Price hike to boost natural gas production, imports

Measure is govt's latest step toward marketization

Last week, the National Development and Reform Commission (NDRC), China's top economic planner, announced it would raise the price of natural gas for non-residential users by 20.5 percent on September 1.

The hike will increase the price of natural gas for industrial and commercial users by 0.4 yuan ($0.07) per cubic meter across the country.

The NDRC touted the price as the latest step in its three-year plan, which began in 2013, to make natural gas prices more market-driven.

Over the past few years, China's natural gas pricing system has evolved from a government-set price to what the NDRC now calls tiered pricing, according to the 2013 reform. Under the tiered pricing, the government sets a limit on the amount of gas it wants to sell at subsidized price. That quota is based on the total volume of natural gas consumed in 2012. Any gas sold within the quota qualifies for the lower-tiered price, which is set by the NDRC. Customers who consume more than their share of the quota will be charged the higher-tiered price, which will be pegged to the market-determined prices of alternative fuels, such as imported fuel oil and liquefied petroleum gas.

The tiered-pricing system, according to the NDRC, is only a temporary, transitional measure. It aims to strike a balance between increasing natural gas usage and motivating natural gas companies to produce and import more of the fuel.

The price adjustment this time is made only to gas sold at the low-tiered price. The NDRC ultimately plans to make natural gas prices entirely market-driven by 2015.

Currently, China is suffering from a shortage of natural gas as the country seeks to replace dirtier sources of energy, such as coal, with the cleaner burning fuel. According to statistics from Sinopec and the NDRC's Energy Research Institute, China's gas consumption increased at an average annual rate of 16 percent from 2000 to 2010, even though gas production grew by only 11.7 percent on average from 1995 to 2009. The latest report by China National Petroleum Corp (CNPC), the nation's largest oil and gas producer by output, estimates there was a supply shortfall of 22 billion cubic meters in 2013.

In April, the central government announced a goal to more than double its natural gas supply from 170 billion cubic meters in 2013 to as much as 420 billion cubic meters in 2020. The announcement was the latest proof that the government aims to achieve a higher penetration of natural gas in the long term.

Domestic production is constrained by the lack of infrastructure and high development costs. The harsh terrain of some of the top gas-producing areas makes it more expensive to explore for natural gas in China than in the US or Europe. The situation hampers gas companies' motivation to explore for gas. The price hike will give these companies an incentive to boost their production.

Last year, China's apparent consumption of natural gas was 167.6 billion cubic meters. Because about half of it was for industrial use and the consumption has been growing, the 0.4 yuan per cubic meter's price rise means China's gas suppliers can increase their revenue.

In the meantime, the price hike will also fill the losses incurred from the country's natural gas imports. The nation's reliance on overseas gas exceeded 30 percent of total gas consumption for the first time last year, according to a report released by the CNPC Research Institute of Economics and Technology. This year, China's dependency on imported natural gas is expected to surge almost 19 percent.

However, due to China's pricing system, energy companies have been taking large losses on imported gas, which they have had to offset with earnings from domestic gas sales.