China’s switch to gas looks rewarding
HONG KONG: China’s city gas distributors expect to secure new finance next year for their race to connect new users, but while the industry’s high-octane growth offers strong returns, the risks look high as well.
Less than 10 percent of China’s households have access to piped natural gas, and the second-largest energy consuming nation uses only as much gas as Argentina — despite having 35 times more people. That is changing fast. Firms like Hong Kong and China Gas (Towngas), Xinao Gas and Panva Gas, are building pipelines to urban households and industrial sites to capitalise on 70 percent profit margins on connection fees and over 30 percent margins on gas sales.
But gas in China remains a costly alternative to electricity from cheap and plentiful coal, and some industry players remain short of the critical mass they need for long term prosperity. Big names already in the sector include Russia’s Gazprom, Italy’s largest utility Enel, China’s Sinopec Corp., and tycoon Li Ka-shing, Asia’s richest businessman, whose Hutchison Whampoa is Panva’s second-largest shareholder.
More interest is expected. “Many international companies want to talk to us on possible cooperation,” said Liu Ming Hui, Managing Director at China Gas Holdings Ltd., which counts Sinopec and Gazprom as strategic investors. A market source said China Gas was in talks with GAIL India Ltd., and analysts see Britain’s BG Group Plc a likely future player as well.
“Some Chinese city gas distributors may just attract bigger and better-funded players. BG may want a share of the pie by taking over Xinao Gas,” said JP Morgan analyst Milton Lim. But the coal-dependent nation aims to double its consumption of the cleaner burning fuel to 7 percent of its energy mix in 2010. It is sinking $8 billion into its massive West-East gas pipeline and has signed deals to import liquefied natural gas (LNG) from Australia and Indonesia.
Competition grows: Gas distribution competitors are racing to strike deals with more cities, pushing up the costs of starting joint ventures with local partners, which are usually state-run utilities.
“We expect fierce competition in 2005. There are now more players fighting for gas projects than before,” said Wilson Cheng, financial controller at Xinao Gas. Hong Kong’s Towngas, which is counting on China to power future growth, has 31 city gas ventures and is in talks about another 20 projects. It focuses on rich regions such as Guangdong and Shandong provinces, and on northeastern provinces where winter weather is cold and industrial demand heavy.
Xinao, which targets large users, aims to add six or eight city gas projects in 2005 to its more than 50 now. It may cease to sign up new projects from 2006 onward as it expects attractive cities to be split among existing players, Cheng said. Panva, which derives a large chunk of sales from selling liquefied petroleum gas, a by-product of oil, is investing in existing projects in the southwest province of Sichuan, as well as northeast China. China’s city gas business was mainly run by regional and local governments until 2002, when Beijing started to attract private capital to help fund the massive investment needed for gas infrastructure construction. —Reuters
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