PRC: Central Asia-China Pipeline Opens,

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 003326

SIPDIS

E.O. 12958: DECL: 12/14/19
TAGS: ECON ENRG EPET EINV PREL KZ TX CH
SUBJECT: PRC: Central Asia-China Pipeline Opens,
Increases Pressure for Natural Gas Price Reform

Classified by: Economic Minister Counselor William
Weinstein for Reasons 1.4 (b/d).

Summary
--------------


1. (C) PRC President Hu Jintao's December 12-14
working level visits to Kazakhstan and Turkmenistan
to inaugurate the Central Asia-China pipeline
demonstrated China's growing energy cooperation with
Central Asia and increasing demand for imported
natural gas, according to two researchers at CNPC's
Research Institute of Economics and Technology.
Economic planners recognized the need to reform
China's domestic natural gas prices to reflect the
higher cost of imported natural gas, according to
the researchers, but it was unclear when a price
reform plan would move forward. Implementing
reforms allowing energy prices to rise would be
particularly difficult in 2010 as Beijing planned to
maintain economic stimulus policies while keeping a
close eye on signs of emerging inflation. End
summary.


New Silk Road Delivers Natural Gas...
--------------


2. (C) During Hu Jintao's December 12 visit to
Astana, Kazakh President Nursultan Nazarbayev said,
according to media reports, the opening of the 4,340
mile Central Asia-China pipeline from Turkmenistan,
through Uzbekistan and Kazakhstan, and into Xinjiang
province in western China, heralded the re-emergence
of a new Silk Road between the region and China.
Jiang Xuefeng and Shan Weiguo, researchers at CNPC's
Research Institute of Economics and Technology, told
Econoff December 11 the pipeline would transport an
estimated 3-4 billion cubic meters of natural gas in
2010, approximately 5 percent of China's current
consumption. The total capacity of the pipeline
would soon reach 30 billion cubic meters (bcm) per
annum with plans to increase this to 40 bcm.

...While China's Natural Gas Demand Soars...
--------------


3. (SBU) Shan noted that China's natural gas usage
was expected to increase from less than four percent
of China's primary energy use to 10 percent by 2020.
While China currently produces most of its natural
gas, analysts expect imports to account for a third
of total supplies by 2015. In addition to the
Central Asia-China gas pipeline, China has begun
work on a natural gas pipeline from Burma and has
announced ambitious plans to increase dramatically
its imports of liquefied natural gas (LNG) from
Australia and Qatar.

...Creating Pressure to Reform Domestic Gas Prices
-------------- --------------


4. (C) Jiang and Shan noted increasing calls from
Chinese state-owned energy firms for natural gas
price reform, but it was unclear when such changes
might be implemented. Econoff said there had been
Chinese media reports earlier this fall indicating
natural gas prices could rise 20 to 30 percent in
2010, but National Energy Administration head Zhang
Guobao had recently made public comments discounting
the possibility of a price hike. Shan said such
media reports of potential price hikes in
electricity, water and natural gas prices had raised
concerns about the impact on inflation and efforts
to continue the government's pro-stimulus policies.


5. (SBU) China's current natural gas pricing scheme
was set up by NDRC in 2005 and includes a fixed ex-
factory price plus additional transportation and
distribution fees. According to an industry
analysis by Sanford Bernstein, China's current
domestic natural gas price excluding transport fees
averaged USD 3.50 per million cubic feet compared to

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imported pipeline prices of USD 7.6 and as high as
USD 15 for LNG. Media reports indicate NDRC was
considering a weighted pricing scheme to reflect the
higher cost of imported natural gas and LNG compared
to domestic natural gas prices.

Goldberg