There is no national shortage per se. A likely explanation is that small cities didn’t secure enough supply in the initial negotiation and aren't willing to pay high prices for out-of-contract purchases.
Photo by Cai Xingzhuo
By HOU Ruining
Residential gas should not, in any case be, rationed or cut off, China's National Development and Reform Commission (NDRC) said on January 13 in response to widespread outages in Hebei last month that left residents shivering in subzero temperatures. NDRC has ordered an investigation and told local governments to reverse their course immediately.
Unlike previous gas outages, the national supply is abundant. NDRC spokesperson LIAN Weiliang, told a press conference that consumption had been lower than projected and the government had ordered enough before the winter heating season. Rationing was mainly the result of regional distributors responding inadequately to short-term price swings.
The government of Xingtai, a small city in Hebei, promised to “talk to higher authorities” and “solve the problem promptly,” after complaints that the local China Gas operator hadn’t secured enough supply when negotiating the initial contract.
An internal document says that “upstream companies” haven’t been supplying enough for residential use, hence the rationing. To buy more, China Gas is “pressured to pay high prices.”
In the case of small cities, “upstream companies” buy from state-owned oil companies and sell to China Gas’s city-level operators. These middlemen do not produce gas and are vulnerable to market moves.
Contracts for the year are negotiated in March last year. In September, minor adjustments were made, based on winter heating projections. Buying more than the agreed amount costs a lot more. Industry insiders reckon that small cities and towns in Hebei didn’t order enough initially, and are now unwilling to pay the markups.
Instead of buying from middlemen, towns may now negotiate collectively to increase their bargaining power, stocking up on LNG during off-peak seasons to supplement the winter gas supply. But the infrastructure required is not always justified given the low demand. A State Council document from February 2021 mentioned building “reliable gas storage facilities and delivery network” in rural areas but little has been done.
Residential gas prices are regulated. As a result, China Gas and its local operators have been charging end users below-market rates while prices rise. A December 2022 document by Handan city government reveals that while natural gas prices rose to 5 yuan (US$0.70) per cubic meter in the open market, Handan was charging residents 2.76 per cubic meter.
Unlike in big cities, where losses from residential gas are sometimes offset by sales to commercial users who pay market prices, distributors in smaller cities and rural areas are sustained almost solely by government subsidies.
From 2017-2019, Hebei paid 1 yuan per cubic meter for up to 1200 cubic meters per household every year. The subsidies have tapered off since but have never gone away.
The county of Laishui, for example, faces a shortfall of 40 million yuan, approximately 3.3 percent of 2021’s fiscal income. At one point, residents were limited to 100 yuan of gas per household per month, roughly 2-3 days’ supply for an average household.
Even at the heavily subsidized rate of 2.76 yuan per cubic meter, a typical family needs more than 5,540 yuan for heating each winter if burning gas only, a third of the disposable income of a typical family. Many still have coal stoves on the side.
China Gas is still profitable albeit not to the same degree as in the early years of the coal-to-gas project. Gross margin slipped in the 2021-22 fiscal year to 17.8 percent from the previous year’s 26 percent, and net profit actually shrank 27 percent to HK$7.6 billion, partly as the result of price control for residential gas, which accounts for about 20 percent of its gas sales.
On the other hand, declining installation fees have had a much more significant impact. From 2016 to 2019, profits doubled as the number of China Gas’s residential customers, soared from 670,000 to over 9 million, charging 2,900 yuan to connect each one of them to the pipeline. In Hebei, the government used to foot 70 percent of the bill, but subsidies were cut in 2018 and allowed to expire in 2021. The number of household signups fell by 41 percent in the 2021-22 fiscal year – 21 percent in cities and 84 percent in rural areas – as the coal-to-gas project wrapped up.
China Gas didn’t respond to requests for comments.
