The natural gas pricing system in China

Publication | May 2012

Introduction

In China, natural gas prices are comprised of three components: the ex-plant prices (well-head prices and purifying fees), the pipeline transportation fees, and city gas distribution fees.

Ex-plant natural gas price

Currently, the ex-plant prices are set by the National Development and Reform Commission (NDRC). The suppliers and purchasers of the ex-plant natural gas may negotiate a purchase and sale price no higher than 10 per cent of the guide price (or any price lower than the NDRC guide price). The ex-plant prices are adjusted annually, and the adjustment factors take into account the average prices of crude oil, liquefied petroleum gas (LPG) and coal in the last five years, with a weighted percentage of 40 per cent for crude oil, 20 per cent for LPG and 40 per cent for coal. Any year-on-year adjustment should not be more than 8 per cent.

The ex-plant prices are set according to usage: natural gas to be used for fertilizer plants, direct industrial customers, or city gas.

Pipeline transportation fees

Pipeline transportation fees in China are set according to specific pipeline projects, either subject to a central government set price (in case of the West to East Pipeline Project) or central government guide price (in case of the Zhong County to Wuhan Pipeline Project). The applicable pipeline transportation fee is set out in official documents issued by NDRC from time to time. Before 2006, the pipeline transportation fee was calculated by multiplying a fixed rate with the transportation distance. From 2006, the transportation fees are (i) the sum of the capacity fee and the actual utilization fee for a consumer which requires uninterrupted supply of natural gas, or (ii) simply the actual utilization fee for a consumer to which the supply of natural gas can be interrupted. Under either case, prices are fixed on a per project basis by the parties and are subject to the ceiling and floor prices set by the central government. The transportation fees for Zhong-Wu Pipeline and Shan-Jin Pipeline are both calculated on this basis.

City gate prices

The city gas price is the sum of the applicable ex-plant price and the pipeline transportation fees. It moves according to any change to the relevant ex-plant price and pipeline transportation fee and is subject to strict government control. There are separate city gate gas prices for natural gas to be used by domestic, industrial and commercial consumers.

Last December, the Chinese government introduced a natural gas price reform pilot scheme. The trial regions for the pilot scheme are Guangdong province and Guangxi Autonomous Region. The two regions now follow a new system of determining the city gate prices, where the city gate price is indexed to a base gas price published in Shanghai, which known as the ‘hub price’: the suppliers and the customers (whether domestic, industrial or commercial) can negotiate a price acceptable for both. In other words, the city gate price under the pilot scheme is no longer linked to the gas usage or a specific ex-plant price and it will be a market-oriented price.

For details as to how the hub price is determined, please refer to our briefing on ‘Has China Finally Picked up the Pace on Its Natural Gas Reform?’.

City gas distribution fees

City gas distribution fees refer to the series of costs incurred after the natural gas passes through the city gate station from the long-distance pipelines and enters into the city gas distribution network. The city gas distribution fee is set by the local government and is subject to the supervision and management of provincial pricing bureaus. The natural gas retail price is the sum of the applicable city gate price and city gas distribution fee.

Adjustment of the natural gas prices

Currently, the natural gas producers, pipeline operators, or city gas distributors are the initiators for any adjustment to natural gas prices in China, who apply to the State Pricing Bureau for price adjustments. Upon receiving such applications, the Bureau reviews the business situation of the gas users (in particular the fertilizer plants) and gas production companies and their tolerance to price changes. If the review suggests an adjustment is required, the Bureau will then put forward an initial price adjustment proposal and consult with each provincial pricing bureau and the gas consumers. After the consultation, the Bureau then submits the final price adjustment plan to the State Council for approval. Once approved, the new guide prices will be announced by the relevant government agencies.

Future development

Although the pilot scheme provides that the natural gas price will be reviewed and adjusted annually (or semi-annually or quarterly at a later stage), it does not offer any guidance on future reform processes for the price adjustment mechanism. Further reform is also required on third party access to main gas transportation pipelines, city gas distribution networks, LNG receiving terminals and hub prices. Without these reforms, the natural gas price market in China will not be a fully commercialized market.


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Fei Kwok

Fei Kwok

Shanghai
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