The government has been trying to set gas prices to encourage more gas consumption. China agreed not to use market adjustment for natural gas pricing when it joined the WTO in 2001 because residents would have no other energy choice as soon as a gas pipeline was installed. Since 2005, the National Development and Reform Commission (NDRC) has been pricing gas based on where it is sourced: one price has been set for gas from fields at Sichuan, Changqing, Qinhai, Xinjiang provinces, along with gas from Dagang, Liaohe and Zhongyuan oil fields and another price has been set for gas from the rest of China. In 2007, the NDRC issued another rule to limit industrial over-use of gas and to slow the growth of natural gas-powered vehicles. Those policies were designed to facilitate the gas production and supply system, such as the natural gas from “the First West-East Gas Pipeline” which transports gas from Xinjiang and Changqing to other cities. However, as natural gas is imported from abroad, those policies have been made obsolete.

In 2008, domestic natural gas production was 2.7 trillion cubic feet (tcf), and the total consumption was 2.8 tcf. Natural gas pipelines today cover about 200 out of 662 cities in China but will cover 270 cities by the end of next year. Gas consumption is expected to reach 5.3 tcf by next year and to hit 8.500 tcf by 2015.

China is beginning to import massive amounts of liquefied natural gas (LNG) and natural gas from middle Asia, south Asia, and Australia. At present LNG supplied in China is priced internationally, equivalent to $16.80 to $23 per mcf. Early next year, natural gas from Turkmenistan, Kazakhstan, and Uzbekistan will reach the Chinese market through “the Second West-East Gas Pipeline.” Prices will be about $8 per mcf at the border at Huoerguosi, over $10 per mcf when transported to central provinces and over $12 per mcf at the east (Shanghai) and south coasts (Guangdong province). If the pricing system does not change, the old customers that use natural gas from domestic sources will be paying less than half the price that is paid by new customers who are using imported gas.

Therefore, before the end of this year, the government must provide a pricing method for CNPC, the operator of the Second West-East Gas Pipeline, to negotiate the price with the gas consumers and to create a stable market. The completion of the second pipeline is expected to save over 11 million tons of coal per year. It will also reduce the air pollution from NOx, SOx and mercury, and thereby improve the indoor and outdoor air quality for millions. (For more information click here and for detailed information click here)

There are a few proposals to price natural gas according to gas source, transportation distance, and individual financial endurance. One is to keep the natural gas price low in the foreseeable future with the government subsidizing the cost. With the lower price, the Second West-East Pipeline is generate big deficits and in doing so could damage the supply-consumption system in the long run. Furthermore, artificially low prices are discouraging domestic gas production.

A more logical proposal is to set the natural gas price so that it is consistent with international prices. “As China starts to massively import natural gas, the price will vary along with the international price. Since our domestic natural gas is too cheap currently, the future price of natural gas will certainly be higher.” said Zhou Dadi, a senior researcher at the Energy Research Institute of the NDRC. In fact, there have been signs of price hikes already. In November, the government hiked gas prices in Shanghai from $8.60 to $10.20 per mcf. Similar price hike proposals are underway in cities such as Zhenzhou and Guilin.

Currently both natural gas sources and long distance pipeline systems are controlled by the state owned oil giants – CNPC, Sinopec and CNOOC. CNPC owns 80 percent of the natural gas reserves and 78 percent of the long-haul gas pipelines. The local city pipeline networks are controlled partly by state-owned corporations and partly by private businesses. This kind of monopoly is the biggest hurdle in reducing natural gas prices. Only when pipeline and gas source are separated, can competition be introduced thereby giving consumers more favorable prices. Of course the government can still adjust the gas market by different tax methods. Although there have been suggestions to establish pipeline companies that are independent of oil and gas companies, there are no signs this will happen soon.

No matter how Chinese natural gas pricing is reformed, gas price hikes are inevitable. To the majority of domestic gas consumers, encouraged to use gas over the past few years, this will mean some painful adjustments in their lifestyles.