China cuts gas supply to industry as shortages hit

BEIJING (REUTERS) - China's top natural gas producers have begun to cut supplies to industrial consumers in a bid to make sure that homes and users of transport are not left short as demand surges over the winter.

Chemical fertiliser makers and other industrial users are likely to bear the brunt of Beijing's latest efforts to ration scarce gas supplies, but they are also victims of a long-term strategy to discourage the use of gas as a feedstock.

China's second-biggest oil and gas producer, the China Petroleum and Chemical Corp (Sinopec), said it would free up gas supplies over winter partly by cutting deliveries to its vinylon plant in the south-western province of Sichuan by 1 million cubic metres per day and those to its Qilu refinery in eastern Shandong province by a daily 300,000 cubic metres.

The firm also said on Wednesday that it would raise commercial natural gas supplies by 10.5 per cent to 7.583 billion cubic metres (bcm) in coming months to address the shortages, noting it had already boosted annual production capacity by 4 billion cubic metres (bcm) this year.

Sinopec and rival PetroChina have raised both production capacity and import volumes this year but still cannot meet demand after cities across China switched to natural gas in order to cut coal use and tackle air pollution.

In response to the supply crisis, China's state planning agency, the National Development and Reform Commission (NDRC), said it would maximise natural gas supplies to residential and transport users by strictly controlling demand.

It said demand in the first three quarters of the year rose 13.5 per cent to 120.8 bcm, while domestic production was increased by 9.2 per cent to 86.3 bcm.

Industries had been under pressure to switch from coal to natural gas but, since last year, growing shortages have forced Beijing to reverse course as it tries to maximise supplies available for priority areas like urban heating.

In guidelines issued late last year, the NDRC banned the construction of gas-fired power plants in coal-rich regions such as Shanxi and Inner Mongolia, and also put restrictions on the use of gas as feedstock for chemical products such as synthetic ammonia.

In a pollution action plan in September, the government went further, saying it would "limit the development of natural gas chemical projects" and "in principle would not allow any more natural gas-fired power plants to be built".

"The government have always been unhappy about the amount of gas going to the chemical sector and the many small, inefficient plants chucking out cheap chemicals, and it is easier to ration supply (to industries) than it is to the domestic residential market," said Mr Tony Regan, an analyst with Singapore-based consultancy Tri-Zen.

China has also sought to use gas supply restrictions - together with price rises imposed on industry earlier this year - to help curb overcapacity in sectors such as glassmaking, fertilisers and porcelain.

An official at a porcelain producer in Hebei province told Reuters that limits on supplies had forced it to buy cylinders of compressed natural gas (CNG) from the market at twice the normal price. Other porcelain makers have switched to more expensive liquefied petroleum gas (LPG).

An official at a fertiliser producer in the southwest city of Chongqing said the firm would close for two or three months over winter, with gas supplies expected to be cut to a minimum.

He said his plant, which uses around 200,000-300,000 cubic metres of natural gas per month, was suffering big losses as a result of higher gas prices and that other feedstocks such as coal or LPG were even more expensive.

"There's no question that these industrial users will face the biggest problems," said Regan of Tri-Zen. "They haven't got contracts for full gas supply and they know they are at risk of being turned off."