In an excusive interview with the 21st Century Business Herald, Jia Chengde, former deputy president of China National Petroleum Corp. and an academician at the Chinese Academy of Science, discussed the development of China’s natural gas pricing system and explained that China needs to launch a pricing mechanism as soon as possible.
“Perfecting the pricing systems for the country’s major resource products is an important task for Chinese government in the 12th Five-Year Plan (2011-2015). However, the study of the natural gas pricing mechanism is a little bit behind schedule.”
“Establishing a natural gas pricing mechanism is not an easy task. However, such a mechanism needs to be launched as soon as possible. From my point of view, the National Development and Reform Commission needs to pay more attention to establishing industrial rules such as a pricing system. In the next three years, China’s natural gas demand may hit 150 billion cubic meters. The bigger the market is, the more complicated it is to establish pricing rules.”
21st Century Business Herald: Since 2007, the relevant authorities have been studying the establishment of a natural gas pricing mechanism. However, such a mechanism hasn’t been launched yet. What’s the status of China’s national gas pricing reform?
Jia Chengde: It’s extremely complicated to establish a natural gas pricing mechanism. Prices of natural gases from different parts of the world are different. In order to establish a pricing mechanism, we need to take factors including international natural gas prices, domestic production costs and the purchasing power of domestic customers into consideration.
On the international market, natural gas prices are linked to oil prices as they are measured by calorific value. But in China, natural gas prices are linked to volume; therefore, natural gas cannot be directly converted into oil prices, and this is still the biggest obstacle facing China’s natural gas pricing mechanism.
China’s natural gas producers only make very limited profits in this sector, while natural gas importers even run a deficit from imports. According to statistics complied by the National Energy Bureau, China imported 4.4 billion cubic meters of natural gas through pipelines in 2010, while total losses from natural gas imports were around RMB 4 billion-RMB 5 billion. There will be more and more calls for pricing reform as China’s natural gas and liquefied natural gas imports increase.
21CBH: There is talk about setting retail natural gas prices on a regional basis, as different parts of China receives supplies from different sources. In your opinion, is this a viable option?
JC: In the next three to five years, China will establish a national natural gas supply network that will connect multiple gas sources, simultaneously supplying every region with gas from several sources. Once this happens, it will be quite hard for a region to distinguish its natural gas source, so therefore I think such a pricing mechanism may not work.
21CBH: How about launching a uniform natural gas price across the country, just like the existing oil pricing mechanism?
JC: We can establish a general pricing system for the country and set a national basic price. However, the basic price needs to be adjusted in different regions based on the area’s economic and social status. For example, natural gas prices in developing regions should be lower than the basic price. Regions with serious pollution problems should be charged extra. And areas like Guangdong and Yunan provinces will pay extra for pipeline costs.
From my point of view, it would be preferable to set the national basic price according to an average weighting method. Under such a method, fluctuations in international natural gas prices would be properly reflected in domestic natural gas prices.
21CBH: Establishing natural gas reserves is considered an effective way of resolving natural gas shortages during peak seasons. However, the development of such reserves in China has been relatively slow. What is the reason behind this?
JC: From an objective point of view, the geology of China, especially is the south, is not ideal for building natural gas reserves. But it’s also a fact that we didn’t realize the importance of building natural gas reserves at the very start.
Also, the cost of building gas reserve facilities is very high, and petroleum companies don’t have the incentive to invest if they have to pay all the costs by themselves.
Source:Jia Chengde