By Myra P. Saefong
China's underdeveloped natural-gas industry is set to grow as
the nation seeks alternatives to its rising purchases of oil -- and
that's boosting the prospects for shares of local companies that
produce and distribute the fuel source.
"China now has many reasons to ramp up its domestic production
and consumption of gas to reduce its dependence on oil," analysts
at Yuanta Research said in a research note Monday.
Natural-gas is a much cheaper alternative to oil, making it
particularly more attractive as an energy source.
The current natural-gas price of $5 (per million British thermal
units) is equal to $29 a barrel of oil equivalent in heat-value
terms, which represents about a $50-a-barrel discount to crude
oil's current price of about $80 a barrel, the Yuanta analysts
said.
"This discount is driving the energy industry towards increasing
gas consumption, particularly in applications that can replace
oil," they said.
The analysts initiated coverage of the China gas sector with buy
recommendations on PetroChina Co.'s (PTR) subsidiary CNPC Hong Kong
Ltd. (0135.HK) and on China Oil & Gas Group Ltd. (0603.HK).
They also placed a hold rating on shares of China Resources Gas
Group Ltd. .
In early afternoon trading, shares of CNPC Hong Kong added 0.4%,
and China oil & Gas rose 1.5%, while China Resources Gas Group
slipped 0.7% in Hong Kong.
Overall, energy shares in Asia were also mixed. Hong Kong-traded
shares of Cnooc Ltd. (CEO) shed 0.8% in Hong Kong, while PetroChina
declined 3.7% in Hong Kong and lost 1.3% in Shanghai. The Hang Seng
Index fell 1%, and the Shanghai Composite was down 1.3%.
However, in Tokyo, Inpex Corp. and Nippon Oil Corp. (5001.TO)
were both flat, with the Nikkei 225 Average down 0.4%. And in
Sydney, Santos Ltd. (SSLTY) added 0.9 % and Oil Search Ltd.
(OSH.AU) rose 0.2% despite a 0.6% loss in the S&P/ASX 200.
Move to ease reliance
China will need to "diversify away" from oil to avoid "runaway"
oil prices, analysts at Yuanta said.
"Given that China is short of oil, we believe the country will
increase natural-gas production aggressively to reduce its reliance
on oil," they said.
The nation has about 11 years of reserves-to-production for oil,
compared with about 32 years for natural gas, the analysts said,
citing data from BP PLC's 2009 statistical review.
"Natural gas has been therefore relatively underdeveloped," they
said.
And that's no wonder. Natural-gas consumption made up less than
4% of China's primary energy demand, analysts at Yuanta said. Coal
accounted for 68% and crude oil took up 19%.
Coal is still the cheapest source of energy because of its
"relative abundance" in China, but the nation has an "insatiable
appetite for oil," with imports having climbed to 17 million-18
million tons a month currently from 10 million in 2004, Yuanta
analysts said.
China became the world's largest automobile market in 2009, and
demand for diesel and gasoline demand has climbed as a result.
But compressed natural gas makes an excellent alternative for
transport fuel and it's cheaper and cleaner than gasoline and
diesel, Yuanta analysts said.
Building a future
Given the rising oil and oil-product prices and demand, China
has been looking to acquire natural-gas assets overseas and working
toward developing its domestic production resources.
Yuanta said CNPC Hong Kong is its top pick in the sector, with
the company best positioned to capture the growth in natural-gas
production.
Following PetroChina's acquisition of a controlling stake in
CNPC Hong Kong in 2008, PetroChina will likely turn CNPC HK into
its gas-distribution arm to support its ramp-up in conventional
natural gas and coal-bed methane production, analysts at Yuanta
said.
PetroChina Co. and Royal Dutch Shell PLC (RDSA) had announced
earlier this month an offer to buy Australian energy producer Arrow
Energy Ltd. (AOE.AU) for about 3.26 billion Australian dollars
($2.97 billion). A news report Monday said Arrow was likely to
reject the takeover bid.
But China is likely to find it increasingly expensive to acquire
natural-gas assets overseas, so that may "incentivize" the nation
to aggressively increase its domestic production, they said.
China has already been investing "heavily" in local gas
infrastructure and "recent discoveries of coal-bed methane and
potential shale gas in China have made even more gas potentially
available," Yuanta analysts said.
The National Development and Reform Commission estimates that
China's economically recoverable CBM reserves total 10 trillion
cubic meters -- more than four times the proven natural-gas
reserves in the nation as of 2008, Yuanta analysts said.
"As China is the world's largest coal producer, we believe it
will naturally be a leading, if not the largest CBM [coal-bed
methane] producer," they said.