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By Chen Aizhu
BEIJING, Aug 18 (Reuters) - China's biggest energy firmPetroChina is reviewing itsmulti-billion-dollar push to produce liquefied natural gas (LNG)to fuel trucks and ships in place of diesel, shutting twoloss-making gas liquefaction plants, sources said.
PetroChina unit Kunlun Energy Co Ltd closed thetwo major plants in the past month, wrongfooted by rising costsfor gas and China's slower growth rate that has cooled demand,two sources with direct knowledge of the situation said.
Seen just a year ago as a fast-growing profit engine, thefirm is now reviewing investment in the niche business thatchills gas into liquid form, sourcing the gas from smallproducing fields or from pipelines tapping large inland basins,they said.
LNG is increasingly being seen as a potential transportfuel, and can nearly treble a vehicle's driving range over rivalcompressed natural gas (CNG). Royal Dutch Shell lastyear agreed to run LNG fuelling lanes at up to 100 major truckstops along U.S. interstate highways.
LNG is cleaner and nearly a third cheaper than diesel,China's main transport fuel. Oil firms had an ambitious goalback in 2011 to replace 10 percent of automotive dieselconsumption with gas by 2015, industry officials have said.
Led by the private sector, China has built dozens ofsmall-scale onshore gas liquefaction facilities since 2001 totap marginal gas fields located off the national pipeline grid,filling a supply gap as demand for lower-carbon producing LNGsurged.
Kunlun, a relative latecomer, emerged as a leader of thebusiness, having spent billions of dollars on a dozen LNGplants, mainly in the country's west and north, and buildingover 600 gas refuelling stations. The company separatelyoperates two multi-billion-dollar LNG import terminals onChina's east coast.
It also helped put nearly 80,000 LNG vehicles on the road bythe end of 2013 by working with auto makers and truck fleetowners, said a Kunlun executive, who declined to be named as hewas not authorised to talk to the media.
But since the second half of 2013, Kunlun has seenutilization rates at some of its plants fall below 50 percent,he said, amid a broad economic slowdown and as Beijing rolledout a gas price reform that pushed up prices of feed gas.
An anti-corruption probe of top PetroChina executives,including Kunlun's former chairman Li Hualin - a protege ofChina's ex-security chief Zhou Yongkang who is now officiallyunder investigation - added to uncertainty about the company'sbusiness strategy, said the Kunlun executive.
A PetroChina spokesman did not respond to Reuters questions.Kunlun Energy's investor relation chief was not available forcomment.
PLANT SHUTDOWNS
In July, barely a month after the start of trial production,Kunlun shut down a 1.2 million tonne per year (tpy) liquefactionplant at Huanggang in the central province of Hubei, the sourcessaid.
The plant, the largest of its kind in China, had aimed tosupply LNG to vessels along the Yangtze, China's longest river.
A second plant at Ansai in northern Shaanxi province wasclosed a month ago. Neither plant has a clear date for arestart, the sources said.
Kunlun is now test-running a new 600,000-tpy facility inTai'an, in the eastern province of Shandong, following someearly technical glitches.
"For the (Tai'an) plant, the day it starts running is theday it begins incurring a loss," said an official at PetroChinaparent China National Petroleum Corp (CNPC), who was involved inbuilding all the three projects, which had a combined cost ofabout $1.3 billion.
Beijing introduced a new pricing scheme in July 2013 aimedat converging its domestic natural gas prices with the cost ofimported gas by end-2015, to encourage domestic production andmore imports by ship and pipeline.
Wholesale gas prices were raised by 15 percent last July,and the government earlier this week announced a fresh hike ofabout 18 percent to take effect from September.
The changes have pushed up the price of the gas feedstockfor LNG, but the slower economy has meant producers have beenunable to pass on the increased costs to consumers.
"It's a combination effect of price reform and the slowingeconomy. The sales prices for LNG couldn't catch up with thoseof feed gas," said Diao Zhouwei, Beijing-based gas marketanalyst at research firm IHS Energy.
Kunlun's plants that started after mid-2013 are paying theso-called "incremental" gas prices that are linked to the costof imported fuels, although some smaller LNG facilities arestill paying lower "existing volume" prices, due to agreementswith local governments, the sources said.
A slowdown in construction, coal mining and transportationsectors is also taking away the incentive for trucks to switchto gas as it involves an upfront additional cost that normallytakes some eight months to pay back.
The CNPC official said PetroChina has temporarily put a banon expanding its onshore LNG business while it studies theeconomics of its existing plants. (Additional reporting by Beijing news room; Editing by RichardPullin)
