Natural gas price hikes on the way

Station attendants monitor the flow of compressed natural gas into vehicles at a service station in Lanfang, Hebei province. As a clean energy source, natual gas now only accounts for about 3 percent of China's total energy conumption. Bloomberg News

Yang Jianjun is a Beijing resident living near the northern end of the city's Fifth Ring Road. He recently paid 410 yuan to buy 200 cu m of natural gas at one time after hearing that the government might raise the price of the fuel.

"I need to buy more in case there is a sudden price hike," Yang said. "Prices of everything have gone up sharply this year for things like houses, water and gasoline."

Reform of the natural gas pricing mechanism has been on the agenda of the central government for a long time.

On Aug 3, China's top economic planning body, the National Development and Reform Commission (NDRC), said that it would implement additional reforms to pricing systems for some natural resources products.

China's top energy regulator, the National Energy Administration (NEA), also said earlier that reform of the gas pricing system would be its key task this year.

"China has seen rapid growth in natural gas consumption in recent years, and it is inevitable for us to further reform the gas pricing system for the healthy development of the industry," said Zhou Dadi, a researcher with the NDRC's Energy Research Institute.

Natural gas prices in China are still controlled by the government. There are diversified pricing rules that vary by regions, industries and even users. On average, the domestic price is about half the international price.

As a clean energy source, natural gas now only accounts for about 3 percent of China's total energy consumption. Globally, the figure is about 25 percent.

But compared with other fossil fuels, the use of natural gas has increased faster in China in recent years. The government plans to increase the use of natural gas to 5 percent of total energy consumption in 2010.

According to a report by the International Energy Agency (IEA), China could be dependent on imports for more than one-third of its total natural gas consumption in the year 2030.

New supplies from Sichuan province are expected to come on line in the short term, and the country's total domestic production of natural gas is expected to increase by an average 3.1 percent per year from 2006 to 2030.

But production growth cannot keep up with the growth in demand, according to the IEA report.

China is now importing natural gas from several countries such as Russia and Australia.

"In line with more imports from overseas markets, domestic gas prices should be more closely linked with international prices," Zhou said.

West-east pipeline

Construction of the country's second west-east natural gas pipeline is expected to speed up domestic natural gas pricing reforms, industry insiders said.

China last year began building the country's second west-east gas pipeline. At 9,000 kilometers, it is the largest of its kind in the world.

The pipeline will carry natural gas produced in Central Asia and Xinjiang to the country's eastern and southern regions.

In 2004, China completed the first west-east pipeline. The project uses all domestically produced natural gas.

Since imported natural gas will play a larger role in the second west-east pipeline, it will be more expensive than other sources, analysts said.

Industry sources said the cost could equal about 2 yuan per cu m, higher than average prices elsewhere in the country.

Guangdong province is one terminal of the second west-east gas pipeline.

Once it comes into operation, the gate price for the province would be about 3 yuan per cu m, said Zhuang Rongjin, director of the natural gas department of the Guangdong Oil and Gas Association.

That price is much higher than the current gate price of 1.65 yuan per cu m for the province.

The Guangdong province's natural gas supply now is available in four cities: Shenzhen, Guangzhou, Dongguan and Foshan. The household prices in the cities range from 3.45 yuan to 3.8 yuan per cu m.

However, under a gate price of 3 yuan per cu m, there undoubtedly will be some increases in household prices, Zhuang said.

Timing

Although several industry insiders agreed that China likely would raise natural gas prices within the year, they differed on the timing.

Some analysts said that now is the right time for China to increase relatively low natural gas prices, as any rise now will have little effect on domestic consumption.

However, more analysts agreed that the government will not make a big adjustment now on gas prices in the face of a tough economic situation.

"In order to ease the burdens of businesses and consumers, gas prices will not see a big change soon," a recent report by the Chinese Academy of Social Sciences (CASS) stated.

Some analysts said that since the central government has already reformed the domestic oil pricing system this year, the government needs to move more cautiously on additional reforms.

China adopted a new oil pricing system this year, under which domestic oil prices would be adjusted when the moving average of a barrel of international crude (Brent, Dubai and Cinta) changes more than 4 percent over a period of 22 working days.

Under this mechanism, China this year raised domestic oil prices three times and cut prices twice.

The latest adjustment was on July 29, when the government cut gasoline and diesel fuel prices by 220 yuan per ton, or by 3 percent, to reflect the drop in international crude prices.

However, many analysts and consumers argue that domestic oil prices are still not reasonable. The price has not experienced the big drop compared with last year, when the global oil price was at a peak, they said.

"It seems that many average customers do not accept the new oil pricing system. If gas prices are raised soon, there will be more complaints by the public," said an analyst who asked not to be named.

Han Xiaoping is chief information officer at a leading energy website, China5e.com.

"Reform does not simply equal to a price rise," Han said. "We need to make the industry totally market-oriented."

Han said monopolies represent the biggest problem in China's natural gas industry by excluding many private companies from entering the natural gas exploration and development area.

A step forward

To align with international standards, China on Aug 1 adopted the Joule and the kWh as the new measurement units for natural gas.

Analysts said the move, which aims to boost gas-related international trading, can be viewed as a step forward in reform of the industry.

The National Standardization Administration of China (NSA) recommended the change in measuring units in late 2008.

China used to measure natural gas in cu m, a unit of volume, while major natural gas players in the world usually use energy units. The Joule and the kWh are standard energy units in international markets.

Analysts said that the implementation of new criteria should make it easier for Chinese dealers to do business with their foreign counterparts, and also facilitate more closely linked domestic and international prices.

(China Daily 08/10/2009 page12)