China's biggest energy firm PetroChina is reviewing its multi-billion-dollar push to produce liquefied natural gas(LNG) to fuel trucks and ships in place of diesel, shutting two loss-making gas liquefaction plants, sources said.
PetroChina unit Kunlun Energy Co closed the two major plants in the past month, wrong-footed by rising costs for 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, the firm is now reviewing investment in the niche business that chills gas into liquid form, sourcing the gas from small producing fields or from pipelines tapping large inland basins, they said.
LNG is increasingly being seen as a potential transport fuel, and can nearly treble a vehicle's driving range over rival compressed natural gas (CNG). Royal Dutch Shell last year agreed to run LNG fueling lanes at up to 100 major truck stops 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 goal back in 2011 to replace 10 percent of automotive diesel consumption with gas by 2015, industry officials have said.
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 refueling 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, said a Kunlun executive, who declined to be named as he was not authorized to talk to the media.
But since the second half of 2013, Kunlun has seen utilization rates at some of its plants fall below 50 percent, he said, amid a broad economic slowdown and as Beijing rolled out 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 of China's ex-security chief Zhou Yongkang who is now officially under investigation - added to uncertainty about the company's business strategy, said the Kunlun executive.
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 ton 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.