Sino gas and energy has different take on china’s gas market _ afr. com

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by Angela Macdonald-Smith

China’s shock reduction in liquefied natural gas imports in 2015 is clearly a setback for LNG exporters but for Australia’s only gas producer within the Middle Kingdom it’s a different story.

As LNG imports get priced out of the domestic market in China, even at current low prices, Sino Gas and Energy is sitting on gas reserves that fall much further down the cost curve.

Sino Gas managing director Glenn Corrie takes encouragement that China’s latest five-year plan gives for gas, identifying as it does natural gas as a key component in the future energy mix. The goal to increase gas’s share of China’s energy mix to more than 10 per cent implies significant demand growth in the coming years.

And with gas prices within China only indirectly linked to crude oil prices, the ASX-listed company is in the happy position of being relatively insulated from the commodity price weakness that is causing headaches for many of its peers.

The key competitive advantage for Sino is the low cost base of its ventures in the Ordos Basin in China’s remote central north, with production costs of around $US2 per million British thermal units and sales prices of $US7. That gives roughly $US5/MMBTU margins that Corrie says are probably among highest available worldwide.

With its fixed gas prices, China’s challenge is to find the right balance in pricing, so that indigenous supplies are encouraged, as well as domestic demand. Failing to find that equilibrium point hurts one or the other.

While gas still has to stack up competitively against other fuel sources, today’s crude prices of circa $US40 a barrel are roughly equivalent to the $US7 price for gas, meaning the equation is more or less in balance.

Gas price fall in line with oil

The opaqueness of likely future prices plays on the minds of investors in Sino, but the city-gate gas price was already reduced by 23 per cent to 25 per cent last November to bring it more into line with the sinking oil price.

Corrie now expects the gas price to remain “fairly stable” for the rest of the year and then to be reassessed against oil. Given oil has drifted up from its lows of early this year, regulators should be comfortable with their pricing decision for now, he says. Further out, the consensus opinion is for prices to lift back above $US8 as crude recovers.

But given pricing is out of Sino Gas’s hands, the focus remains on costs.

Sino Gas’s tight gas assets sit only above conventional onshore gas on the cost curve for domestic supplies in China, while contracted LNG imports lie at the extreme other end, above pipeline imports from Turkmenistan, Uzbekistan and elsewhere. In the middle sit offshore gas, coalbed methane, shale gas and other sources.

Still, competitiveness of supply is worth little unless those supplies are paid for, and after more than a year of delays, Sino Gas now has that battle behind it with its first proceeds finally received last month from its joint venture partner for pilot gas sold from their Linxing venture.

Corrie says problems getting initial payments have been common among foreign players and believes Sino has now “turned the corner”, joining the sparse ranks of foreign-owned fully-fledged gas producers operating in China.

Still, on a value per barrel of reserves basis, Sino Gas, with its $160 million market cap, remains heavily discounted to its peers given its total resource base close to 8 trillion cubic feet, its closeness to demand and infrastructure, and low costs. Corrie says the market is looking for Sino Gas to demonstrate that value by delivering on production growth and moving to full development of its ventures.

While challenges lie ahead as Sino Gas pursues its target of becoming cash flow positive in 2018, it is one of the few producers for which commodity prices are less of a concern.