PipeChina's Cost-Sharing Plan Reduces Importer Interest for LNG Terminal Slots

SINGAPORE/BEIJING (Reuters) — Most companies shortlisted for PipeChina's LNG import terminal slots are backing off from a deal as new terms proposed by the gas pipeline operator threaten to jack up costs, trade sources said.

PipeChina has proposed that LNG buyers share the burden of the three national state oil companies' more expensive historical long-term contracts. The plan, which has yet to be finalized, is for each new importer to purchase one legacy-priced cargo in order to win slot for a spot import shipment, the sources said.

The cost-sharing proposal has slashed the number of firms expected to sign up for import terminal access, they said.

In late January, PipeChina shortlisted 54 firms from 82 applicants to sign up for delivery slots at half a dozen receiving terminals it now manages. They included city gas distributors like Beijing Gas Group, traders such as Zhenhua Oil, and smaller traders with little experience in LNG.

PipeChina was due to start opening the terminals - with each slot worth millions of dollars - to third parties this month.

But since the proposal companies are now delaying finalizing contracts or postponing the slots already agreed, four trading sources with knowledge of the matter told Reuters.

Sources estimate only around a fifth of the 54 shortlisted buyers are likely to agree to the terms, suggesting that China's LNG demand may fall short of expectations. Demand had been based on assumptions that a rush of new buyers would imminently enter the market.

China is expected to overtake Japan as the top global LNG buyer next year as Beijing's drive to cut coal use widens domestic gas use. Companies outside the state majors make up about 15% of China's total LNG imports.

"Many are worried about being caught with unknown cost inflation linked to the legacy cargoes," said a Beijing-based official with a major gas importer, "especially as the spot market is not as cheap as earlier thought".

PipeChina did not respond to requests seeking comment.

Asia spot LNG prices for June delivery rose to $7.60 per million British thermal units on Friday, more than triple year-ago levels partly due to strong buying from major Chinese importers.


The idea of having slot users share the costs of historical contract deals was pitched by China National Offshore Oil Company, China's largest LNG importer and one of the state majors which divested pipelines and terminals worth over $56 billion under a state mandate to create PipeChina.

CNOOC used to own five of the seven terminals now under PipeChina.

National oil companies have suffered billions of dollars in losses importing gas due to the multi-year supply deals signed with exporters such as Qatar nearly a decade ago, when oil-linked prices were much higher and China badly needed the fuel to tame air pollution.

But now that the majors have ceded control over the import terminals, they argue they should no longer bear the brunt of those contract terms.

CNOOC did not respond to requests for comment.


Despite the cost-sharing caveat, some established gas firms such as Guangzhou Gas, ENN Group and Beijing Gas Group remain committed to securing LNG imports via the PipeChina network.

"So long as the overall cost still comes in lower than the domestic wholesale prices asked by state producers, especially during the winter heating season, it will be a viable business opportunity," said an official with China Gas Holdings, one of China's largest private-run piped gas marketers.

With Chinese demand already crimped by high spot prices and importers facing difficulties passing on costs during the low season, PipeChina may need to improve the third-party access rules, said Wood Mackenzie's research director Miaoru Huang.

However, China's robust economic recovery and environmental policies will lead to continued LNG demand growth, Huang added.

If the cost-sharing plan fails to materialize, an alternative could be for LNG buyers to seek tax refunds for imports, a policy that has helped ease some of the losses of legacy contracts in recent years, a state oil trader said.

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