By staff reporter Yang Yue

(Caijing Magazine) China's energy consumers are expecting clear evidence of a successful launch for the country's first pipeline carrying imported natural gas – in the form of higher utility bills.

A weighted average system may be applied to domestic and imported gas pricing starting in 2010, pushing user costs higher, under a natural gas price schedule expected to be released soon by the National Development and Reform Commission (NDRC), the government's chief planning agency.

As a result, natural gas buyers from factories to urban apartment dwellers may be paying higher prices within months of the end-2009 opening of the Central Asian Gas Pipeline.

"Next year, city prices for natural gas will be higher, and there will be a corresponding increase in wholesale prices," an official at China National Petroleum Corp. (CNPC) who asked not to be named told Caijing recently.

The chief financial officer for energy supplier Xin Ao Group, Wang Dongzhi, has seen a draft of the reform scheme and said "unified mechanisms" are at the core of the pricing plan. He added that prices for upstream providers would be set province-by-province.

"Unified mechanisms" point to price increases for downstream gas users that correspond with price increases for upstream supplies. Similar weighted-average price links would be arranged for crude oil, liquefied petroleum gas (LPG), coal and alternative energy.

"With linkages in prices between upstream and downstream prices, enterprises are protected from potential cost increases," said Wang, who spoke to Caijing on Nov. 2 at the China Clean Entergy Summit. "This definitely has a positive impact on enterprise."

But any fluctuation in the fixed price of a utility in China -- water, electricity, gas, or oil -- always touches a raw nerve. Price controls for refined oil were the subject of long-running disputes before government and industry settled in early 2009. Now natural gas interests are in the ring.

Simplified System

NDRC in late summer asked company officials at several enterprises to offer perspectives on natural gas prices, Caijing learned. Since then, an agency official told Caijing, NDRC has simply been waiting for the right time to finalize the plan.

The CNPC official said a proposal to set "old prices for old gas and new prices for new gas" was rejected in favor of a unified pricing for domestic and imported natural gas.

Supporters of price reform say it would change what's now a chaotic situation. Currently, the government regulates prices separately for suppliers and users, and further controls user prices according to categories such as industries, farm fertilizer and urban usages. Industries pay the highest prices and fertilizer producers the lowest.

Prices also vary according to natural gas origin. For instance, the general public pays 0.56 yuan per cubic meter of gas piped from western China's Xinjiang region. But gas originating from fields in Dagang, Liaohe and Zhongyuan oil fields cost 0.98 yuan per cubic meter.

"Gas pricing in China is far too complicated right now," said Xin Ao's Wang. "If we don't adopt a unified system, we'll return to a two-tiered pricing system when foreign imports begin to flow."

But the proposed pricing strategy also has critics, such as the secretary of the Guangdong Provincial Gas Association, Liang Zuoxian. He questions the effectiveness of the plan.

The proposal "operates on the principle that upstream affects downstream," Liang said. "In the current situation, however, demand exceeds supply, (so) when it comes to linkage schemes like this, the source has the final say."

Yet the head of the Guangdong Oil and Gas Association, Zhuang Rongjin, told Caijing he would support unifying prices inside city limits, although unified pricing plans for entire provinces would be more difficult. He cited the large variety of sources and different costs as barriers.

Guangdong, for example, has nine natural gas sources, including imported LNG. And even among LNG sources, origins and prices differ. Similar obstacles to unified pricing can be found in Jiangsu, Zhejiang and Fujian provinces as well as the city of Shanghai.

How high will prices go? Wang predicted that the factory price of gas would jump 20 to 30 percent next year, which would lead to a 10 percent increase for end-users. But he expects the change to only affect onshore natural gas assets held by CNPC and Sinopec. Offshore gas supplied by Dapeng and Putian would not be affected in the first round of price increases, Wang said.

Dapeng operates a joint LNG venture with CNOOC and the Britain's BP, having signed a 25 year contract with the Australian North West Shelf project at a cost of 1.6 yuan per square meter -- far exceeding domestic prices.

Qiu Xiaofeng, industry analyst from Merchant Securities, said the average wholesale pre-tax price for gas from Sinopec and CNPC was 0.82 yuan last year.

The CNPC official said the Central Asian pipeline is expected to transport 4 to 5 billion cubic meters of gas in 2010. That's a modest amount for the domestic market, and should have a limited effect on nationwide prices.

But the official added that gas imports will rise substantially between 2015 and '20, which means foreign fluctuations in gas prices will have a major impact on the Chinese market.

Until now, consumption and supply-demand tensions have been growing due to relatively low prices for natural gas, environmental concerns, the government's promotion of natural gas use, and calls for reducing China's reliance on oil and coal.

Natural gas consumption reached 70 billion cubic meters in 2008, and CITIC Securities forecast 25 percent average annual growth between 2007 and '10. CNPC researchers estimated natural gas production in China would increase about 15 percent per year between 2006 and '10, lagging behind rising demand.

Qiu said domestic production is growing at 10 billion cubic meters per year but can't keep pace with rising demand, which means China must take more risks by buying from abroad.

"Relying solely on an increase in domestic production is a risky strategy," Qiu said. "Eventually, we could find ourselves as reliant on foreign gas as we are on foreign oil, with more than 50 percent of our demand coming from abroad."

To strengthen energy supply and security, the Chinese government has sought to diversify energy channels. In addition to the Central Asian pipeline, pipelines are planned to link energy consumers in China to natural gas suppliers in Russia and Myanmar.

1 yuan = 14 U.S. cents