PetroChina's logo is seen at a gas station in Beijing

PetroChina reviews push for LNG in transport

China's biggest energy firm PetroChina is reviewing its multi-billion-dollar push to replace diesel used in transport with liquefied natural gas.

The firm’s unit Kunlun Energy Co closed loss-making gas liquefaction plants in the past month, as rising gas prices and slowing growth in Asia’s largest economy have undercut demand, forcing the company to review its investment in the niche business, according to two sources with direct knowledge of the situation.

The technology chills gas into liquid form to and LNG can nearly treble a vehicle's driving range over rival compressed natural gas (CNG). It is cleaner and nearly a third cheaper than diesel, China's main transport fuel used primarily in trucks and ships.

Led by the private sector, China has built dozens of small-scale onshore gas liquefaction facilities since 2001 to tap marginal gas fields located off the national pipeline grid, filling a supply gap as demand for lower-carbon producing LNG surged.

Kunlun, a relative latecomer, emerged as a leader of the business, having spent billions of dollars on a dozen LNG plants, mainly in the country's west and north, and building over 600 gas refuelling stations. The company separately operates two multi-billion-dollar LNG import terminals on China's east coast.

It also helped put nearly 80,000 LNG vehicles on the road by the end of 2013 by working with auto makers and truck fleet owners, a Kunlun executive told Reuters, though they declined to be named as they were not authorised to talk to the media.

But since the second half of 2013, Kunlun has seen utilisation rates at some of its plants fall below 50 per cent, he said, amid a broad economic slowdown and as Beijing rolled out a gas price reform in July 2013 aimed at converging its domestic natural gas prices with the cost of imported gas by end-2015, to encourage domestic production and more imports by ship and pipeline.

Wholesale gas prices were raised by 15 per cent last July, and the government earlier this week announced a fresh hike of about 18 per cent to take effect from September, but while the changes have pushed up the price of the gas feedstock for LNG a slower economy has meant producers have been unable to pass on the increased costs to consumers.

A slowdown in construction, coal mining and transportation sectors is also taking away the incentive for trucks to switch to gas as it involves an upfront additional cost that normally takes some eight months to pay back.

A PetroChina spokesman did not respond to Reuters questions. Kunlun Energy's investor relation chief was not available for comment.

In July, barely a month after the start of trial production, Kunlun shut down a 1.2 million tonne per year (tpy) liquefaction plant at Huanggang in the central province of Hubei, the sources said.

The plant, the largest of its kind in China, had aimed to supply LNG to vessels along the Yangtze, China's longest river. A second plant at Ansai in northern Shaanxi province was closed a month ago. Neither plant has a clear date for a restart, the sources said.

Kunlun is now test-running a new 600,000-tpy facility in Tai'an, in the eastern province of Shandong, following some early technical glitches.

"For the (Tai'an) plant, the day it starts running is the day it begins incurring a loss," said an official at PetroChina parent China National Petroleum Corp (CNPC), who was involved in building all the three projects, which had a combined cost of about $1.3bn.

The CNPC official said PetroChina has temporarily put a ban on expanding its onshore LNG business while it studies the economics of its existing plants.

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