02 July 2013 08:45 [Source: ICIS news]
By Ricki Wang
SINGAPORE (ICIS)--China will start implementing a market-oriented gas pricing mechanism nationwide on 10 July, a year and a half after conducting pilot tests in Guangdong province and in the Guangxi Zhuang autonomous region, industry sources said on Tuesday.
The move will mean a 15.4% increase in the government-set wholesale prices for natural gas to non-residential users to an average of yuan (CNY) 1.95/cubic metre ($0.32/cbm) from CNY1.69/cbm, according to China’s National Reform and Development Committee (NDRC).
The reform would help align domestic prices with the international fuel oil and liquefied petroleum gas (LPG) markets, as well as reflect resource scarcity and the market supply-demand balance in China.
China’s natural gas imports will likely increase following this reform but there are concerns that the resulting higher prices could slow down demand, industry sources said.
Liquefied natura gas (LNG) demand for use in vehicles may take a hit if the cost of feedstock gas continued to increase. In most Chinese cities, vehicle-use LNG prices have increased to about 65-80% of the cost of zero-pour-point gasoil as LNG ex-works prices have been on an uptrend since the second quarter of 2013 amid supply shortfalls.
“Logistics companies can still get some profit if vehicle-use LNG prices are about 65% of gasoil’s. However, they may not be able to break even if the prices go higher,” said Yao Mingde, honorary president of China Road Transportation Association (CRTA).
A major LNG producer said: “If LNG’s feedstock gas prices are raised, it may not be easy to pass the increased costs onto downstream end-users, as higher prices will dampen logistics companies’ demand for LNG vehicle.”
Meanwhile, cost of power companies using natural gas are expected to increase under the new pricing mechanism, industry sources said.
There was a promise of subsidies or price discounts for power generation firms from the government, but specific policies have yet to be introduced, they said.
A two-tiered approach in the gas price adjustment will be implemented for non-residential users – based on the 2012 consumption volume of 112 billion cubic metres (bcm), the ceiling city-gate prices will be increased by no more than CNY0.4/cbm, while the full extent of the gas price reform will apply to any excess gas consumption to 2012 levels. The projected increase in gas consumption is 11bcm this year or 9%, industry sources said.
The price reform puts a 60% weight to fuel oil and 40% weight to liquefied petroleum gas (LPG), with a 15% discount, which takes into account the price advantage of natural gas, according to NDRC. China's previous pricing formula mostly considers production and delivery costs of natural gas.
Under the reform, NDRC will set caps on city-gate gas prices for different provinces/regions, instead of setting the ex-works prices for domestic onshore and imported piped gas, while consumers and suppliers are allowed to negotiate their specific prices as long as the prices do not exceed the ceilings.
Local governments at the provincial level will be in charge of setting retail prices.
The pricing reform is restricted to industrial users, while residential consumers will be spared from higher gas prices, for the time being.
City-gate price refers to the settlement price of natural gas pumped at the "city gate" where the natural gas is delivered from suppliers to buyers (including local pipeline firms, urban gas fuel firms, and direct bulk users).
The NDRC, however, provided that gas prices for residential users will also undergo a gradual increase following a study on household consumption, a government source said.
China hopes to complete the implementation of the gas pricing reform to include residential users by 2015.
The price gap between outstanding and existing consumption is CNY0.88/cbm for most regions, while the gap is CNY0.86/cbm in Hainan, Sichuan and Chongqing, as the ceiling city-gate prices of piped gas in the three regions were hiked in late 2012, market sources said.
Meanwhile, prices of natural gas used to make fertilizer would not rise by more than CNY0.25/cbm, the commission said.
The price hikes only apply to domestic onshore and imported natural gas supplied through pipelines. LNG prices and ex-works prices of shale gas, coalbed methane (CBM) and coal-based natural gas are determined by suppliers and buyers in reference to market fundamentals.
The Chinese government is implementing the pricing reform nationwide to encourage rational domestic usage of natural gas in the country, as well as to boost domestic exploration and production activities, in line with the objective of ensuring energy security, according to NDRC.
Cheaper prices of natural gas compared with fuel oil and LPG have led to indiscriminate consumption of the important clean energy resource, it said.
Currently, the after-tax price of piped gas imported from central Asia on a cost & freight (CFR) basis is about CNY1.5/cbm higher than the average ex-works prices of domestic onshore natural gas before the adjustment effective from 10 July 2013.
First-time suppliers of non-conventional natural gas such as shale gas, coal bed methane (CBM) and coal-based gas, can distribute volumes via gas pipelines operated by another company, according to the government.
Gas prices will be settled between suppliers and buyers, and the suppliers will only need to pay transportation costs to the pipeline operator. These are aimed at establish a more competitive gas industry in China with higher levels of marketisation, the NDRC said.
($1 = €0.77 / $1 = CNY6.14)
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