China Faces Nat. Gas Shortages, Price Hikes

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"The root of the problem is the natural gas price control by the government."

China has a new energy headache: natural gas shortages and price spikes. And those shortages are likely to persist for the foreseeable future.

Unseasonably cold weather, including heavy snow in northern China, has resulted in natural gas shortfalls of as much as 40%. Industrial facilities, office buildings, and even hotels have been closed to save gas and those closures have occurred in cities in the south and northern cities. Rather than close, some industrial users have begun using diesel fuel to keep their factories running.

The shortages began nearly two weeks ago. On November 13 PetroChina, which produces 70% of domestic gas in China, issued an emergency announcement to its gas distributors saying that it would limit supplies. Sinopec also started to apply similar gas supply restrictions on the same day.

"Ostensibly this natural gas supply crisis is caused by the weather. In fact, the crisis is caused by a lack of gas supply," said Dong Xiuchen, a professor at China Petroleum University. The root of the problem "is the natural gas price control by the government. To oil and gas industries, if there is no profit for their businesses, they then don't have the resources and motivation to explore for more oil and gas reservoirs. The ongoing rough pricing negotiation for imported natural gas makes it hard for foreign gas to flow into the country."

Although natural gas only provides about 3.4% of China's total primary energy (compared to the world average of 24.1%), shortages of natural gas are likely to persist. The China Social Science Academy recently predicted that the country will have a shortage of at least 1 trillion cubic feet in 2010 and more than 3tcf in 2020.

In the meantime, poor residents in southern China, even patients in hospitals, are shivering in rooms at close to freezing temperature. It will be a long, cold winter in China.

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