cui Jun, a senior analyst at the CCIC Information Research Institute who has been tracking the developments in coal chemical projects for a long time, told reporters that according to China’s policies regarding coal chemicals, there are currently 19 new and planned coal-to-gas projects in the country, with a total capacity of 83.8 billion cubic meters. Adding to this, the total capacity planned for coal-to-gas projects that were approved in previous years is 15.5 billion cubic meters; thus, China’s total coal-to-gas capacity amounts to 99.3 billion cubic meters. If this capacity is gradually brought into use, it will help **alleviate the shortage of natural gas resources in China. However, due to the currently low price of natural gas in our country, companies incur losses as soon as they start operations; as a result, some coal-to-gas projects have seen their construction delayed or their product portfolios adjusted. Tang Hongqing, a technical advisor for synthetic oil technologies at the Chinese Academy of Sciences and an expert in the coal chemical industry, said that given China’s large population, natural gas is far from sufficient; therefore, developing coal-to-natural gas technology to an appropriate extent is the right choice. However, to enable the development of coal-to-natural gas or other unconventional natural gases, reform of the gas transmission network is not only necessary but also urgent. The reporter noted that as early as May 2017, the Central Committee and the State Council issued the \"Several Opinions on Deepening the Reform of the Oil and Gas System,\" proposing to \"gradually promote the independence of the main pipelines operated by large state-owned oil and gas enterprises, so as to separate pipeline transportation from sales.\" Improve the fair access mechanism for oil and gas pipelines, ensuring that both main oil and gas pipelines as well as local pipelines are opened equitably to third-party market entities”, and eight key tasks were specified. But as the year comes to an end, half a year has passed, and there is a sense of disappointment – it seems as though only the sound of footsteps on the stairs can be heard, with no one coming down; no tangible progress has been made in the gas pipeline network so far. According to a source close to the **National Development and Reform Commission**, the relevant departments of this commission are also making vigorous efforts to advance this matter, but they say that since it involves the interests of various parties involved, a decision and push from the State Council are required.