Public Vents as Utility Prices Rise
Part I - A Rising Tide of Water Prices
Part II - Electricity Price Reform: Still Putting the Cart before the Horse
Analysis: Room for Change

(Caijing Magazine) After two years of construction, the Central Asian Natural Gas Pipeline stretching over Turkmenistan, Uzbekistan and Kazakhstan has finally reached the Chinese border. On August 5, an insider official from the China National Petroleum Corporation (CNPC) told Caijing that, according to plans, the pipeline should begin shipping natural gas by the end of the year.

From now on, the predictability of gas supply will no longer be a concern. However, given the high price of gas from Central Asia, how should future gas be priced domestically?

According to a source at CNPC, natural gas arriving at the Chinese border from the pipeline will cost approximately two yuan per cubic meter, already approaching the retail price of natural gas in some areas. In Beijing, residents pay 2.05 yuan per cubic meter.

Diversified Gas Supply

China's natural gas is priced by volume. "With a single pipeline and a single source of gas, this makes sense," says Zhang Kang, chief engineer at Sinopec's Exploration Research Institute. But if natural gas is provided from multiple sources, there will be regional differences in quality, and it would only be fair and reasonable to set prices according to the energy value of the gas.

"This is in accordance with international practice and will influence pricing of gas from the Central Asian pipeline," Zhang says.

In order to guarantee the strategic security of energy supplies, China has developed multiple overseas energy channels in recent years. The Central Asian pipeline in the northwest, the China-Russia oil and gas pipeline in the northeast, the China-Myanmar oil and gas pipeline in the southwest, and sea imports of liquefied natural gas are now China's four major energy channels.

But as China obtains more and more overseas resources, the question of reasonable domestic natural gas pricing remains. "If the price (of imported gas) is too high, how can we set the domestic price?" Zhang said.

"Because of the unique qualities of natural gas, there is no unified global pricing market such as that for crude oil," Yan Kefeng, an analyst at Cambridge Energy explained to Caijing.

Discrepancies in natural gas prices between different regions cause natural gas to move from low-cost regions to high-cost regions. "Because it is relatively difficult to get natural gas out of Central Asia, and because much of it comes via pipeline, pricing is usually decided between the two parties, Yan says.

"This is the world's longest natural gas pipeline," Zhang explains. "There is no free lunch on a 10,000 kilometer pipeline. This gas will force a national price increase."

Upward Pressure

"The NDRC is caught in a dilemma. CNPC rationalizes price increase on corporate reasons, but consumers believe oil company profits are already generous. Why should prices go up?" "But CNPC is a listed company -- it's not a pure state-owned company, and they have to explain themselves to shareholders and their overseas investors," Zhang Kang said. They can't continue running at a loss and depend on government subsidies."

At present, exploration in China's gas industry is conducted by upstream firms, while production is primarily done by CNPC, Sinopec and CNOOC. The midstream long-distance transport pipe network is also dominated by these three companies, while both state-owned enterprises and private companies co-exist in the downstream urban and industrial gas distribution business.

In pricing natural gas, companies generally propose price adjustments based on cost calculations approved after verification by the NDRC. Rarely do companies suggest lowering prices. Yin Xiaodong, analyst from Citic Securities, believes that allowing enterprises in the downstream to determine their own prices ensures that prices will not fall.

As the price of crude oil rose and fell, international natural gas prices also fluctuated. Cao Xiaoxi, a senior engineer at Sinopec, says, "If the NDRC continues raising natural gas prices while international prices fall, the public will be dissatisfied."

But according to Yin, only the price of condensed natural gas in China has followed gasoline prices. Natural gas price reform must rationalize the complex relationship between refined oil, liquefied petroleum gas, coal and other energy prices.

The International Energy Agency predicts that China's future gap between natural gas supply and demand will continue to widen, reaching 28 billion cubic meters by 2015. Importing natural gas and reforms in natural gas pricing are inevitable.