China is set to fall short of its goal of doubling the share of natural gas in its energy mix by 2010 as the government and local companies shun the resource in the face of rapidly rising global prices.
The shortfall could force some cities, such as Shanghai, which have built an energy policy on increased reliance on the relatively clean-burning gas, to recalibrate their plans and rely more on dirtier fuels.
The price of liquefied natural gas (LNG) landed in China has doubled in the past two years, making it up to four times more expensive than coal in some parts of the country.
But in some wealthier coastal cities, which want to reduce pollution in line with government policy and the demands of their own citizens, the price differential is not nearly as high.
At the centre of growing controversy over China's energy policy and a tight regulatory system that leaves prices out of kilter with global trends is the National Development and Reform Commission (NDRC), the economic planning agency.
The NDRC has pressed foreign suppliers of LNG to offer lower contract prices to Chinese buyers in light of the country's potential as a long-term market, but without success.
Beijing's position has exasperated foreign suppliers, which in the meantime have concluded contracts with South Korean and Japanese buyers for gas once earmarked for China. "Why is it that China is willing to pay the international price for every other commodity but it will not do it for LNGT?", asked a Shanghai-based foreign energy executive.
But China's abundant coal and some supplies of local gas also give it alternatives, something not always available to rival buyers in north Asia.
"China is not as desperate as South Korea and Japan to get LNG -- China thinks it can rely on domestic gas and coal," said Chi Zhang of Cera, the energy consultancy, in Beijing.
In spite of ambitious plans to build 10 terminals to unload LNG along China's coast by 2010, only two have been finally approved and begun construction, and no new contracts have been signed with suppliers since 2002.
The second of these terminals, in Fujian, may be delayed until 2008 over a continuing dispute on price, as will two others in Shanghai and Ningbo, where preparatory work has begun, for the same reason.
"The NDRC is basically waiting for global prices to come down before they conclude any more supply deals," said a Beijing-based analyst.
The NDRC's guidelines for Chinese companies trying to buy LNG on the global market have also hampered the industry's expansion, say foreign and local analysts.
The NDRC's four-point plan stipulates that Chinese companies entering into long-term supply contracts for LNG should also have equity in the upstream resource, a condition that is difficult to meet in the current environment.
"The global gas story has changed dramatically in the last 18-24 months and it is now a sellers' market," said Gavin Thompson, head of China oil research at Wood MacKenzie in Beijing.
The share of natural gas in China's energy market was about 2.5 per cent in 2005, and had been earmarked to rise to about 6.0 per cent in 2010 and 10 per cent in 2020.
— FT Syndication Service