Sinopec Group, parent of China Petroleum & Chemical Corp. (00386.HK), recently received the official nod for two multibillion-dollar coal-to-gas projects. If these go according to plan, they will help turn the tide for the state energy giant in the fuel gas sector.
PetroChina Co. Ltd. (00857.HK) commands nearly 80 percent of the domestic natural gas market on the strength of its upstream output and midstream pipeline assets. But things will change once Sinopec completes the Xinjiang-Guangdong-Zhejiang pipeline and a coal-based synthetic natural gas conversion project in Zhungdong, Xinjiang province.
When the two mega projects are completed, Sinopec will be able to pump 30 billion cubic meters of cleaner energy a year to energy-hungry coastal regions from coal-rich northwest China, PetroChina’s traditional stronghold.
Certainly, coal-to-gas conversion is not cheap. Also, it consumes large amounts of water. However, weak coal prices, coupled with rising import prices of natural gas, make the coal-based synthetic gas increasingly feasible in the country.
China Securities Journal, quoting an unnamed source familiar with the inner workings of Sinopec, reported that in late 2012, the cost of coal-to-gas processing was about 60 percent that for onshore natural gas imports from Central Asia, not to mention the fact that domestic coal prices have dropped a fifth time this year.
The Xinjiang-Guangdong-Zhejiang pipeline overlaps the West-East gas network operated by PetroChina. The National Development and Reform Commission wants more competition in the midstream transmission and distribution market, curbing PetroChina’s dominance.
After securing its upstream gas supply and its midstream distribution network, Sinopec can start looking for buyers for its piped fuel gas. The company hit a snag last year in a hostile bid for China Gas Holdings Ltd. (00384.HK) but the failure is unlikely to dampen Sinopec’s interest in the downstream city piped gas supplier.
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