A Green Light For Cleaner Fuels in China

China gas companies benefit from push to convert vehicles

Published: 15-Mar-2004

ONG>BEIJING Zhou Jun, who drives a bus on the No.1 route through Tiananmen Square in Beijing each day, sees the benefit of his company's switch to buses powered by natural gas in his paycheck: He gets extra money for saving fuel.

"If we save energy for the company, we get a bonus at the end of the month," Zhou, a driver for Beijing Bashi, said at one of the capital's 16 compressed natural gas stations. Last month he earned an extra 160 yuan, or $19.30. "I fill the bus every morning and the rest of the day I won't worry about fuel," he said.

Zhou's bus is one of 2,100 in Beijing powered by compressed natural gas, or CNG, the most of any city in the world. China plans to more than double gas use by 2010 to cut pollution and the nation's $20 billion oil import bill. As world gasoline prices rise to records, suppliers such as Xinao Gas Holdings and Zhengzhou Gas are building CNG stations to bolster sales.

"This business definitely has potential in the long run because China is moving toward cleaner sources of energy," said Alan Wang, an asset manager at Value Partners. "Compared with developed countries, gas use in China is a small portion of total energy consumption."

China, where respiratory disease is the No.1 killer, is turning to natural gas because it produces fewer harmful emissions.

Chinese oil companies, led by PetroChina, are spending more than $7 billion to tap the nation's gas fields and pipe the fuel to cities such as Beijing and Shanghai. The Beijing city government in 1999 ordered public vehicles to convert to natural gas or liquefied petroleum gas, a similar fuel derived from oil.

The nation, which relies on coal and oil for 90 percent of its fuel, plans to increase gas use to 8 percent of the country's energy supply by 2010 from about 3 percent, according to the National Development Reform Commission, the country's top planning ministry.

Consumption of gas in China more than doubled to about 1.34 trillion cubic feet, or 38 billion cubic meters, in the decade ending 2002, according to the U.S. Energy Information Administration.

"The government is, in general, very supportive, because natural gas is cleaner," said Yan Kefeng, a researcher at Cambridge Energy Research Associates, an energy industry consultant.

It's also cheaper. A cubic meter of CNG equals about 1.1 liters of gasoline and sells for between 1.95 yuan and 2.40 yuan, said Xinao Gas's financial controller, Wilson Cheng. That is as much as a third cheaper than gasoline, which retails at up to 3.20 yuan a liter. It costs about 7,000 yuan to convert a taxi to run on CNG and 9,000 yuan for a bus.

Meanwhile global gasoline prices are soaring. U.S. motorists may pay record prices for the fuel this summer, the Energy Department said.

China's crude oil consumption will rise 5.1 percent to about 255 million metric tons this year, worth about $60 billion at current prices, according to figures from the state-run China Petrochemical News. About a third of that will be imported, mostly from Saudi Arabia, Iran and Russia.

China's biggest oilfields, such as Daqing, have been in production for half a century or more and their output is falling. By contrast, the country is just beginning to tap some of its largest gas reserves in Xinjiang in the far west and off the eastern and southern coasts.

The benefits of CNG to operators of bus and taxi fleets, which don't require large networks of filling stations, has helped the industry grow.

China is ranked seventh in the number of vehicles using natural gas, the International Association for Natural Gas Vehicles says. The nation had 69,300 converted vehicles and 270 refueling stations in May last year, up from 36,000 vehicles in 2000 and 10,200 in 1999.

That's still less than 2 percent of the vehicles on China's roads because the lack of filling stations makes the fuel impractical for private vehicle owners, said Zhang Xin, an analyst at Guotai Junan Securities.

"Natural-gas stations are few and far between," said Zhang. "If it's for short-distance travel within the city, then it's not a problem."

The small number of stations and gas-powered vehicles on the roads compared with gasoline-fueled vehicles makes investors such as Choo Yoon Lai wary of how quickly the market will develop without government help.

"It's a chicken-and-egg situation. If there are not enough gas stations then no one will convert to natural gas. If there are not enough vehicles, then there won't be demand for the gas," said Choo, a fund manager at Comgest (Far East).

"Unless the government offers incentives to encourage use of natural gas or imposes penalties for not using it, I think it may be quite tricky to get this business to work," she said.

Suppliers such as Xinao Gas, which has the right to sell gas in about a third of China's provinces, say they don't have to invest a lot of money to expand availability of the fuel.

"The cost to us is not very high," said Cheng of Xinao. "Our gas supply is right where the stations are located."

Xinao, based in Langfang in the northern province of Hebei, plans to spend 200 million yuan to build 19 new CNG stations. The outlets would be set up mostly with government partners. Eventually, the company plans to sell CNG in all the cities where its 39 distribution projects are located.

Zhengzhou Gas, the sole natural gas supplier in the capital of northern Henan Province where it runs four CNG stations, is also looking to the roads to bolster income.

"The natural gas refueling station business is a focus for our company," said a spokesman, Li Hongwei. "We will continue to invest and expand our business in the area."

The growth of CNG as an alternative has attracted China's big oil companies. "We intend to enter the CNG business," said Chen Ge, a director of China Petroleum Chemical, or Sinopec, the nation's biggest gasoline producer. "We see its potential."

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