China Plans Big Gas Price Rise

2006-11-29
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Nov. 2, 2006: Industrial buildings of Russia's Gazprom Interprise Vyngayakhinsky gas fields some 200km outside of the Siberian town of Noyabrsk. Photo: AFP/Wojtek Laski

China’s government is considering a major price hike for natural gas to match world market rates, but experts doubt the country’s economy can support a dramatic increase any time soon.

Speaking at the China Gas Summit Conference in Beijing Nov. 9, an official with the National Development and Reform Commission (NDRC) Energy Bureau said China must raise prices to encourage production of clean-burning fuel.

“The era of low-price clean energy has passed, so China has to speed up natural gas price reform to promote development of the gas industry and ensure national energy safety,” said Wang Jing, vice director of the bureau’s oil and gas department.

Heading toward world market prices

Wang said China’s gas producers are now allowed to charge only about one-fourth of the world market price for natural gas, the official Xinhua news service and China Daily reported.

The era of low-price clean energy has passed,

China’s low prices also remain a problem in negotiations for gas imports. Russia has ambitious plans to build gas pipelines from Siberia to deliver up to 68 billion cubic meters of gas per year.

But Russia’s Gazprom and the China National Petroleum Corp. (CNPC) “are still far from seeing eye to eye on the price of Russian gas,” the Interfax news agency said Nov. 16.

Energy experts said in interviews that China clearly must move toward world market prices for gas. It's unclear, however, whether many parts of the country will be able to afford the cost.

Kang Wu, head of China energy projects at the University of Hawaii’s East-West Center, noted that China’s NDRC has so far set no timeframe for the move to market rates.

“Russia wants the market price, and China certainly has a different way of doing things,” Wu said. “They want to be gradually leading up to the market price, and that could be a long process.”

Income disparities could also make it impossible for most rural areas to pay for market-priced gas. But Wu said that sharply higher rates would be hard even for richer coastal cities such as Shanghai to afford.

“If it’s right that Russia is asking for 2.5 yuan per cubic meter, that is way too high for the Chinese to pay. And even in eastern Shanghai, when the final price reaches the end user, it will be way higher than that.”

Power sector is key

“Maybe only a fraction of the people and the sector can pay for that,” Wu added, “but not the entire country.”

Wu said that some residential consumers are already paying higher prices, but only for relatively small quantities of gas. It will be “a big challenge” to get industrial users and power plants accustomed to world market prices, Wu said.

“People sometimes look at the residential price, and they believe that everybody in the country can pay a high price. But that’s kind of misleading. The deciding factor is the power sector and industrial [uses], and both of them have to compete with coal and even with electricity itself, which can be produced from coal anyway.”

Song Yenling, an energy analyst at the Petroleum Intelligence Weekly in Singapore, said it is hard to determine how high China’s gas prices might go.

“We’re not sure exactly how much the Chinese are willing to pay, because gas prices have been so low for such a long time. But demand is booming. And at this point, demand seems to be growing at double digits to 20 percent per year.”

“We’re not sure at what point the prices will start to hurt actual demand,” Song said.

Song added that China’s instinct has been to move slowly toward market prices to shield local consumers from “too-high prices.”

Power plant developers have so far shown little confidence in the future of gas, despite a government push several years ago to promote its use, he said. Coal is still seen as China’s most reliable fuel, Song said.

Original reporting by Michael Lelyveld. Edited for the Web by Richard Finney.

Original reporting in Chinese

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